The project of a Trans-Caspian Pipeline (TCP) between Turkmenistan and Azerbaijan via the Caspian Sea is on the table again after the strategic decision to open the Southern Gas Corridor linking Shah Deniz 2 with the European Union via the Trans-Anatolian Pipeline (TANAP) and Trans-Adriatic Pipeline (TAP) projects. Piping Turkmen gas to Europe appears to be the next logic step in the development of the Southern Corridor and has recently become very topical. This paper seeks to contribute to the discussion about TCP by analyzing it from both economic and business angles.

TPC depends heavily on Turkmenistan which is interested in the option of direct gas sales to Europe. However, the project faces a number of obstacles.

Firstly, Turkmenistan has signed a strategic agreement with China for 30 billion cubic meters of gas annually in 2007, the volumes of which have only recently reached targeted figures. [1] The existing pipeline between Turkmenistan and China (via Uzbekistan) has the capacity to transfer up to 65 bcm a year. Uzbekistan is expected to add 10 bcm to Turkmenistan’s 30 bcm, but the remaining matter of 25 bcm represented a sticking point in the negotiations between China and Turkmenistan. A final agreement was reached on September 4th, 2013. Turkmenistan will produce the additional 25 bcm a year for China from the new giant gas field, South Elotan; the field is currently undergoing development. Almost all annually produced gas from South Elotan will be sent to China. [9] Given that China financed a huge share of the project via direct-credit and controls the field’s development, which widely features Chinese subcontractors, Chinese involvement in South Elotan - originating gas deals would be hard to circumvent [2]. Furthermore, South Elotan, Turkmenistan’s most active project, has certain limits on annual production and, without volumes from South Elotan, Turkmenistan will be hard pressed to find another 30 bcm for the EU.

Additional crucial factors are the number of international companies (IC) on the market, the availability of capital, labor and technologies ICs provide and IC involvement in the development of the new aforementioned gas fields. It is well- known that Turkmenistan is a difficult business partner and, as such, there are few ICs presented on the national market; the Turkmen Business climate is unlikely to change in the short run. National productive forces are predominately state-owned and have limited access to the advanced technology and equipment required to develop Turkmenistan’s challenging new fields economically. Meanwhile old fields (Dovletabad, Yashlar, Samandepe) will still require adequate upkeep in the following decade. Taking into account the necessities and challenges facing the Turkmen petroleum sector, it is difficult to count on the timely development of newer fields and, by association, a rapid growth in annual production is unexpected.

There are also two important players which add uncertainty to TCP: Iran and Russia. Iran may begin to play a stronger role on international gas markets and if it increases sales of gas from southern fields it might be interested in increasing its gas purchases from Turkmenistan for domestic use in its northern regions. Current capacity affords Iran the ability to buy up to 20 bcm a year. [8] Russia has a strong interest in the control and resale of Turkmen gas as well. It has a long history with Turkmenistan and may again increase purchases which fell from 50 bcm to 10 bcm in 2009. Both actors’ decisions are very politically influenced and therefore they might be interested in Turkmen gas even without economic motives.

Additionally, there is a new project which is in direct competition with TCP - the Turkmenistan- Afghanistan-Pakistan-India (TAPI) pipeline. TAPI has received significant international support lately and, while showing much better progress than TCP, may attract another 30 bcm.

Turkmenistan has potential but also faces some economic and technical restrictions which it does not demonstrate a political will to remedy. The availability of additional volumes for Europe in such circumstances is under serious doubts and even if they do appear, the choice of transportation routes and buyers will be made under a high level of competition between alternative projects.

A key role in this project also belongs to Azerbaijan. Baku officially supported this project but, from a business standpoint, Azerbaijan is not interested in additional volumes of gas for its new pipeline to Europe at this moment. Yes, Azerbaijan would earn transportation fees, but theses might not make up for losses from additional competition. Hence, the logic here is that Azerbaijan should first place its own gas

profitably, protecting itself from competition with new producers. In this situation, political gains and transportation fees from TANAP (68% SOCAR controlled) and Azerbaijan proper will always help warrant the Trans-Caspian project another look. However, the only conditions under which Baku will give serious thought to TCP are signed contracts for all Azeri gas as the sole initial source for the Southern Corridor. Azerbaijan has launched Shah Deniz phase 2 and has signed long-term contracts for the gas. But it is an international consortium that controls the field. It was a big challenge to bring Azeri gas to Europe but Shah Deniz served its purpose as a locomotive to create transportation infrastructure to the EU. [4] Gas from Shah Deniz 2 will come online around 2019-2021 but the availability of an export route for gas will give a strong impulse to the development of other gas reserves. Considering the potential of all the fields in and around the Absheron peninsula, we can conclude that Azerbaijan will be able to increase its export greatly. Many of these fields are under Azeri control and will be profitable to the country, but will also take years to develop properly – estimated commercial production for many is around 2022-2025. As such, Azerbaijan has little interest in competition with Turkmenistan before it guarantees its own future and locks in fair prices for its prospective fields. [7]

It should also be taken into account that the gas market in Southern Europe is very competitive. Assuming that Azerbaijan will contribute an additional 14-16 bcm of gas from other fields (thereby fulfilling TANAP’s 30bcm capacity), Azerbaijan will supply between 25- 32 bcm a year to Europe. Where will this gas go? Italy may absorb an additional 12-15 bcm and Balkan countries 7-10 bcm (provided new infrastructure is constructed). Besides that, there is the possibility of new gas from Iraq and Israel, destined to be exported to the Southern Europe, and a several new LNG projects. Baku is not interested in yet another competitor for Southern Europe. In this case, property and equity rights and control over the infrastructure are very important. Currently, there are no investors for new infrastructure to support an additional 30 bcm of Turkmen gas. If we consider these volumes we have to admit that new pipelines along South Caucasian Pipeline, TANAP and TAP (or

alternatives) are required. It would be possible to add 10 bcm of Turkmen gas to existing/planned pipelines but then an increase in Azeri supplies would be impossible. On the other hand, 10 bcm are not commercially attractive and do not merit the start of a new project. In any case, the development of infrastructure requires investments and, taking into account Azeri control over TANAP, Baku has the power to decide on this issue. EU and Turkmenistan may not like Azeri control over the infrastructure, but Baku is unlikely to compromise on its position or role in regional energy projects which it initiated in the first place.

Considering the unpredictability of so many actors, Turkmenistan is likely to continue with its strategy of gas sales at its border; Turkmenistan’s fear of becoming dependent on transit countries is actual and reasonable. From the points of view of the EU and Azerbaijan, this means no guarantee for either a deep commitment from Turkmenistan or the availability of the required gas. If Ashgabat involved itself in the Southern Corridor project, it would be interested in its success, but if Ashgabat simply chooses between the best commercial opportunities then TCP may remain empty. The well-grounded position of the EU emphasizing energy interdependence is based on a very contradictory political image of Turkmenistan. Without Turkmenistan’s direct participation, European businesses will not offer investment for TCP. The diverse structure of players compounded by the low level of trust between potential partners creates a vicious cycle. Turkmenistan must take part in the project but is uninterested because it cannot influence the export route to Europe. Furthermore, it is difficult even to imagine a balanced ownership structure for such a mega-project in the near future.

The short-to-mid term will be tough for gas producers world-wide. Prices are under pressure and market competition is increasing as more players jump into the game. Lower prices could become a challenge for Turkmenistan due to high transportation costs. Turkmenistan’s main gas deposits locate at the south-eastern part of the country meaning 3500-4000 km from producer to the customer – a distance usually only covered by LNG. It is simply a very expensive project with uncertain profitability. [7] Essentially, the price that Turkmenistan might receive in Europe may not merit Turkmenistan’s involvement in such a multilateral project as TCP.

In summation, TCP represents a series of complications. It would be expensive to bring Turkmen gas to Europe; the risks are great thanks to the amount of actors; private enterprises would play a key role in investments and would expect hefty profits for doing so; the production chain would include five or more states from Turkmenistan to the EU all with different infrastructures and expectations; and without the necessary political will from all players, coordination will be neigh impossible, as seen in the Nabucco project.

However, in the long run, the EU would be interested in the diversification of suppliers within the Southern Gas Corridor; Turkmenistan would benefit from more buyers and routes; and Azerbaijan and Turkey would be interested in the political gains and transportation fees from the infrastructure they control. Everyone is interested in TCP from a strategic point of view, hence the continued political speculation. Nevertheless, if we go deeper into the business analyses and consider the profitability of the TCP as well as mid-term interests and the project’s feasibilities - the situation changes dramatically. The realization of the project is difficult and not so

Policy Brief by Artem Krashakov published with thanks to the Caspian Center for Energy and Environment of ADA University

 References

1. CNPC official website, Turkmenistan country profile available at http://www.cnpc.com.cn/ru/gszzyels/t kmst/

2. Gurt M. “China asserts clout In Central Asia with huge Turkmen gas project.” Reuters, September 4, 2013 available at http://www.reuters.com/article/2013/ 09/04/us-gas-turkmenistan-galkynysh- idUSBRE9830MN20130904

3. Jackson, A. (October 23, 2013) “Coordinating The Azerbaijan- Turkmenistan-Turkey Energy Relationships – the case of the Trans- Caspian Pipeline”, CCEE Policy Brief Series, available at

beneficial to all participants at this moment. Perhaps this will change in the future, but until then the project will be put on hold. It seems that TCP must wait for better timing and market conditions, possibly taking decades to materialize. Though TCP will remain a substantial topic for political declarations, it is still far