Why Europe didn’t increase Caspian gas imports sooner

Why Europe didn’t increase Caspian gas imports sooner

For more than two decades, the European Union has been looking for gas in the gigantic reserves of the Caspian Sea. During that time, large pipeline projects were debated and forgotten. All the while, the block became more dependent on Russian gas.

As a journalist who has spent the last 25 years specializing in Turkish and Caspian energy issues, I was not surprised to see European Commission President Ursula von der Leyen in Baku last month desperately trying to get extra volumes of gas. Russia, as security experts have long predicted, is now using its supply stranglehold on the EU to try to force concessions over its war in Ukraine.

But why hadn’t Brussels had supplies of Caspian gas for a long time? It was only in 2020 that small amounts finally began to flow into Europe along the so-called “Southern Gas Corridor”. In Baku, von der Leyen secured a non-binding pledge that these supplies could double to 20 billion cubic meters per year (bcm) by 2027. That’s a pittance. Compare the number to 155 bcm, which is what Russia supplied last year, meeting 40% of EU demand.

Something went terribly wrong

The root of the problem has been Brussels’ insistence that the pipelines be developed by private companies and be “commercially viable”. The EU is unwilling to underwrite the necessary infrastructure, assuming that market forces would take the lead. Perhaps this would happen in a world of perfect competition. But market forces could not compete with Gazprom, a Russian monopoly that plays by its own rules.

In theory, as an EU technocrat patiently explained to me, creating a commercially viable pipeline project to transport gas from the Caspian to Europe is simple: you need the Europeans to sign contracts to buy the gas, which they are willing to do. This ensures a revenue stream and allows banks to provide the tens of billions of dollars in financing needed to develop the fields and pipelines to deliver the gas.

Simple – but, he warned, the reverse is also true. If, like Gazprom, you have the financing, you can go ahead and build the pipelines and then secure the buyers – whose primary interest is short-term supply, not long-term security. In the process, Gazprom effectively blocked the development of rival pipelines.

Which, in short, is how Europe missed a succession of opportunities to import Caspian gas and allowed itself to be blackmailed.

If Gazprom just liberalized

The collapse of the Soviet Union in 1991 and the emergence of independent, gas-rich Caspian states coincided with the decline of Europe’s own gas production and the first warnings of excessive dependence on Russia.

Soviet-era agreements and pipelines meant that Russia already supplied 30% of Germany’s gas in the early 1980s. Last year, Germany relied on Gazprom for more than half of the gas it consumed. With such an eager buyer, Gazprom financed its own pipelines.

Against this, bringing Caspian gas to Europe required developing difficult offshore gas fields and building 3,500-kilometer pipelines through several countries with only a passing familiarity with democratic and trade norms – some of which were barely spoken about. .

Brussels assumed that liberalizing the Russian economy would end Gazprom’s monopoly, while a European market governed by legally enforceable contracts would guarantee free competition and competitive prices. If Caspian gas were commercially viable, the mantra went, the private sector would be able to bring it to market.

The private sector has tried, but has repeatedly encountered insurmountable obstacles.

A first attempt, launched in 1999 with strong support from Washington, saw US giants GE and Bechtel team up on an ambitious project to produce more than 30 bcm of gas from fields in Turkmenistan, to be transited through a “Trans-Caspian Pipeline”. to Azerbaijan and through Georgia to Turkey.

Ankara agreed to receive half of the gas and develop pipelines to transport the rest to Europe, apparently securing the project’s finances.

However, it foundered not for commercial reasons, but after the discovery of the giant Shah Deniz gas field in Azerbaijan and the failure of Baku and Ashgabat to agree to share the planned pipeline. Could European guarantees of revenue from gas sales have persuaded the two emerging states to agree to share a pipeline? We will never know. Brussels showed little interest in the Trans-Caspian project. (Russia also threw cold water on the pipeline arguing that the Caspian Sea was a lake and that therefore Azerbaijan and Turkmenistan needed its approval before building anything on the seafloor.)

With Turkmenistan out of the way, in 2001 Turkey and Georgia signed contracts to take some of Azerbaijan’s newly discovered gas. This allowed a BP-led consortium to develop Shah Deniz and build the South Caucasus Pipeline (SCP), which finally delivered gas from Azerbaijan to eastern Turkey in 2006.

Waiting for Nabucco

The plans for the South Caucasus pipeline inspired European companies and in 2002 Austria’s OMV formed a consortium with state gas transport operators from Turkey, Bulgaria, Romania and Hungary to develop projects for a 31 bcm “Nabucco” gas pipeline. to transport gas from various Caspian sources to Europe’s Baumgarten Gas Trade Center in Austria.

The European Commission finally got interested, funding half the cost of a feasibility study. But it was only six years later, with the publication of the EU’s “Second Strategic Energy Review” in 2008, that concern about Russia’s growing dependence turned into a real policy for the development of a “Southern Gas Corridor”. . The review stated: “A southern gas corridor should be developed for the supply of gas from Caspian and Middle Eastern sources, which could supply a significant part of the EU’s future needs. This is one of the EU’s highest energy security priorities. HUH.”

Still, Brussels remained wedded to the idea that development was a job for the private sector. He couldn’t identify Nabucco or any other pipeline projects that might fit the bill.

At the same time, Nabucco faced other challenges.

Two smaller projects were trying to transport the same gas from Azerbaijan to Europe. And Gazprom announced its own giant 63 bcm “South Stream” pipeline across the Black Sea to Bulgaria, which would flood the European market.

Nabucco could not find the gas to fill its 31 bcm capacity. Planners looked to Turkmenistan, then Iran and even Iraq. But with Azerbaijan still reluctant to transport Turkmen gas, Iran hit by international sanctions and Iraq mired in its own never-ending troubles, none offered any hope of gas within a viable time frame. Azerbaijan’s Shah Deniz could supply less than 20 bcm, and the BP-led consortium developing the field was unwilling to commit its gas to Nabucco unless Nabucco’s sponsors found other suppliers to ensure it was commercially viable.

If the European Union had been sufficiently committed to the creation of its Southern Gas Corridor, it could have designated Nabucco a project of “strategic importance” and secured funding, ensuring the construction of the gas pipeline.

At the event, the Azerbaijani government got tired of waiting and announced that it would fund its own 31 bcm gas pipeline across Turkey, dubbed the Trans Anatolian Pipeline (TANAP), a move that effectively killed Nabucco.

Construction began in 2015. After crossing into Greece, TANAP connected with what had been one of Nabucco’s rivals, the Trans-Adriatic Pipeline (TAP).

Supply to Turkey began in 2018, with gas finally flowing to Italy in late 2020.

Related: Natural gas demand outstrips production

Twenty-one years after the first serious talk about transferring Caspian gas to Europe, and 12 years after the Southern Gas Corridor became EU policy, the market finally delivered Caspian gas to European consumers.

But the Southern Gas Corridor transports only 10 bcm to Europe (this year the amount is expected to rise to 12 bcm). Can this be seen as a success? Does it confirm Brussels’ commitment to diversify outside Russia?

Far from it. In the same 21-year period, Gazprom commissioned three major gas pipelines to Europe with a total capacity of over 125 bcm.

Only the last of these, the 55 bcm Nord Stream 2 line – partly financed by German gas companies – encountered serious obstacles, when German Chancellor Olaf Scholz finally gave in to EU and US pressure and blocked the operation, and that only in 22 February 2022, two days before Russian tanks enter Ukraine.

expensive mistakes

It is possible to further increase the volume of gas from the Caspian to Europe. Turkmenistan, which until now has been effectively frozen out of the Southern Gas Corridor, has reserves of 13.6 trillion cubic meters – the fourth largest in the world. Relations with Azerbaijan have heated up and Russia even dropped its opposition to a Trans-Caspian pipeline in 2018.

But delivering enough volumes to Europe to significantly replace or compete with Russian gas will require many tens of billions of dollars and the voluntary cooperation of the countries through which the new gas pipelines will have to be built. More importantly, Brussels may need to abandon its insistence on following neoliberal market rules.

Even so, this pipeline will take years, during which Europe will remain dependent on Russia.

This raises the question of whether the huge investment needed for Caspian gas can be better spent on another pressing energy issue that has increasingly occupied my time over the past two decades – namely, developing Europe’s renewable energy resources to meet the carbon reduction targets.

Failing to deliver significant volumes of Caspian gas to Europe is proving to be a costly mistake. This summer’s evidence of heat waves and wildfires suggests that failure to address climate change could be even more costly.

By Eurasianet.org

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