Black Sea Nations Set New Rules for Power Play

Could Romania, Georgia and Azerbaijan’s new liquefied natural gas corridor compete with the EU-backed pipeline proposal Nabucco or is this a gambit for strengthening the countries’ bargaining position with Turkey and Russia?

Romania is spearheading an inventive solution for diversifying natural gas supply to Europe through a Liquefied Natural Gas (LNG) terminal in Constanta in combination with Azerbaijan and Georgia. 
However critics argue that the proposal is a tool created by three smaller Black Sea nations to give them a stronger bargaining position with their mightier neighbours, Turkey and Russia, over gas supply and transit routes.

“This project demonstrates our political will for connecting strategically Europe with the Caspian Sea region in the domain of energy,” Romania’s President Traian Basescu has stated. “This is our contribution to the energy strategy of the EU and the plan of action in the energy domain.” 
However some analysts question the practicality of the project, the expense of its construction and its possible realisation in an environment where many gas transit ‘concepts’ are competing for domination of the Black Sea.

“Azerbaijan wants to prove to Russia and Turkey it has options and an energy project like this one can give it leverage to do so,” says Eurasia analyst for global intelligence company Stratfor, Eugene Chausovsky. 
The AGRI interconnector aims to transport Azeri gas by an existing pipeline to Georgia’s Black Sea coast, where an LNG platform will liquefy the gas. Tankers will transport the liquefied gas across the Black Sea to Constanta, where a second LNG terminal will re-gassify the product and deliver it by pipeline to Hungary and then to the EU.

At this stage Georgia is unsure whether the location of its LNG Terminal will be in Kulevi, where Azerbaijan’s State Oil Company owns an oil terminal, or in the port of Poti.

The route is the same as the unrealised 1,100 km pipeline project White Stream, which was set up by a London-based consortium of independent investors who worked as advisors on Georgian pipelines. This project fulfilled the EU’s demands of building a southern corridor of diversifying gas supply sources and transit routes and is the most direct route from central Asia to central Europe, although it bypasses Turkey.

The two to five billion Euro project is a new enterprise for the Black Sea nations, as none of the participating countries have set up an LNG terminal before. In the last few years, Romania was musing the idea of building an LNG energy link with Qatar. 
There will be an auction for private developers to build the LNG terminals – which will be the main bulk of the necessary investment, as much of the pipeline infrastructure is in place.

But the project is set to rival Nabucco – an unrealised seven billion Euro 3,300 km pipeline connecting the Caspian Sea region with west Europe through Turkey, Bulgaria, Romania, Hungary and Austria. 
Critics argue AGRI and Nabucco will be competing for limited sources of financing and for a limited sources of gas, mainly from Azerbaijan. 
AGRI will probably aim to gain financing from International Financial Institutions (IFIs) – such as the World Bank, European Bank for Reconstruction and Development and the European Investment Bank. 
These IFIs are committed to the EU-backed Nabucco project and, in September, began an appraisal process for Nabucco, which could lead to a financing package worth four billion Euro.

Energy analyst at Washington DC’s Jamestown Foundation Vladimir Socor calls this pledge by the IFIs the “most significant milestone” for Nabucco since its inception. “It provides that long-expected boost to the project’s credibility with Caspian gas producers and European gas importers,” he states.

The IFIs are lending massively to developing nations reeling from the financial crisis and there may only be limited billions available in credits. 
“But I would not say they are competing - Europe needs as much diversification as possible – AGRI or Nabucco or other possible developments are essential for Europe,” argues Georgian Ambassador to Romania Levan Metreveli. “Europe needs it and more Europeans have to understand that - Hungary’s interest in AGRI demonstrates that Europe is getting more involved.”

Nabucco aims to transit - at its first stage - eight to ten billion cubic metres (bcm) per year up to a maximum of 32 bcm of gas. The source countries for the gas could be Azerbaijan, Iran, Iraq or Turkmenistan. 
Meanwhile AGRI aims to transport seven bcm per year and does not have the same dimensions as Nabucco in the long term. Participating countries say the project is complementary to Nabucco and not an alternative.

But Nabucco has seen multiple delays for both economic and political reasons. 
“Nabucco still has problems with some source countries,” says one analyst. “The Turks do not want Iraqi gas to be used as it comes from the Kurdish region and the west does not want Iranian gas to be used, because of that country’s ongoing nuclear programme.”

Therefore the only secure source of gas for both projects is Azerbaijan. If the two projects go-ahead at the same time, a problem may be the volume of gas available from the Azeri Shah Deniz platform, especially as Azerbaijan is also supplying Russia with gas on a year-by-year basis.

“The AGRI project - if pursued seriously - can undermine Nabucco by reducing the volumes of Azeri gas available to that pipeline project,” argues Socor. “Within the current parameters of production and supply, and pending a boost in Azerbaijan’s gas production or a Trans-Caspian flow of Turkmen gas, a choice must be made between pursuing Nabucco or AGRI.”

Russian oil and gas group Gazprom also has a rival pipeline project, South Stream, which transits Russian natural gas across the Black Sea to Bulgaria. Both South Stream and Nabucco are shooting past any deadlines for any further development and there is fresh speculation that these pipelines are no more than gambits to bargain away in deals between Russia and the EU.

“AGRI is very similar to projects like Nabucco and South Stream in that it is meant more as a political tool than a feasible project that has a realistic chance of being completed,” says Chausovsky. “While Nabucco is used as leverage for the Europeans to diversify from Russia, and South Stream is Russia’s answer to Nabucco, AGRI is Azerbaijan’s way - with Romania and Georgia - to send Moscow a message that it too has leverage.”

But a project now under development in the north is changing the game in the south. Gazprom’s 7.4 billion Euro Nord Stream gas pipeline linking Russia to Germany has started laying down the pipes for the 1,224 km Baltic Sea project with a capacity of 55 bcm. The first half of the pipeline is due for 2011 and the second for 2012.

Due to this precedent, Chausovsky says none of the three projects - Nabucco and South Stream or AGRI - can be completely ruled out.

The EU may also want to push forward either AGRI or Nabucco because it will be increasing its reliance on Russian gas by 2012 due to Nord Stream.

Russia will not be fond of AGRI as it has nothing to gain from the project and Turkey and Ukraine could raise objections as this is an energy proposal that bypasses both countries on their doorstep. “Turkey’s opposition would certainly contribute to preventing this project,” says Chausovsky.

Meanwhile Russia is consolidating its military presence in eastern Black sea region. The country has troops present in the breakaway republics of Abkhazia and Southern Ossetia in Georgia and this year signed a deal to keep naval fleet in the Black Sea at Sebastapol in Ukraine until 2042 and a military base in Armenia until 2044.

However Russia will need to ensure political stability in the Black Sea region in the run up to its holding of the Winter Olympics in 2014 at the coastal town of Soci, which is meant to herald Russia’s return as a host for global sports competitions.

Gas talk

Supporters of the AGRI interconnector project are Azerbaijan, Romania and Georgia, who back the project at a state level, while Hungary is also interested.

The move consolidates a strengthening relationship between the three countries, who may need to combine political forces in the future for negotiating with Turkey and Russia on energy issues.

At this stage all that is in place is a draft charter on the venture between Azerbaijan’s state oil company, Georgia’s oil and gas corporation and Romanian gas producer Romgaz, which itself is slated for privatisation of a minority stake in 2011.

President Traian Basescu is keen to open up the project to other states. He announced the project has the support of the current leadership in the Republic of Moldova, and he intends to also woo Bulgaria. If the project moves on, a further branch could develop to source gas from Turkmenistan.

The USA benefits from the project as a gas transit route though Georgia would give this country - a strong ally of Washington - more political security. For the EU, it would also reduce the 27 member-bloc’s reliance on gas from Russia.

AGRI will probably need a big name private supporter. “We are not sure at this stage if a private company could become a shareholder, but cooperation is welcome,” says Georgia’s Ambassador to Bucharest Levan Metreveli.

In the region, Croatia has been planning since 2007 a one billion Euro LNG project ‘Adria’ in Omisalj on the island of Krk. The main shareholders of this project are Germany’s E.ON, France’s Total, and Austria’s OMV. “These would be the type of energy firms needed for participation in AGRI,” says Eurasia Analyst for global intelligence company Stratfor Eugene Chausovsky. “The participation of such shareholders would help, but that by no means guarantees the project would get off the ground quickly.”

Bucharest will be the HQ of AGRI’s project company and its administrative centre. The US Trade and Development Agency is financing a feasibility study on the necessary size and throughput of an LNG Terminal in Constanta, which should be available by the end of 2010. The three participating countries will also appoint a company to draw up a feasibility study for the entire project.

This article was provided with the kind permission of thediplomat.ro