Shah Deniz Natural Gas: Key to the Southern Corridor

When will the Shah Deniz consortium take its Final Investment Decision (FID) for the production of the second phase of this giant gas field in Azerbaijan? When will the consortium decide, which  is the preferred pipeline route to Europe: the Nabucco West pipeline or the Trans Adriatic Pipeline (TAP)?

Currently,  negotiations among the consortia, the oil majors, and Azerbaijan are very tense. New challenges surface as the dynamics in the international gas industry are changing. The shale gas revolution, the EU gas glut due to the Eurozone debt crisis, and the determination of Russia to construct the South Stream pipeline, are among the new primary challenges that Shah Deniz consortium is facing. Furthermore, the chronic delays to reach the FID are creating internal disagreements.  

The most recent open disagreement, not directly related to the Shah Deniz, was between SOCAR and BP,  the two most significant companies  in the Shah Deniz consortium. The issue  of the open disagreement concerned the decline in oil production of the Azeri and Chirag oil fields, which led the President of Azerbaijan Ilham Aliyev to state: “I should note that the unexpected drop occurred only due to crude mistakes by BP, which leads the consortium operating the Azeri and Chirag fields. We have co-operated with BP for many years. At all times we have supported their activity. We supported them in their hardest days. And we expected adequate treatment. These erroneous forecasts given to us are unacceptable. The false promises given to the state oil company [SOCAR] are unacceptable. In the business world, there is no place for such a relationship, it is impossible.”

 This statement is no good news for Europe, for BP or  for the Shah Deniz consortium.  Why? Because President Aliyev, who is very experienced in the oil and gas industry, (he served as Vice-President of SOCAR  before he was elected President of Azerbaijan) chose  the current timing to make  such a public statement: a few months before the FID for Shah Deniz. Moreover, President Aliyev has been very successful in his energy policy bringing unprecedented revenues to his country. I remember five years ago when the Shah Deniz phase one started to produce gas no one from the European oil majors believed that SOCAR would grow so much. The financial liquidity that SOCAR has achieved, has come as a surprise to many oil analysts and to experienced oilmen.

 BP is today the most important oil major in Azerbaijan. BP has invested more than any other oil company and is by far the number one investor in Azerbaijan. An effective relationship between BP and Azerbaijan is essential for the development of the Shah Deniz gas field. The relationship between President Aliyev, BP, and SOCAR will affect the decision: which pipeline route will eventually transit the Shah Deniz Gas to Europe. The ultimate decision lies with  the President of Azerbaijan.

Another challenge relating  to the Shah Deniz gas and the opening of the Southern Corridor is the Shale gas revolution. Shale gas, in less than five years, is transforming the United States from a net importer of natural gas to a net exporter. The amount of proven shale gas reserves in the US places  America today as one of the leading countries globally.  The shale gas development is one of the key issues of this year’s US Presidential  elections. The shale gas production in the US has led to an international oversupply of gas, and consequently  to the decline of natural gas prices. Moreover, the US is investing to new LNG terminals in the US territory for exporting purposes. Today the US energy policy aims to export LNG to the European markets. For Azerbaijan the EU is the primary market for the Shah Deniz gas. So, any extra supply of gas from other sources, which means lower prices, is not the best development for Azerbaijan.

Russia is moving rapidly towards signing the necessary inter-governmental agreements and solidifying its geopolitical alliances, in order  to reach, before the end of this year, the FID for the South Stream pipeline. Although South Stream does not provide the EU with new gas it does affect the Southern Gas Corridor, since it reaches the South Eastern European markets, which are intended for the Azeri gas.

EU Energy Commissioner Günther Oettinger is pursuing the most effective policy in order to open the Southern Gas Corridor, which is currently the cornerstone of the EU energy policy. The Southern Corridor, will diversify the routes and resources of gas supplies, thus strengthening the European energy security. Key to the opening of the Southern Corridor is the Shah Deniz gas supply. This is the only proven available gas supply of 10bcm annually to be exported in the EU market.

Currently, there is no other available gas supply that can be produced and sold to Europe. After Shah Deniz gas production, the most plausible gas supply for the Southern Corridor will come again from another Azeri gas field, namely Absheron. Plans for the opening of the Trans-Caspian pipeline and the import of Turkmen gas to Europe are more long term and contain  geopolitical challenges both with Russia and Iran. So, to make the long story short, the Shah Deniz gas is the most important gas supply for the Southern Corridor. Consequently, any delay of the FID of Shah Deniz is weakening the European energy security. Furthermore,  the pipeline route that will, eventually, be selected - either Nabucco West or TAP - will make a big difference: it will determine the strategic impact to the European energy security. Each of the two pipelines possess a different rationale, thus it is imperative for EU to have the FID of the Shah Deniz consortium, in order to implement effectively its energy security policy.

Any delay of the FID for Shah Deniz entails risks both for the EU energy security and for Azerbaijan. Since 1997 when the original Project Sharing Agreement (PSA) was signed for the Shah Deniz gas field, fifteen years have passed. There is no doubt that Azerbaijan managed to accumulate unprecedented wealth since that time,  stabilized its political system and increased the standard of living for its society. For all of us who visited Azerbaijan in the early ‘90s and witnessed the economic development since then, we can definitely talk  about an economic miracle. The success story behind this economic development is the political leadership of the country, its Western allies, SOCAR and European oil majors such as BP, Total, and Statoil. Now is the most critical timing both for Europe and for Azerbaijan. Both  for SOCAR and BP. The speed of the developments in the European gas industry is rapid. Any further delay of the Shah Deniz FID means loss of billions in  revenues. The estimated overall investment for the upstream and midstream development of the Shah Deniz phase two, which includes the construction of the new gas pipelines is in excess of €40 billion. This  represents  one of the largest investments globally in the natural gas industry.

The challenge between Europe and Azerbaijan is to open the Southern Gas Corridor with the optimum economic and strategic impact for both of them. The opening of the Southern Corridor will bring further economic development to Azerbaijan and will strengthen the EU energy security. The key to these goals is the Shah Deniz gas.

Anthony Livanios, is CEO, Energy Stream CMG GmbH, international oil and gas advisory firm based in Frankfurt, Germany.  Energy Stream is organizer of the 2012 First Annual Frankfurt Gas Forum, devoted exclusively on the Southern Gas Corridor.