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The future of a Caspian Gas Ring: Marat Terterov, BREC Director on Southern Gas Corridor

30 March, 2017


The future of a Caspian gas rig swings between the EU and Russia

Ali Mustafa

Azerbaijan's ambitious Southern Gas Corridor project has the potential to further estrange EU-Moscow ties and trigger energy price wars.

BAKU, Azerbaijan — A white metal building protruded upwards in a large empty field along the coast of the Caspian Sea in the east of Azerbaijan. Welding sparks flickered from its floors in early March, making the structure look like a matrix, lighting up from afar. Men in fluorescent coveralls purposefully walked in and out of the building. In it, two pipes, each as wide as a redwood tree trunk, stood crisscrossed with their ends severed.

Six months later, these pipes are planned to be one of the main arteries of an ambitious energy project aimed at transforming Azerbaijan into a key gas exporter at the crossroads of Europe and Asia.

"We are sitting on two trillion cubic metres of gas," Elman Nasirov, a close aide to Azerbaijan's President Ilham Aliyev, told TRT World. "If we can get gas to Europe it will be a game-changer and everybody would win."

Azerbaijan's focus on developing its gas fields began just as falling oil prices hit its economy in 2011. A large part of the country's revenues come from the sale of crude oil, covering one-fifth of its Gross Domestic Product.

Baku's concerns over its singular source of revenue matched with those of Europe, which sought to explore new energy fields to diversify its energy mix away from Russia. In Azerbaijan, it saw a potent energy source.

The European Union (EU) member states came together in May 2009 for a summit named "Southern Corridor – New Silk Road." The summit planned out what eventually became the Southern Gas Corridor, a proposed 3,500-kilometre-long network of three gas pipelines from Azerbaijan's Caspian Sea basin. They are expected to carry 16 billion cubic metres of gas from the Shah Deniz rig alone, and likely more if other gas sources are added to the network. The South Caucasus Pipeline (SCP) would carry gas from Azerbaijan to Georgia and relay it through Turkey's Trans Anatolian Natural Gas Pipeline (TANAP) before passing it on to Greece, Albania and Italy through The Trans Adriatic Pipeline (TAP).

But the future of the Southern Gas Corridor will not be shaped by hollow pipes. It will be shaped by geopolitical realities instead, where Russia, Europe and Turkey are engaged in a power play for supremacy.

"The corridor will allow Brussels more negotiating power and help end Russian price monopolies," said Marat Terterov, founder of Brussels Energy Club. Marat said Lithuania won big concessions from Russia's Gazprom after the country began importing liquid natural gas from the Middle East. The option of trading liquid gas from the region gave Lithuania a much needed bargaining chip against Russia. Soon after, "Russia gave Lithuania a 25 percent discount [in natural gas]," he said.

Steering past tense geopolitics

Azerbaijan has cautiously steered through delicate international tensions, staying neutral when Russia annexed Ukraine's Crimea in March 2014. The EU, one of the major stakeholders in the Southern Gas Corridor, condemned Russia's military advances, describing the presence of its troops in Crimea as illegal.

"At the moment politics dominates the debate on gas supply in Europe," Terterov said. "And this project will help de-politicise the debate."

Azerbaijan was careful not to antagonise either Russia or the EU. The stakes are too high for the country: while European markets offer economic growth, Russia holds the market levers to control gas prices.

In the long run, this could mean that if Azerbaijan tilts away from Moscow and somehow happens to pivot towards Brussels, Russia can hit back hard by selling gas at rock bottom prices, making Azeri gas uncompetitive.

"Gazprom could, in theory, offer large volumes of below-cost natural gas into the transit infrastructure crossing Turkey and Greece just to block Azeri gas and any other gas from accessing the European market," said Antonia Colibasanu, a Russian energy analyst with US-based think-tank Geopolitical Futures.

The Azerbaijani government is fully aware of Russia's sheer volume of gas and its own limitations.

"This is not against Russia," Nasirov, President Aliyev's advisor said. "Azerbaijan has a balanced strategy that doesn't support any one side. We want to use our energy to make friends. This is our vision of strategic balance. It is President Aliyev's vision."

Russia produces 500 billion cubic metres of gas per year and caters to 34 percent of Europe's energy needs. That's 161 billion cubic metres of gas per year. It has access to an estimated 24 trillion cubic metres of natural gas reserves, according to state oil firm Gazprom.

In comparison to that volume, Azerbaijan's total production is 29 billion cubic metres a year. With Shah Deniz, the production will go up to 45 billion cubic metres a year.

"Completely replacing Russia is not a goal in itself," Colibasanu said. "But having something else that would not allow Russia fully controlling the energy sector, especially in regions like Central and Eastern Europe [which are transit areas and are also emergent economies] is needed for strategic purposes. Which is why Europe invested in diversifying away from Russia."

Russia, on the other hand, considers Azerbaijan as its ally. Sergey Markov, a senior advisor to Russia's President Vladimir Putin, told TRT World in Baku that Azerbaijan's ruling elite were Russophiles, who couldn't afford to leave Russia out. "Most of Azerbaijan's ruling elite speaks Russian as a first language," said Markov.

Way forward

Azerbaijan will kick start the Shah Deniz gas platform by the year's end. The gigantic 29,000 tonne installation will be set up in the Caspian Sea, 90 kilometres off the coast of Baku, and its severed pipes will be connected to the gas source.

"It'll be a remarkable sight and will take at least two months to execute," said Aslan Aliyev, the overseer of the project. "Shah Deniz will become a model for future platforms in the Caspian Sea."

The success and further expansion of the Southern Gas Corridor will be defined by whether Russia and the EU dilute their competing foreign policies. In early February, Russia's energy giant Gazprom brought discomfort to the EU when it hinted toward developing a counter gas deposit in the eastern Mediterranean.

"I wouldn't be surprised if Russia has given some sort of blessing or endorsed the corridor. It is a very fine line, not that Russia is giving orders to Baku, not at all. But there are things that happen behind the scenes which we are not aware of," Terterov said.

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