The Balkans and Energy Supply

Back from the dead, the Balkan economies are picking up steam.

Consumers are spending again and managers are expanding their production lines. This is good news, save one problem – energy supply. The Balkan energy markets are insufficiently supplied, not diversified enough, and still over dependent in some case on energy sources that emit unacceptable quantities of CO2 into the atmosphere.

The Balkan markets face an energy conundrum – how and from where will this region get new energy to support its vibrant economic growth? There are several options, and some countries have already made their arrangements. Serbia for example, sold its national oil and gas company to the Russian Gazprom.

The good news for the Balkans comes from the Caspian in the form of the recently signed Azerbaijan-Turkey transit deal that sets the transit price for Azerbaijani gas passing through Turkey. For the Balkan energy planers this is an opportunity to tap into a steady and price-competitive natural gas market.

Azerbaijan, the western state on the Caspian shores is a major producer of natural gas and of oil. It has been the darling of the big western oil companies for over a decade now, because its energy markets are open to direct foreign involvement. In light of this, an international consortium is developing and operates the Shah Deniz natural gas field where the local oil and gas company SOCAR has only a minority share. This structure helps ensure that market principles rather than politics drive the deals froward, and that the price of natural gas is transparent. The Russian model is vastly different from this, and Moscow already showed us how it runs its energy relations with third parties – gas is used as a source of political influence.

The Balkan states, all on track to becoming EU members, should find Azerbaijan’s Caspian alternative to the Russian gas interesting. First, it is a market driven set-up, and second, Azerbaijan has no hang-ups about spheres of influence, and like the Balkan countries, is pursuing a future within the Euro-Atlantic structures.

For a long time the main roadblock to accessing Azerbaijan’s gas was Turkey. Ankara has an ambition to become an international energy hub, and this has stood in the way of agreeing a transit formula with Baku. No more. This agreement was finally signed last month between the two heads of state. A provisional plan on how to get the Azeri gas to the Balkan consumers is already in the making. Gas will be piped via the existing infrastructure from Azerbaijan to Georgia to Turkey and on to Bulgaria. It will then be available for pick up on the Bulgarian border.

Second, the connection to Azerbaijan can yield a future connection to Turkmenistan. Azerbaijan and Turkmenistan are already working on a way to link their gas lines under the Caspian Sea. Turkmenistan is considered to have one of the world’s largest deposits of natural gas.

Now is the time for big strategic vision in the Balkans.  The Albanian Prime Minister has already voiced his interest in turning Albania into a mini gas hub, by using the country’s favorable geographic position to offer natural gas in LNG form to international buyers and link Albania with Italy under the Adriatic Sea. Macedonia has similarly expressed an interest in new and stable supplies of natural gas. Kosovo’s energy market is under-supplied, and Pristina desperately needs to figure out a way to bring up its energy supply in order to keep alive its post-independence economic boom. Burning lignite coal, which is the current plan, is not an environmentally responsible decision, which in the end will cause problems for Kosovo in its negotiations with the EU.

Natural gas from the Shah Deniz field will be available as early as 2014. The field is already in the development phase, and the consortium is talking to interested buyers. The volumes of natural gas from this field are limited, so there's not much room for deliberation. Energy security is a good pretext then, and a good reason for the Balkan leaders to pay an official visit to Baku still this year.

And then there is Nabucco, the project that never seems to stop being planed. Should the Balkan states count on it to ensure their own energy security? The answer is no, for two reasons. First, the Nabucco pipeline is about shipping gas from the Caspian to the Baumgarten trading platform and from there to third markets in Western Europe. As the energy price in Western Europe is higher, buying gas in Baumgarten is likely to be much more expensive for the Balkan countries than buying it directly from the Caspian suppliers. Second, the pipeline is still a paper tiger, in other words, it continues to lack financing and real political support to make itself operational.

This article was published in Atlantic Council