Looking Ahead for Eurasian Gas Politics

Pipeline politics is often seen in very simplistic terms, and it’s true that far too much ink was spilled last year, like every year, on ‘pipeline struggles’ – but the coming year is likely to be dominated by the status of gas pipelines in the wider region.

Firstly, 2013 is of course the year in which a decision will be made on the export route for Shah Deniz gas, and thus the initial shape of the Southern Corridor. The Shah Deniz consortium’s decision between Nabucco West and the Trans-Adriatic Pipeline is expected to be made by May or June, probably the latter. Speculation is mounting over the expected choice, and although it’s still too close to be certain, it looks like Nabucco is just about in the lead.

This view is not exactly universal, given Nabucco’s long litany of problems and TAP’s successful effort to portray itself as a sensible, commercially minded proposal. Unfortunately TAP’s success therefore depends on everyone in Baku - and Brussels to a lesser extent - also being sensible and commercially minded. But seeking to avoid ‘politicising’ the project is difficult given the profoundly political context of diversifying away from Russian gas and anchoring Azerbaijan into the European architecture.

The commerciality of the rival proposals is important but probably not the deciding factor. The Southern Corridor is ultimately a project of strategic and political (in the broadest sense) importance for Azerbaijan, which is a key decision-maker in the Shah Deniz consortium through the presence of Socar. BP, which leads the consortium and also holds a commanding position in the wider oil and gas sector, is also sensitive to the views of the government. 

Baku has repeatedly hinted that it favours Nabucco over TAP, partly for technical reasons but also because it understands ‘European markets’ as central Europe, not the south. Maybe Italy will indeed turn into a major gas hub, as TAP claims, but Baku has little vested interest in building one when it could go straight to Baumgarten instead.

Although Nabucco West would contend with Russian gas through South Stream, potentially bringing Azerbaijan into commercial and political competition with its former master, Baku has demonstrated that it is willing to work against Moscow on energy issues without suffering severe consequences. If Nabucco West does get picked, it can probably be read as a victory for the Azerbaijani government in general and Socar in particular. 

This is going to be a developing trend this year; the emergence of the Azeri state energy firm onto the world stage. The past eighteen months or so has seen it come on in leaps and bounds: from upstream activity in Israel and Saudi Arabia; the establishment of the Trans-Anatolian Pipeline consortium and its huge petrochemical refinery in western Turkey; and a string of downstream acquisitions in Switzerland, Ukraine, Georgia and elsewhere. Alongside BP it has become a project champion for the disparate legs of the Southern Corridor. Unlike earlier pipeline projects from the Caspian to the West, the national company is now an influential player in European gas supply. Expect it to ramp up upstream activities this year in a bid to strengthen its technical skills and line up Azerbaijan’s gas production for the next decade.

South Stream is supposed to get under real construction this year: whether it does, and how much, will serve as an indication of how serious Vladimir Putin is on pushing through the project. Also expect a showdown between Russia and the EU over anti-trust legislation intended to wrench away Gazprom’s monopolistic practices. Putin has called the new package “uncivilised” and accelerating South Stream is intended, at least in part, to undermine it by offering southeastern EU states a Faustian bargain.

Ukraine is being offered one too, as the struggle between Kiev and Moscow over gas contracts rumbles on. Russia is attempting to use pricing to lure Ukraine into its Customs Union with Belarus and Kazakhstan, although doing so would be a huge political gamble for the Ukrainian leadership and signal a definitive turn away from the EU. Expect Kiev to prevaricate on the choice for as long as it can.

Other developments at the project level will include the final round of regulatory approvals for the Trans-Anatolian Pipeline, as well as the first funding from Azerbaijan’s state oil fund and – possibly – the start of construction at the end of 2013. The Azerbaijan – Georgia - Romania Interconnector LNG project may move forward, but for now this seems unlikely as Azerbaijan doesn’t seem committed enough to allocate gas volumes yet. Georgia is also a problem; locked into a political struggle between the old and new governments, and with the new administration still finding its feet, it seems unlikely that the inexperienced Energy Minister will be ready to sign off on a new LNG terminal by the end of the year. 

In the Eastern Mediterranean gas exploration will also gather steam off the coasts of both Greek and Turkish Cyprus, as well as in Israeli and Lebanese waters. However the intricate complications of the region’s politics and borders will continue to make investors extremely cautious and make exports impossible.

At a broader level the big trends of last year will continue. Shale gas in Europe is likely to remain contentious in certain quarters but with some heavyweight countries now moving towards shale extraction, and warnings that Europe is missing out on the boom, European sceptics will probably fall into line. This will increasingly affect the debate on the EU’s gas strategy (with knock-on effects for Caspian gas politics) although nothing substantive is likely to happen this year.

Similarly LNG will become, as in 2012, an increasingly important source of gas for wider Europe although it seems unlikely it will change the overall game in twelve months. It is likely to make more difference at the margins, with countries like Turkey and Ukraine anxious to boost LNG imports to tackle their severe import dependence.

Watching Turkey struggle with its reliance on imported gas will be a subject which this author will be following closely, as in 2012. The significance of this is not limited to Turkey, although its rapidly growing appetite for gas does make it important in its own right.

But its geographic position makes it a vital actor in gas politics across the whole region. Caspian, Russian, Iraqi, Mediterranean, Balkan, and Black Sea gas developments will all be affected by what policymakers decide in Ankara. As the web of regional gas projects grows ever more complex, Turkey will become more and more influential as a link – or a blockage.

Alex Jackson is an analyst of political, energy and security issues in the Caspian region. He is based in London and can be contacted at ajackson320@gmail.com.