Increased Western Involvement in Caspian Sea Energy Transport

On December 23 Austria’s OMV energy conglomerate and Germany’s leading power producer RWE (Rheinisch-Westfaelische Elektrizitaetswerke) announced an initiative to create a joint company for gas transportation from the Caspian Sea’s eastern shore westward. This initiative targets mainly Turkmen gas, aiming to build a trans-Caspian pipeline to Azerbaijan and link up through Georgia with the planned Nabucco gas pipeline to Europe.

The OMV-RWE initiative forms a part of the overall Nabucco project, in which both companies are involved along with Turkey, Bulgaria, Romania, and Hungary. In 2008 the Hungarian government and the company MOL were the first to approach Turkmenistan and Kazakhstan for discussions on possible gas supply commitments for the planned Nabucco pipeline (see EDM, July 21, September 30, and December 12, 2008). While Nabucco’s first phase relies mainly on Azerbaijani gas, the financing and construction of the first phase presupposes arranging in advance for supply commitments and transport solutions for the project’s second, full-capacity phase. Turkmenistan can thus become a key to the project, albeit without ruling out Iran.

The fully-owned subsidiaries, OMV Gas & Power and RWE Supply & Trading, established the joint Caspian Energy Company (CEC) on December 22, each holding a 50 percent stake, with headquarters in London. The CEC will examine the technical and legal possibilities of building a gas pipeline under the Caspian Sea and, more generally, will seek comprehensive solutions for a gas transport infrastructure from the Caspian basin to Europe. With its potential partners, CEC proposes to advance the construction of a west-bound trans-Caspian system and then operate that transport system as owner.

Pending approval of European Union competition authorities, CEC has invited other European and American oil and gas companies to join this project. It has identified BP specifically as a potential participant, given the British company’s leadership position in Azerbaijan’s Shah-Deniz gas extraction consortium as well as in the South Caucasus Gas Pipeline (APA, December 22; Der Standard, Financial Times Deutschland, December 23, 2008; Die Presse, January 2, 2009).

The South Caucasus pipeline, from Azerbaijan via Georgia to the Turkish border, connects the Caspian Sea with the Nabucco pipeline’s planned starting point in Turkey. The existing South Caucasus line, the partly achieved Turkey-Greece-Italy Interconnector, the planned Nabucco, and the proposed White Stream pipeline (from Georgia across the Black Sea to Romania) are elements in the European Union-backed Southern Gas Corridor project for Caspian and Middle Eastern gas to Europe. While the Nabucco pipeline remains clearly the centerpiece of this overall project, Nabucco alone—even in its second, full-capacity phase—would be far from sufficient to cover the anticipated rise in European net demand for non-Russian gas in the next decade.

Only a fully-developed Southern Corridor with all its proposed components could achieve the twin objectives of European energy security: meeting the rising gas demand in Europe while reducing the Russian share in European gas consumption. This, in turn, presupposes integrating a trans-Caspian pipeline from Turkmenistan into the Southern Gas Corridor to Europe. It will also necessitate an overland pipeline from Iran via Turkey to Europe or a liquefaction solution for Iranian gas to reach consumer countries outside any Russian-dominated cartel.

At least four recent and continuing developments in energy security and gas markets explain these efforts to open European access to the eastern Caspian coast via Nabucco. First, uncertainty is deepening about Russia’s capacity to meet supply commitments to Europe and other external customers simultaneously with Russia’s own internal demand in the years ahead. Even Germany’s reliance on the Russian Nord Stream project reflects the calculation that Germany must outrace other European countries in a contest for Russian gas before supplies fall short. While E.On Ruhrgas and BASF/Wintershall are heavily invested in Russia, the RWE company displays considerably greater interest in diversification.

A second factor is the prospect of a gas-exporting states’ cartel taking shape, mainly at Russian instigation, potentially to dictate terms to Western consumer countries. Such a prospect underscores the urgency of opening direct access to gas reserves that are not yet controlled by the potential cartel’s members.

Thirdly, the recent Gaffney Cline audit of gas reserves in Turkmenistan—not, or at least not yet, under Russian control—has reported immense reserves of at least four trillion cubic meters of gas, six trillion at the best estimate, and 14 trillion cubic meters at the high estimate, at the South Yoloten-Osman gas fields alone, while other Turkmen fields have yet to be audited (see EDM, October 15, 2008). Meanwhile, Gazprom is already seeking priority access to develop South Yoloten and divert the future output to Russia, as Gazprom’s CEO Alexei Miller made clear during his late-December visit to Turkmenistan (Turkmen TV, Interfax, December 25, 26, 2008).

A fourth factor is the growing realization in Brussels and Washington that strategic energy projects, specifically Nabucco and its potential trans-Caspian link, require financial support from the public sector, rather than being left to the full discretion of “market forces.” In a recent manifestation of this reassessment, the EU Commission’s Second Strategic Energy Review announced on November 13 and 14 its intention to create a Caspian Development Corporation (CDC). The CDC’s goals will focus on the development of Turkmen gas reserves and subsequent delivery of that gas to Europe through a dedicated infrastructure in the Southern Corridor (Platts, November 21, 2008).

These convergent developments presage a convincing assessment of Turkmen gas development prospects and the Southern Corridor’s prospects at the upcoming, Hungarian-hosted Nabucco Summit.