Europe's plan to control Azeri gas supply in jeopardy

LONDON/BRUSSELS Fri Aug 3, 2012 9:01am BST

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LONDON/BRUSSELS (Reuters) - Europe's plan to secure and control a supply of Azeri natural gas, backed by legal agreements, is in jeopardy as Azerbaijan joins forces with Turkey to own and operate the main export pipeline.

By creating a so-called Southern Corridor to bring in large volumes of central Asian gas, the European Commission hopes to reduce dependence on Russian gas and avoid supply disruptions caused by disputes between Russia and Ukraine over gas deliveries via Ukrainian territory.

The Commission's initial plan was for European utilities to build a single pipeline to transport gas from Azerbaijan's Caspian Sea through Turkey to European markets, all under EU regulation and with limited possibilities for diverting gas en route.

Azerbaijan and Turkey are following their own agendas in developing the gas corridor, however, which in many ways directly oppose European interests and make legally binding commitments with Europe unlikely.

The Azeri government and the consortium of companies developing the Shah Deniz 2 offshore gas field have made clear that they prefer two separate pipelines.

Azerbaijan and Turkey will build the Trans-Anatolian Pipeline (TANAP) to supply Turkey's domestic market and carry gas to the EU border. A second will run from the Turkish border to major EU markets, with two proposed routes under consideration.

"TANAP is connected in the first instance with the interests of Azerbaijan and Turkey and not with any third country," Fikrat Sadykhov, political science professor at Baku's Western University said in a paper for Azerbaijan's Diplomatic Academy.

The Azeri government hopes to get a better deal for its gas supplies, and Turkey plans to use gas transit as a political lever in its European Union accession talks.

The European Commission and the government of Azerbaijan in 2011 agreed in a joint declaration to develop the Southern Gas Corridor together.

"Those agreements set the terms under which gas will eventually reach Europe. Once ratified, they provide the legal guarantees needed," said Marlene Holzner, a European Commission spokeswoman.

But lawyers say the agreements are of no significance without a committed gas supplier. The Shah Deniz consortium - led by BP (BP.L), Statoil (STL.OL) and Azeri state energy company Socar - is currently the only viable supplier of central Asian gas.

"Unless a creditworthy gas supplier has signed a long-term agreement to supply, this memo is meaningless," Kirk Lovric, a lawyer at Hunton & Williams in London, said.

TURKEY NEEDS GAS

TANAP, 80 percent owned by Socar and 20 percent by Turkey's Botas, will start by carrying 16 billion cubic metres (bcm) of gas per year from 2018.

Six bcm are earmarked for Turkey's domestic market and 10 bcm - a mere 1.5 percent of Europe's annual demand - for Europe. The total could eventually increase to as much as 60 bcm.

Azerbaijan's main goal is to prevent European customers and EU market regulation from having too big an influence on the transportation process, the government-funded Center for Strategic Studies (SAM) said in a research paper.

"The Azerbaijani government as an owner of the gas would not want to transport its gas via the pipeline that belongs to the consortium representing the interest of the consumer countries and be thereof dependent on such an infrastructure where its interests are not represented," the paper said.

For Turkey, the SAM paper said that the motivation was of a more political nature.

"Turkey's greater involvement would increase its negotiating power vis-a-vis the EU and its accession talks."

Additionally, Turkey's demand for gas is rising at faster pace than it can find new supplies, so it will be keen to increase its share of supplies through TANAP.

"It was only logical that SOCAR and its Shah Deniz partners would want to build a dedicated, standalone pipeline," the SAM paper said.

By splitting the pipeline route into two pieces, Azerbaijan and Turkey also avoid EU regulation for the segment that runs through Turkey.

EU energy regulation forbids a single company or consortium from owning more than 50 percent of assets in the upstream, midstream and downstream projects of a gas value chain.

"SOCAR would want to hold at least 50 percent (in TANAP)," the SAM paper said. "There is a completely different approach from the consumer side at the other end of the network, namely the EU, which differs from the position of the upstream players."

TANAP will also make it more difficult to realise the European Commission's plan to bring gas from Turkmenistan across the Caspian Sea and into Europe.

The Commission would have to rely on TANAP to transport this gas to the EU border, something Azerbaijan has little interest in doing since this would bring competing gas to its markets.

"Azerbaijan is reluctant to commit capacity for Turkmen gas in its own pipeline system," the SAM paper said.

Adding to the EU's problems, the joint declaration between the Commission and Azerbaijan lacks binding commitments from Azerbaijan.

Under the agreement, Azerbaijan has the option to supply non-EU members in southeastern Europe with its gas, which effectively means Turkey.

(Additional reporting by Julia Payne in London, editing by Jane Baird)

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