Oil shale revolution shakes up Caspian pipeline calculations

Many of the longstanding assumptions about where pipelines should be built leading out of the Caspian basin have been undercut by the oil shale revolution, the rise of LNG distribution, and the rise of China relative to Europe and the United States, and these new realities are now exerting a powerful influence on the struggle for energy resources and their export in Azerbaijan and other Caspian littoral states, according to a leading Russian analyst. In a major article in Kommersant-Vlast, Aleksandr Gabuyev says that these underlying changes in the oil and gas world mean that “many projects, whose prospects seemed to be doubtful only a few years ago now are turning out to be more realistic” and nowhere is that more true than on the key question of the construction of oil and gas pipelines to Europe that will bypass Russia. In September 2010, Vladimir Putin confidently predicted at a Valdai Club session that no one was going to be able to build a gas pipeline that would bypass Russia.  He based his conclusion on the fact that none of the proposed suppliers had enough gas to justify the kind of investment such a pipeline would require.  To a certain extent, Putin has been proved right, at least so far.  But now the situation is changing, and the prospects for exactly the kind of pipelines he dismissed as unlikely or even impossible are becoming far more real.

Even the difficulties that the Nabucco project has had can hardly be “happy news for Russia and Gazprom,” Gabuyev says.  That is because its problems are the result of growing support for the Trans-Adriatic Gas Pipeline (TAP), a project whose route is shorter and thus whose cost is less.  Moreover, the Baku-Ceyhan oil pipeline has already broken Russia’s monopoly on the export of hydrocarbons to Europe.

The April 2013 meeting of the World Economic Forum in Baku highlighted these changes and pointed to more ahead.  Its participants focused on the future of regional energy policy and consequently on “the prospects for the construction of new gas pipelines from Azerbaijan to Europe and also the laying down of a Trans-Caspian Gas Pipeline on the bed of the Caspian Sea,” Gabuyev says, noting that because the WEF operated under Chatham House rules, he cannot say more about who said precisely what.

The idea of setting up a network of pipeline to carry Caspian basin oil and gas to Europe bypassing Russia “appeared shortly after the disintegration of the USSR.”  It was pushed by US President Bill Clinton in the 1990s, and some of those who worked on that initiative—Matthew Bryza and Richard Morningstar—subsequently worked as American ambassadors in Baku, an indication of that capital’s centrality on such questions.

Their efforts have already had results, Gabuyev notes.  In 2005, the 1,768 km Baku-Tbilisi-Ceyhan oil pipeline went on line, and in 2006, the Baku-Tbilisi-Erzurum gas pipeline followed.  But even as they did, “American and European diplomats stressed that in the future, [these two] would be supplemented by new and larger pipelines” to Europe and by a 300 km connector to Turkmenistan.”  Such an arrangement could give the European Union yet another “alternative” to Russia’s Gazprom as a supplier and help make the countries of the South Caucasus and Central Asia wealthier and “more independent” of Moscow.

Moscow together with Tehran was able to block progress on the Trans-Caspian gas pipeline by citing the lack of an agreement on the delimitation of the sea.  And the Russian government used Gazprom as “its main weapon” to try to get the littoral states to agree to ship their oil and gas via Russian pipelines rather than engaging in the construction of new ones bypassing the former metropolitan center.

The 2008 economic crisis and developments in the oil and gas industry undercut Moscow’s position, Gabuyev says.  Gazprom could not fulfill its contract with Turkmenistan, and it was forced to pay a supplement to Azerbaijan to secure Baku’s agreement to ship gas northward.  That step led many in the Russian capital to conclude by the end of 2010 that Russia had “won the battle with Nabucco and the Trans-Caspian project” and that Putin’s predictions had been proven correct.  However, since that time, “major changes have taken place on the world energy market” and these have profoundly affected the Caspian region.

The most important of these, the Kommersant-Vlast writer says, is “the shale oil revolution” in the United States.  That has dramatically increased production there and equally dramatically reduced American interest in pipelines, including in and from the Caspian region.  But this revolution has also “reduced” Europe’s dependence on Gazprom and hence Russia’s influence there.  And those changes have been reflected in the decision of the Obama Administration as part of its “reset” policy to reduce its interest in promoting “many geopolitical projects on the post-Soviet space, including in the Caspian region.”

The Europeans, too, have shifted their attention, with many in Brussels now assuming that “Europe will receive more LNG from Qatar” or even from the United States.  As a result and because of the economic crisis, the European Union has backed away from its earlier support of projects like Nabucco.  Problems with shale oil prospecting in Europe itself and political instability in the Middle East have blunted this trend and kept European interest in the Caspian higher than it is in the United States, the Moscow analyst says.

Azerbaijan is the key country in all of this.  In 2016, its Shah Deniz-2 field will go fully online and produce some 16 billion cubic meters of natural gas a year, a large portion of which could be sold to Europe if pipeline capacity were available.  Baku would like such a pipeline to bypass Russia and that explains the current push for a Trans-Anatolian route (TANAP).  Final decisions about its construction, which needs to begin no later than 2014, are scheduled to be made this summer.

Some Azerbaijani officials project that by 2030 Azerbaijan will export up to 30 billion cubic meters of gas and by 2050 some 50 billion.  In addition, they are saying that they believe that a Trans-Caspian pipeline would allow these figures to go even higher—and thus make Baku an even more important player in this game.  

“For a long time,” Gabuyev notes, the construction of such a pipeline has been held up not only by the opposition of Moscow and Tehran, but by disagreements between Baku and Ashgabat over which country owns which part of the seabed.  However, the prospects of such enormous gas sales to Europe are gradually bringing the two countries closer together on this issue.  By diversifying the pipeline routes, Baku will earn more money; and by earning more money, the Azerbaijani government will be in a better position to diversity its economy beyond the oil and gas sector.

Turkmenistan, too, has its reasons for a rapprochement.  It has had its problems with Moscow, but now Moscow is much less important in Ashgabat than it was.  China is now Turkmenistan’s banker, and consequently, at least according to the Kommersant-Vlast analyst, “Ashgabat can survive” any conflict with the Russian Federation.  Moreover, China is unlikely to oppose Turkmenistan participation in a Trans-Caspian pipeline as long as much of that central Asian country’s reserves go eastward.  Consequently, however much Moscow and Tehran oppose the idea, it seems likely to go ahead.

Russia no longer can effectively employ economic sanctions, nor can Iran, although the latter might engage in another round of cyber-attacks.  After all, it did so against Saudi Arabia’s oil company Aramco in August 2012.  Or Tehran could attack one of the oil and gas platforms in the Caspian.  But that is a threat that, if carried out, would easily backfire on Iran.

In all these ways, Gabuyev concludes, “the shale revolution has been able to change not only the geography of the global flows of LNG, but also the geography of gas pipelines, at least in the Caspian region.”

Notes

[1] See http://kommersant.ru/pda/power.html?id=2178605 (accessed 30 May 2013).