Twists in Shah Deniz II Tales

Twists in Shah Deniz II Tales 

As the race for the Southern corridor heats up, BP has decided to cool things down. Azeri gas from Shah Deniz II will eventually end up being contracted towards European markets, but it’s far from certain which pipeline consortium will win out, or indeed if it proves to have a European flag. Decisions might not be as quick as popular media commentary thinks, particularly as BP will hold out for the best possible deal. But when they take the plunge, expect a Nabucco II debate to start – and do so quite soon.

Everyone is now well aware that BP tabled their own South East European Pipeline as a fourth downstream option, alongside TAP, ITGI and the European Commission favoured Nabucco pipeline to open the Southern Corridor. Fickle or not, BP has good reason to garner major returns on Shah Deniz II gas. The British company has expended considerable commercial and political capital getting Azeri gas to the verge of European markets. Upstream investments tot up to around $22bn, a serious chunk of change for any oil major put onto Baku balance sheets, money that BP will be keen to get back sooner rather than later. The time and effort required to nail down Turkey’s Botas over transit fees shouldn’t be underestimated either. BP, Azerbaijan and Turkey finally managed to strike a tariff deal over the 10bcm of gas making its way from the Georgian-Turkish border onto Greece and Bulgaria in late October – a further 6bcm will remain in Turkey after fierce haggling from Ankara.

Whether Turkey stays on the contractual straight and narrow in future remains to be seen – particularly as Russia still has a stake in the Turkish game through Blue Stream supplies, not to mention the nascent South Stream project. The fact it will be a bumpy ride between Moscow and Ankara to agree on domestic supplies and South Stream routes, underlines the degree to which the October deal is a crucial piece of the Southern Corridor jigsaw. Azeri gas will be Ankara’s stick used to eat the Russian (gas) carrot.

But none of this directly flagswhat happens to Azeri gas once it leaves Turkish turf. This is where Shah Deniz downstream focus will now be most pressingly placed. Despite endless column inches devoted to the BP’s SEEP ‘destination’ markets of Bulgaria, Romania, Croatia and Hungary as to whether demand would be sufficiently buoyant to soak up an extra 10bcm of gas - this misses the point. Once gas has made it as far as Hungary, it’s basically made it to Austria, which means Baumgarten. Baumgarten means feeding gas into the European grid writ large. BP would basically be priming European liquidity and volume across the board; structural South East European dependence questions are at best, a red herring.   

If that ‘answers’ lingering demand questions, we then need to consider whether BP would want to get directly dragged into Southern Corridor politics – the most tedious of which invariably emanate from the European Commission and its pet Nabucco project. BP are painfully aware that they need to bulk up upstream positions, so the likelihood of being pulled into messy downstream pipeline politics is quite limited – irrespective of any stated Azeri desires to sell ‘directly’ into European markets.

Rather, what the SEEP proposal does is lay down a marker to exact better terms out of the ITGI or TAP projects on tariffs, and in some cases, gas prices. BP can leave their own proposals on the table for as long as the like (particularly as they claim SEEP can all be done with pre-existing pipes)until one of the other players either decides to meet the required terms - or at the very least - shifts significantly in that direction. The chances of this being wrapped up by Christmas are probably limited – the game will keep being played until BP is satisfied they’ve got the best terms in town. 

That’s why Nabucco can only remain part of this narrative if the European Commission accepts that it is willing to directly subsidise the pipeline and come out and say so. That applies to upfront CAPEX and longer term throughput costs. Empty (or half filled) pipelines tend to be rather expensive to run. Given that’s about as likely to happen as the EU ever securing serious supplies East of the Caspian Sea (i.e. Turkmenistan), we’re basically been left with a two horse ITGI vs. TAP race, albeit with an additional BP ghost rider jockeying along. The relative merits between remaining projects will have more to do with the commercial terms being offered rather than a geopolitical beauty contest of where they end up. ‘Going Greek’ on the ITGI might be something BP is less smitten on that it would have been a couple of years back.  

If you thought all that was complex, then ‘becher’s brook’ is still to be jumped. Russia could easily upset the entire Southern Corridor show by tabling a serious offer for Azeri gas to fill South Stream pipes. BP would not only evade messy pipeline politics involved by making the Southern Corridor a pure play Russian affair, they might also gain lucrative upstream positions with the Kremlin as part of a deal.Conspiracy theory some might say, but the logic for a BP-Russia deal is a plain as it is compelling to see.Let’s not forget, initial South Stream gas is slated to come online by 2015, not the 2017 target most European based plans have earmarked. As long as BP keeps SEEP in the game, they are basically open to better offers. 

Ultimately if Russia doesn’t play the Azeri card to clip Turkish (and EU) wings, Europe will probably get its 10bcm of Azeri gas through one of the pipeline consortia. The key question then is whether that’s enough elasticity and diversity of supply for Europe to live with. If Europe can’t live with 10-20bcm of new gas, a ‘Nabucco II’ debate will start all over again. The planned pipeline will no doubt be even bigger (50bcm), even though the prospective gas to fill the pipes will be as ‘virtual’ as ever (Absheron).

Matthew Hulbert is Senior Research Fellow, Clingendael International Energy Programme, Netherlands Institute of International Relations