AGRI Project Moves Ahead

The Azerbaijan-Georgia-Romania-Interconnector project has always been one of the lower-key projects of the Southern Corridor from the Caspian to Europe. Unlike the regional pipelines, AGRI has not been breathlessly described as part of a ‘new Great Game’ or a tool in the contest between Russia and the West.

But with liquefied natural gas increasingly important as a share of European gas supplies, AGRI could become a key part of the region’s gas export infrastructure. In the past few weeks the project, which would bring up to 8bcm of Azerbaijani gas to Georgia and – as LNG – across the Black Sea, has moved forward another step,

A feasibility study for AGRI has recently been awarded to UK consultancy Penspen, paving the way for the project’s eventual implementation in 2016. Bulgaria and Ukraine have also expressed their interest in AGRI in recent weeks. With the project apparently moving forward, the question is how AGRI can tie into the Southern Corridor and affect the wider environment for gas supplies.

Firstly it is clear that AGRI will not be a game-changer for Europe as a whole - the volumes are too small. But for the target markets – Romania, Bulgaria and particularly Ukraine – the supply could be significant, particularly if the volumes increase from 8bcm and assuming that only a limited quantity is shipped on to central Europe as anticipated. AGRI offers a degree of energy independence for the consumers which, in combination with unconventional resources, could significantly reduce their dependence on Russian gas.

Ukraine, in particular, is keen to get on board with AGRI. Kiev has been doggedly trying to cut its reliance on Russian gas: in September it announced that imports from Russia would fall to 24.5bcm in 2013, from 27bcm this year and 40bcm in 2010. Even if Ukraine were to receive all of AGRI’s 8bcm output, this would only be 14% of its 2011 consumption – but it would at least offer some insurance against cut-offs or price increases from Moscow. It would also be cheaper, with early estimates suggesting a price for Azeri LNG of around $300/tcm compared to over $400/tcm for Russian gas.

Ukraine’s hunger for gas underlines the fact that Romania is not the only destination for Azerbaijani LNG, particularly since Ukraine is already moving ahead with plans to build an LNG terminal at Odessa. There could, therefore, be something of a competition between Kiev and Bucharest. Azerbaijan has been lukewarm on a previous project which would take 15bcm of Azeri LNG from Georgia to Ukraine but if Ukraine has the infrastructure and the appetite for large-scale LNG imports, it may be a more attractive consumer than Romania.

This competition could easily be resolved in the long-term, once more Azerbaijani gasfields come onstream or if a way was found for Turkmen gas to come west, by building a terminal in both countries. However until AGRI scales up its operations only one destination will be chosen.

AGRI would also be valuable for Azerbaijan and Turkey. As a producer with rapidly increasing gas output and rather limited options for getting it to market, Azerbaijan benefits from any alternative export routes. AGRI would enable it to avoid putting all its eggs in the Trans-Anatolian Pipeline basket, ensuring another route to European markets if TANAP is temporarily forced to shut down. Initial speculation that AGRI would compete with the cross-Turkey route seems pessimistic given Azerbaijan’s rising production.

Turkey, meanwhile, plays a critical role thanks to its geography. As the keeper of the Bosphorus straits, Ankara has been reluctant to allow LNG tankers from other states, particularly Qatar (which Ukraine has repeatedly sought to buy LNG from) to enter the Black Sea.

Although perfectly legitimate on grounds of safety – the Bosphorus is crowded and dangerous as it is, without huge LNG tankers added to the traffic – this also allows Turkey to act as a gatekeeper. If Black Sea states want gas from Qatar, the logic goes, it will have to be turned into gas on the Turkish border and re-exported via pipeline. Turkey can only benefit from this.

One project which AGRI would almost certainly kill off is White Stream. This was intended to take around 8bcm of Azerbaijani gas across the bed of the Black Sea, from Georgia to Ukraine, although the project has lost its momentum in recent years. White Stream was always a Georgian and Ukrainian-led initiative with fairly tepid Azerbaijani support: AGRI, which is more flexible and enjoys wider backing, will almost certainly be the final nail in its coffin.

If AGRI has an Achilles heel it is the cost. LNG and re-gasification terminals do not come cheap. The provisional cost for each terminal is around $1 billion and excludes the cost of LNG carriers. Given restrictions on transit through the Bosphorus the carriers will probably be locked into a single route, which may be too inefficient for shipbuilders and owners.

Adding to the commercial uncertainty is the fact that LNG is also considered to be commercially worthwhile only at distances over 2000km, significantly less than the distance across the Black Sea (around 1200km at its widest point). It will remain for Penspen to establish how AGRI can actually be made profitable.

If the states involved can find a way to deal with the financial issues, however, AGRI could be a valuable contribution to the broader Southern Corridor. It would give Azerbaijan an alternative export route; would give Turkey additional leverage in its role as a regional gas hub; and five Black Sea littoral states more flexibility in their gas imports. AGRI may not be a game-changer but it will certainly make things more interesting.

Alex Jackson is an analyst of political, energy and security issues in the Caspian region. He is based in London and can be contacted at ajackson320@gmail.com.