BY Drd. BABKEN MATEVOSYAN
In late June this year I was invited to a conference in Bucharest where experts and officials from across the region were discussing the regional energy developments, right after Azerbaijan, Romania, Georgia and Hungary officially reanimated the AGRI project (transportation of Azerbaijani natural gas to Constanta by LNG) . However, on the sidelines and during the private talks experts agreed, that the project was overoptimistic and would hardly be realized. That was the opinion given by the officials and energy experts from the region, specialists who conducted the feasibility study, as well as the team leaders for EU gas infrastructure development institution that was the one to give a green light for funding. Moreover, despite some loud statements by SOCAR (State Oil Company of Azerbaijan Republic) deputy chef, we all agreed on several key ideas: Azerbaijan will not have enough gas to supply the project by 2019 and beyond; Romania will remain self-sufficient with natural gas; and multibillion-dollar LNG (liquefied natural gas) terminals in the Black Sea shores are economically unconvincing.
Besides AGRI, many other energy projects have been launched in recent years in the region with different levels of support and possibility of success, namely: Vertical Gas Corridor, Southern Gas Corridor (first NABUCCO, then TANAP and TAP), Russian-proposed Turkish Stream, Slovakian-proposed Eastring, BRUA (Bulgaria, Romania, Hungary, Austria), various LNG terminal and shell gas initiatives. So, why is Romania officially supporting AGRI and why is the energy market of Central and Southeastern Europe in such confusion?
Here we can see the shortcomings of classical International Political Economy (IPE) approach, which implies that actors, and the policies of these actors, are economically rational (Rational choice theory), i.e. importing and exporting states, the political component prevails along with long-term security measures. However, to better understand and evaluate the current situation, we need to start from the bases: supply and demand data and its dynamics. It is noteworthy, that, according to EUROSTAT, despite the reduction of the European Union’s natural gas demand to 409bcm (billion cubic meters) annually with the help of more efficient usage, demand is growing in Southeastern Europe and, particularly, in Turkey. According to some experts Turkey’s current annual 65bcm demand will reach 85bcm by 2023. In total, by the time most of these projects could get operational (2020-2025), the region will need additional 40-45bcm of natural gas. That is the volume of a single, economically rational gas pipeline.
The situation with supply is much more complicated and politicized; and thus requires deeper discussion. In February 2015 the European Commission launched its new project – European Energy Union , which implies that the countries should have diversified gas supply with at least three alternative sources by 2030. This was a positive signal for building regional gas interconnectors with the possibility of reverse (Vertical Gas Corridor, BRUA, Eastring). Several interconnectors are currently under development or construction between Romania and Bulgaria, Romania and Moldova, Bulgaria and Greece (which can be connected and supplied by TANAP), and Hungary and Romania.
Yet, it is uncertain how this system will diversify its supply and where it can get additional gas to cover the growing demand. Moreover, some recent geopolitical shifts and emerging factors can, and theoretically will, affect the gas market in the region.
1. Russia, which uses natural gas as a foreign policy tool, promised to stop the gas transit through Ukraine by 2019;
2. Russia terminated the South Stream project to Bulgaria (Bulgaria is 100% dependent on Russian gas) and proposed new Turkish Stream pipeline through the bottom of the Black Sea to Turkey. The initial volume of the pipeline should have been over 60bcm annually, but later countries signed agreement only on first phase of the project (14bcm). There are still disagreements between the sides due to political reasons.
3. NABOCCO was improbable due to lack of suppliers and Azerbaijan signed TANAP (Trans-Anatolian gas pipeline), which avoids Bulgaria, Hungary and many other countries in the region. Moreover, only 5bcm will pass through Turkey according to the contract with Shah Deniz II, while NABOCCO implied 30bcm;
4. It has become practically impossible for Central Asian countries, such as Turkmenistan and Kazakhstan, to join Azerbaijani and any other west-oriented project as they signed agreements and invested billions of dollars in pipelines towards China and Asian markets. Besides, the issue of the status of the Caspian Sea is far from being resolved, and no pipeline can be constructed without the agreement. Furthermore, Russia made it clear that it will not tolerate any movement toward western direction that can avoid its territory or control;
5. Iran’s nuclear deal opened new possibilities for the Central and Southeastern Europe gas supply as Iran possesses one of the biggest proven natural gas reserves and, conditions being favorable, could even substitute Russia in the European market (Russia supplies 30% of EU’s 409bcm demand). However, it will be much more beneficial for Iran to look eastwards and fight for Indian and South East Asian emerging markets, that offer a vast and growing demand. In addition, Iran’s infrastructure is damaged, outdated and requires huge investments. Most experts agree that Iranian gas is not reaching Europe anytime soon, taking into account technical and geopolitical factors. Nevertheless, Iran has a huge pipeline connecting it to Turkey, and any Iranian supply will go through this route, thus avoiding Azerbaijan and AGRI.
6. In February 2015 Chevron, the last American shale gas company that operated in the region, abandoned its shale concessions in Romania and Poland where there are probably the biggest shale gas reserves in the region. This closes the page of shale gas exploration in the region.
7. Newly discovered offshore natural gas reserves in eastern Mediterranean Sea, including Israeli Leviathan field, have over 500bcm proven reserves and can become a game changer in the regional energy market in the long run. However, the reserves are a constant dispute not only between Israel and Lebanon, but also Cyprus and Turkey, the letter claiming that Turkish part of Cyprus (Northern Cyprus) has rights to offshore fields south from the island.
Surely, this does not include all the factors, political or otherwise, that change and shape the natural gas market in the Central and Southeastern Europe, as every country has its own domestic agenda, supply and demand curve, internal and external issues. Nevertheless, we can notice the pattern of a more active discourse around the topic of energy security as a result of above-mentioned factors.
It must be pinpointed that policies of supply countries are of no less importance. Russia’s anti-western rhetoric and Ukrainian crisis, as well as elite’s need to show a quick victory and please China, brought about a Sino-Russian agreement of annual 68bcm (maximum) gas supply capacity starting from 2018. The conditions were favorable for China: prices were connected to oil prices and China could buy as much gas as it wanted without paying a fixed annual amount, i.e. 68bcm is not a fixed volume and China will probably buy much less and concentrate on Central Asian sources. By that contract Russia gave up its decade-long negotiated dream of becoming China’s main supplier. Another noteworthy fact is that in 2014 Gazprom couldn’t sell alarming 173bcm of natural gas, losing billions of dollars. In this case, with no LNG infrastructure development, Russia will not have its gas selling diversified in short and middle run.
Taking into consideration the above-mentioned factors, conclusions and predictions can be drawn. In short and middle run, Central and Southeastern Europe will hardly have any alternative to Russian natural gas, however, later, LNG, probably with American shale gas, Iran or Eastern Mediterranean fields, along with more efficiency in consumption, can weaken the Russian factor. Here, EU goal for 2030 seems realizable. Russia, in turn, will hardly find an alternative gas market and will probably use all of its geopolitical tools to maintain its position in Europe, including Central and Southeastern Europe. It will also further concentrate on Turkey as a market and as a transit country.
Despite the fact that Iran and Eastern Mediterranean fields have the capacity to contribute to regional energy security and Europe will try to engage these actors, the region will hardly have any natural gas supply from the east besides Russia, and Azerbaijan in small volumes, until 2025-2030 due to geopolitical reasons as well as the attractiveness of eastern markets.
Azerbaijan has no other long term contracts and capacities besides Shah Deniz 2, that will most probably be absorbed by Turkish growing demand, taking into account low prices of Azeri gas for Turkey in comparison with Russian gas, as well as ongoing Azerbaijani investments in Turkey’s infrastructure. As for AGRI reanimation that was discussed in the beginning of the article and Romania’s political support, one event sheds light. The same day of the conference SOCAR officials announced another short-term 50 million euro investment in Romania. In return, Azerbaijani dictator gained a small win to announce to its society, and another card to play for its lobby with European mid-level officials. This case serves as a good illustration of the politically complex and multidimensional nature of the regional affairs affecting energy security.
- See also official website of the project with correspondent data http://www.agrilng.com/agrilng/Home/DescriereProiect
- Susanne Lohmann (2008). “rational choice and political science, “The New Palgrave Dictionary of Economics, 2nd Edition, see also works by Gary Backer and others on Rational Choice Theory
- From the interview with EU official responsible for the natural gas network development
- See details and plans for European Energy Union project http://www.agrilng.com/agrilng/Home/DescriereProiect
- See also gas crisis in Ukraine in 2006 and 2009
- “Chevron leaves Romania” http://www.shalegas.international/2015/02/23/chevron-leaves-romania/
- “New China-Russia Gas Pact Is No Big Deal” http://www.bloombergview.com/articles/2014-11-14/new-chinarussia-gas-pact-is-no-big-deal
- Russia produced 617bmc in 2014 but sold only 444bcm. See also http://carnegie.ru/2015/06/24/ru-60480/iaz0
- See Azerbaijani investments in Romania http://www.socar.ro/en/news/29-06-2015-forum
DISCLAIMER: The views and opinions expressed in the article are solely those of the author(s) and do not necessarily reflect the official policy or position of the ERA Institute.