December 28th, 2015 8:45pm Posted In: Featured Articles

*first published 14 July 2015*

Background

The proposed Trans-Caspian Pipeline (TCP), which aims to bring Turkmen gas to Europe, has recently become a topic of intense debate. Despite the existing barriers to the implementation of the project, there have been positive shifts towards its construction. The Ashgabat Declaration launched the work of the intergovernmental committee and provides a foundation for the practical implementation of the project. The EU is much more interested in the TCP than before, as it may face natural gas shortages after 2019 when the gas contract between Russia and Ukraine expires. Turkey?s regional energy hub ambitions mean that it is keen to play a political role. Turkmenistan sees not only financial benefits, but also advantages in terms of diversifying its export routes. The collective commitment by the interested parties – Azerbaijan, Turkmenistan, Turkey and the EU – in overcoming the various obstacles to the project?s implementation indicate strong prospects for success.

Analysis

Foundations for high-level negotiations were laid during the visit by the Turkish president to Turkmenistan (November 7, 2014), when he stated that the Trans-Anatolian Pipeline (TANAP) is dependent on gas supplies from Turkmenistan. During the visit, an agreement on cooperation was signed between Atagas (a private Turkish Gas Company) and Turkmengas (the national gas company of Turkmenistan) over the purchase and sales of natural gas. In 2013, the TCP was placed on the list of Projects of Common Interest of the European Commission.

In the absence of a pipeline capable of transporting large volumes of gas from the Caspian Basin to Europe, the potential role of the TCP was unclear. But by 2019, with the expansion of the South Caucasus Pipeline (SCP), the construction of TANAP and Trans-Adriatic Pipeline (TAP), a Caspian-European route will become available. The other problem was the lack of available gas ready to be transported from the eastern coast of the sea.

However, Turkmenistan is currently constructing the ?East-West Pipeline?, with an expected completion date of 2015-2016. This pipeline will deliver gas from the resource-rich fields in the east of the country to its western territories. When the construction started in 2010, the plan was to feed the Russian-backed Prikaspiisk pipeline (or Caspian Coastal pipeline), but that project has been scrapped, freeing the gas up for export elsewhere. Notably, the capacity of the pipeline is as the projected capacity of the TCP (30 bcm/year). The Caspian Coastal line was scrapped in 2010 and is unlikely to be revived given the current tensions between Russia and the EU. This raises questions about the purpose of the East-West pipeline. Russia is not planning to import more Turkmen gas, and there is no need to allocate additional volumes to Iran. Turkmenistan?s intention is to prepare for gas exports via the TCP. By 2016 Turkmenistan will technically be able to transport hydrocarbons from the east to the Belek compressor station, which is located next to the city of Turkmenbashi (where the TCP will presumably start). The pipeline will not be confined to the Dovletabat field, but will also be connected to the Galkynysh Field. Thus, the opportunity to deliver vast gas reserves to the eastern coast of the Caspian together with the availability of transportation on the western coast clearly indicates the importance of the Trans-Caspian line.

Turkey?s role and the Trilateral Format

Due to the absence of existing pipelines between Turkey and Turkmenistan, energy cooperation agreements remain poorly implemented. In 1997, the sides signed the first agreement on the import of 30 bcm of Turkmen natural gas to Turkey. However, without the available conduits it was impossible to realize the agreement. Therefore, the Turkish government is seeking grounds for future cooperation. In November 2014 Turkey and Turkmenistan reached a framework agreement for pumping Turkmen gas into the TANAP. Although the details of the agreement have not been revealed, it is clear that steps are being taken to enable the supply of Turkmen gas to European market.

Just ahead of the Berdymuhamedov?s visit to Turkey, Turkmenistan?s Ministry for Oil & Mineral Resources released a statement promising to supply natural gas to Europe. According to the statement, Turkmenistan intends to supply 10-30 bcm per annum. Turkey understands its role in making this a reality. Ankara has increasing influence in Turkmenistan; it is now the country?s second biggest trading partner after China. Moreover, Turkish construction companies occupy a leading position in Turkmenistan?s economy. Nonetheless, Turkey?s influence in Turkmenistan is not on its own sufficient to guarantee the success of the TCP. It will have to face down the major opponents of the project, Russia and Iran.

The increasing cooperation among Turkey, Turkmenistan and Azerbaijan reveals another perspective on the TCP. The trilateral meetings, previously among ministers, have been upgraded this year to the presidential level. Turkey?s idea for trilateral energy consultations dates back to 2008, when Turkey invited both Azerbaijan and Turkmenistan to cooperate on a drilling project in the Black Sea. Since then Turkey has been promoting the idea of bringing both sides to the table to further cooperation and partnership. As such, the upcoming meeting of leaders in Ashgabat must be regarded as a diplomatic achievement of Ankara.

The position of the EU

The intention of the EU is to reduce its dependence on Russian gas and thus diversify the routes and sources of supply. Although there is no official data on the amount of gas to be supplied by Turkmenistan, initially the EU was planning to purchase about 14 bcm per annum out of the total 30 bcm (the TCP was designed to accommodate 16 bcm of gas for the Turkish market). The distribution of volumes may change, but it is clear that by gaining access to the Turkmen resources, the EU will benefit enormously in terms of diversification of its gas supplies. Consequently, the EU is committed to helping Turkmenistan to overcome the existing barriers to the project?s realization. For instance, experts have emphasized that ?the EU has repeatedly expressed its support to Azerbaijan and Turkmenistan regarding the exclusive right to lay a pipeline in the Caspian Sea between the two littoral countries in line with international agreements and conventions.? Furthermore, according to resent research, ?the European Commission proposed in 2009 the creation of the Caspian Development Corporation envisaged as a single commercial vehicle that could aggregate the purchase of Turkmen gas. Finally, in apparent desperation at the lack of progress, the Commission in September 2011 se- cured an unprecedented decision by the EU?s governing Council, mandating it to negotiate a legally binding treaty with Turkmenistan and Azerbaijan providing for pipeline construction.?

Is Turkmenistan interested?

Ashgabat appears to be intensely engaged in the diversification of export routes. Given that Russia has reduced its gas imports from Turkmenistan to 4 bcm per annum, compared to 11 in 2014, Turkmenistan?s interest in finding an alternative market should not be underestimated. Further- more, because of the disruption of plans to deliver vast volumes of natural gas to Europe, Russia has pivoted towards China. Five years from now, it will be able to deliver extra 40 bcm/year to China via the Power of Siberia (known as Yakutia?Khabarovsk?Vladivostok pipeline).

Competition with Russia over the Chinese market may lead to cheaper Turkmen gas. Iran, the second biggest consumer of Turkmen gas, is also refusing to buy the gas at current volumes. Iranian Oil Minister Bijan Namdar Zanganeh said on August 11, 2014 that his country no longer needed gas from Turkmenistan. Zanganeh went so far as to say, ?Iran is importing Turkmen gas just because it is important to promote political and economic relations with Turkmenistan. Iran is rapidly boost- ing its domestic gas production. Moreover, once the sanctions are lifted, Iran, which has the world?s second largest gas reserves, may become an export rival. In this context, official Ashgabat is urgently seeking new energy partners. Note that Turkmenistan may only support the TCP in line with the golden rule of ?zero financial burden, hundred percent effectiveness?. In addition, it will never agree upon the construction of the pipeline to the detriment of relations with Russia.

Light at the end of the tunnel

In general, there are two hurdles to the implementation of the TCP: the uncertainty over the status of the Caspian (along with opposition from Russia and Iran) and the financial burden that few are will- ing to share (because of the high risks of the project). In regard to the resolution of the legal status of the Caspian, many consider the Astrakhan summit as a big step forward and a chance to consolidate the final document, now that parties have reached agreement on points of dispute. Khalaf Khalafov (deputy foreign minister of Azerbaijan) characterized the last summit as the beginning of a new stage in negotiations. ?I believe we will be able to agree upon all the points of the convention before the summit in Astana so that we can sign the final act.? In addition, the Caspian states agreed on six more points on the juridical status of the Caspian, reported Iranian Prime Minister Ibrahim Rahimpoor. Khalafov said that the sides had agreed upon some controversial issues. At the 39th meeting of the Working Group on the determination of the legal status of the Caspian Sea, issues related to environmental problems and use of water were agreed among the Caspian littoral states, according to the Azerbaijani side. However, one of the remaining questions is how to resolve the issues related to the division of undersea territory. This question must be solved in accordance with the sovereign rights of each littoral state, as claimed by Azerbaijan and Turkmenistan.

Now the focus is on the summit in Astana, where some experts expect the final agreement to be signed. The future of the TCP has been closely linked to the determination of the legal status of the Caspian; without the inked document there is no room for progress. Thus, further intensification of the dialogue over the implementation of the TCP is expected following the Astana Summit in 2016.

Problems & Prospects

Along with some major political hurdles to the project (such as the question over the status of the Caspian), there are some others of minor importance that bear mention. For instance, significant efforts must be taken to resolve the dispute between Turkmenistan and Azerbaijan over the oil fields, Kapaz (Serdar). A positive sign is that the leaders of both countries have demonstrated their willing- ness to work hand in hand within the framework of trilateral cooperation with Turkey.

There is also significant scope for the EU to persuade Iran to set aside its intentions to block the construction of the Trans-Caspian. Previously these negotiations would have been unthinkable, and so once the sanctions are eliminated, the opportunity will be there. One potential means to appease the Iranian government would be to propose a spot for Iranian natural gas in the TANAP and TAP pipelines. If this were not enough, the EU could additionally offer a helping hand in modernizing Iran?s outdated gas infrastructure. Iran has also made clear in the international arena that it is ready to offer its territory as alternative and reliable route for delivering Turkmen gas to Europe.

Brussels has put all its efforts into achieving a breakthrough on the realization of the TCP. It has called upon European energy companies to join the negotiation process. The Caspian Development Corporation, established in 2009, can help in this regard. This will help Turkmengaz find common ground with the relevant European energy companies. Experts also believe that Ashgabat is especially interested in cooperation with companies willing to invest in the development of the Turkmen sector of the Caspian Sea. Earlier, during talks with Turkmenistan, the Eni management voiced its willingness to assist with the Turkmen gas delivery to the world markets in the long term. The dialogue between the EU, Turkmenistan and the representatives of energy giants does not require any additional outside help, as the parties involved are committed to the project?s realization. This is a strong indicator of success.

It has also been argued that Turkey may utilize its leverage over Russia, via Turkish Stream – the only viable route for gas delivery from Russia to Europe – to address Russian opposition to the TCP. In other words, the subsea pipeline between Turkmenistan and Azerbaijan could progress in light of Turkey?s increased diplomatic power. However, one should not overlook the strategic interests of Russia in the region, as well as its desire to remain Europe?s major gas supplier. If the second part of the puzzle can be solved easily (since the capacity of the Turkish Stream is twice that of the TCP), the first part remains unanswered.

Despite the existing political obstacles, the technical requirements of the TCP have been met. Most of the projects that may feed the TCP are either under construction (East-West, TAP and TANAP) or already in place (South Caucasus Pipeline). Thus, only 300 km is remaining, needed to link one port to another in order to connect Turkmenistan with Europe. However, this step has always been something of a Herculean task. The key to the whole success of the project lies in those 300 km.

The elimination of political challenges will not immediately bring the pipeline to life; there remain financial constraints. First of all, the European companies have to come to an agreement with Turkmenistan over the sales of gas; there may be a need for a Production Sharing Agreement. This is not a question of a few weeks.

Conclusion

The actual implementation of the Southern Gas Corridor (SGC) has accelerated talks on the construction of the Trans-Caspian pipeline. The climax of these talks resulted in the Ashgabat Declaration, with some minor practical results (such as the establishment of the inter-governmental committee). At the same time, the trilateral meetings among Turkmenistan, Turkey and Azerbaijan have achieved top levels of engagement. At first glance, this trilateral energy cooperation does not seem to be directly linked to the TCP, and progress remains suspended until the Astana Summit. However, in the long term, this new format could facilitate energy dialogue between Baku and Ashgabat; and involvement in joint projects, no matter how small, could be a positive step during this initial stage.

Furthermore, the East-West pipeline of Turkmenistan will be commissioned soon. Thus, Turkmen gas will be delivered right to the coast of the Caspian Sea, ready for transportation to Europe. The other SGC components, aside from the TCP, will be operational by 2019, delivering Azerbaijani gas. In other words, the pipelines to the east of the TCP are almost ready. The only fly in the ointment is that that the most complex part, i.e. the sub-sea conduit (TCP), needs much more work.

However, given the commitment of the EU, Turkey and Turkmenistan, there is significant impetus for the realization of this final step. Along with Azerbaijan, these parties more committed than ever. The EU needs to meet its energy demand once the Russian supplies via Ukraine are terminated in 2019. Turkey, which has harbored ambitions to become a regional gas hub, sees great potential in the opportunity to play a crucial role in both the project implementation and the transportation of Turkmen gas to Europe. Turkmenistan, which has been forced to reduce its exports to Russia, is urgently seeking new partners and customers in order to avoid dependence on a single buyer, namely China. Moreover, Iran may not need gas from Turkmenistan for its northern region, because once the sanctions are lifted it will be able to cover that demand through domestic production. Azerbaijan is also willing to become a transit country and thus contribute even further to EU energy security. This raft of potential benefits cannot be ignored.

Elmar Baghirov is a foreign policy expert based in Azerbaijan. His areas of expertise include the energy policy of Azerbaijan and the Black Sea-Caspian region energy security.

Policy Brief published with thanks to the Caspian Center for Energy and Environment of ADA University, a Natural Gas Europe Knowledge Partner


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