Gulmira Rzayeva: Final Stretch for the Southern Corridor

Gulmira Rzayeva provides insightful comments and remarks regarding the final countdown towards the selection of the preferred route of the “Southern Corridor” natural gas pipeline currently being contested between Trans-Adriatic Pipeline (TAP) and Nabucco West. Moreover she adds her estimations on the future prospects of Azeri gas for the European Union markets, as well as, the potential collaboration and future projects between Azerbaijan and Central Asian producers.

Azerbaijan’s SOCAR key role in a multitude of ongoing projects in the regional natural gas trade is highlighted, while the complexities of these issues are analyzed. It is more than certain that once the Southern Corridor selection is finalized, more projects will come that will encompass a wide range of both producers and consumers of natural gas in a region stretching from the Caspian up to the Danube and the Adriatic Sea.

“Important facts that will play decisive role in selection of the pipeline are terms and conditions of Gas Sales/Purchase Agreement”

The selection for the preferred route of the "Southern Corridor" by the Shah Deniz consortium is on the final countdown. What is the feeling in Baku's energy circles and how in general do you view the process unfolding? 

On 28th March both NW and TAP submitted their Pipeline Decision Support Packages. It will play crucial role in decision making on the selection of the pipeline. Although the 48 inch diameter of NW makes it more expensive for 500 million US dollar than its 42 inch competitor TAP (**), it makes sense for Azerbaijan from commercial view to select scalable pipeline considering bigger volumes to come from other fields offshore Azerbaijan; as the economics of the scale is given in favor of 48” - size is the matter. Thus, it is quite possible that Nabucco West will submit two scenarios, 42’ and 48’ to show the economics as evidence for commercial attractiveness of 48”.

Another important fact that will play decisive role in selection of the pipeline is terms and conditions of Gas Sales/Purchase Agreement (GSPA). The negotiations with the European gas buyers resumed in January this year. Potential buyers received GSPAs draft in February 2013 and intensive negotiations are ongoing (with NW’s and TAP’s potential buyers in parallel).

The target is to initialize GSPAs by the end of April 2013 and to execute them in June 2013. After the negotiations finalize the picture will be clear as to what is the price for SD gas in the particular country/market, what is the volume that each company is going to buy and what will be the price setting: more gas-to-gas indexation (spot price) or oil indexation. All this will help to make a decision.

The EU is gradually entering an energy age characterized by an increasing reliance on natural gas. Do you reckon that further projects in which Azerbaijan participates are possible, apart from the Southern Corridor?

It is possible. Azerbaijan has signed MOU with Bulgaria (1bcm MoU with Greece) on exporting 1 bcm of gas from 2014. It is also possible to access Greek market via TGI (Turkey-Greece Interconnector). If there is enough gas output available for export, it is not necessary for SOCAR (could supply from other sources available currently) to wait till 2018, when SDII will come onstream (another 1 bcm MoU has been signed recently with Serbia).

In your estimation, how is the cooperation between SOCAR and Gazprom unfolding, and what may be the challenges and also the strong points ahead?

I don’t see any challenge in SOCAR-Gazprom cooperation. It’s been 3 years that SOCAR exports gas to Russia (to cover demand in the Northern Caucasus) and is going to double the exported volume, from 1.5 to 3 bcm and have not experienced any problems.

As per the market, both Gazprom’s South Stream and the Southern Corridor that are targeting the same markets, here I also don’t see any major problem. Two scenarios are possible: It can be either market share or volume substitution. In the country markets where gas demand will be growing (The Balkans, South East European market) SD will supply additional volume of gas to cover demand.

In the markets where gas demand will be stagnating or decreasing (e.g. Italian market), the volume substitution scenario is possible. In this case those countries will lessen their import from Gazprom and replace it with the SD gas. I think the best example of co-existence of both Socar and Gazprom in the same market is Turkish market. It is been already years that both companies are exporting gas into Turkish market and never experienced any problem with market share.

What lays ahead in your opinion in future projects relating to the Central Asia natural gas sector, especially with countries such as Uzbekistan-Turkmenistan? 

In my view, Uzbekistan assigned its export to Russia (considering cooperation with Gazprom and Lukoil in gas production and processing), but increasingly redirecting those and new volumes towards China.

With TKM you never know the policy of multi investor diversification hasn’t really worked as Russia and Iran (additionally is being under sanctions which shrinking business activity), TKM’s traditional export markets as leading gas producers experiencing problems in monetizing their own volumes.

China is the only market which could absorb bigger TKM volumes, however the latter has to serve nearly $10bln loan of Chinese Development bank – half of export volumes are being paid in cash, another half serving the loan.

It is really up to TKM to decide if it wants to establish direct link to the true liberalized European markets. However, it is in nature of TKM to observe a while.

Regarding the cooperation between Azerbaijan and Balkan countries such as Bulgaria, Romania and Greece - does a company like SOCAR view them as long-term costumers for gas and are there any plans to boost cooperation between all of them?

Azerbaijan is interested in long-term cooperation with those countries, especially political from strategic point of view.

However, personally I don’t see any necessity to be present in each of energy (gas) champion company, unless really economics given.

(** TAP comments that its proposal allows for 48 inch diameter pipe and fully scaleable to more than double the capacity.)