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    Central Asia
     Jan 5, 2012

Anatolia gas pipeline races towards reality
By Robert M Cutler

MONTREAL - Competition in the Southern Gas Corridor from the Caspian Sea basin to Europe continues to heat up, with more details about the Trans-Anatolian gas pipeline emerging and Russia's Prime Minister Vladimir Putin bringing forward construction of the South Stream pipeline under the Black Sea.

Putin ordered construction of the Russian-Turkey-Europe South Stream pipeline to start by the end of 2012 instead of in 2013 as previously planned, despite having no identified sources for gas and no commitments for purchases.

The Trans-Anatolian pipeline (TAGP), which will run from Turkey's

eastern to its western border, is also referred to as "Trans-Anadolu" and sometimes by its acronym in Turkish TANAP. Azerbaijan's energy minister, Natik Aliev, and his Turkish counterpart, Taner Yildiz, last week signed the Memorandum of Understanding (MoU) for TAGP construction, fixing its "initial" volume at 16 billion cubic meters per year (bcm/y). The agreement also established that the State Oil Company of the Azerbaijani Republic (SOCAR) will build the pipeline with the two Turkish state firms - BOTAS and TPAO.

Reports indicate that the TAGP will be 80% owned by SOCAR, enough to permit the Azerbaijani state firm to negotiate advantageously with major foreign energy companies wishing to use the pipeline, by offering them a significant minority share of ownership while still retaining a majority stake for itself.

Yildiz has said separately that SOCAR will establish the construction cost and hinted at a figure around US$5 billion; other figures in the press range up to from $7 billion to $9 billion. This range will be better defined as feasibility studies proceed and the planning process develops.

While the TAGP has symbolically been started already, real construction is scheduled to begin in 2012 and finish by 2017, when the gas from the offshore Shah Deniz Two deposit is scheduled to be available for shipment and sale to foreign customers. Shah Deniz Two is estimated to hold 1.2 trillion cubic meters of gas. Of the 16 bcm/y that it will start producing in 2017, 10 bcm/y is destined for consumption in Europe and the remainder for Turkey either to consume or sell onwards.

It is significant that the TAGP's partners now refer to the 16 bcm/y figure as the pipeline's "initial" volume. This indicates the intention that other pipeline projects should be integrated with it, rather than the TAGP with them. Thus Stefan Judisch, who heads the supply and trading unit of Nabucco's German co-principal RWE, told Bloomberg News that TAGP construction "raises questions about access and financing" even as it would lower Nabucco's investment costs and shorten it. According to Judisch, banks might require a "pre-completion guarantee" in order to be assured that "gas actually flows".

Judisch also indicated that the TAGP's entry into the pipeline competition field could complicate negotiations with other potential Southern Gas Corridor suppliers. Without naming them, he clearly intended to indicate Iraq and Turkmenistan, which could require guaranteed access to the pipeline system and upon whose participation (or at least one of them) depends the realization of the Nabucco's full 31 bcm/y planned throughput.

Meanwhile, in the attempt to steal a march on Nabucco, construction of which is scheduled to begin in 2013, Putin has ordered that the symbolic start to construction on South Stream be moved ahead to the end of this year. This follows the conclusion, at the end of December, of an agreement with the Turkish government for construction to proceed. The leader of the Turkish opposition Republican People's Party (CHP), Kemal Kldarolu, has criticized the government, alleging that the deal is a special favor to industrial circles close to the ruling party.

Speaking with the Turkish media at an end-of-the-year review of political and economic developments, Kldarolu said the deal "contradicts Ankara's interests and will destroy the country's plans to become a regional energy hub". Earlier in 2011, Ankara had informed Russia that it would cease to take 6.6 bcm/y from Gazprom through the Blue Stream natural gas pipeline (Russia to Turkey under the Black Sea). Gazprom announced its readiness to sell directly to Turkish industrial companies but found no takers for its offer.

Now Gazprom has reduced its prices at the same time when the Turkish government has given its approval for the South Stream pipeline to be constructed through in the waters of its exclusive economic zone (EEZ). Kldarolu points out that the price reduction will be valid for only a limited time while the South Stream would have long-term effects not only on the economic but also on the geo-strategic level, while increasing the country's dependence on gas from Russia.

Notwithstanding this bilateral agreement permitting construction through the EEZ and Putin's wish to accelerate the pipe-laying plan, it is far from a sure thing that South Stream will be built. Not only is the final route of the pipeline undefined, but it is not even clear which country it would make landfall at on the western Black Sea coast.

Nor are even the outlines of its putative route westward from there set out programmatically. Gazprom head Aleksandr Medvedev continued to be intentionally vague on this matter when speaking to the press at the signing ceremony. Such a decision, he said, would be taken only at the time of a future final investment decision.

Originally a project of Russian gas giant Gazprom, South Stream has been pushed by the Russian government as it has sought to increase its lobbying weight in Brussels by co-opting first the Italian firm Eni (which cooperated in laying the Blue Stream pipeline on the Black Sea floor a dozen years ago), then the French firm EdF and the German BASF.

The project is a bargaining chip not only against the TCGP but also against Ukraine's pipeline transmission system. Russia and the EU are seeking to reach a financial understanding to cooperate in the reconstruction of this system at the same time as Russia and Ukraine are bilaterally negotiating terms for future delivery of gas to Ukraine, with price as a huge sticking point.

According to a report by the independent agency Ukrainian News, Mykola Tomenko, the deputy chairman of Ukraine's Verkhovna Rada, has stated that Russia demands the privatization of the Ukrainian gas transportation system and the Naftohaz Ukrainy national oil and gas company. Such privatization is currently banned by a parliamentary act having the force of a constitutional amendment.

Gazprom's Medvedev has publicly challenged the valuation placed by Ukraine on its pipeline and energy transmission system. Over the past 10-15 years, Russian energy companies have taken control of energy infrastructure in other Soviet successor states by offering to forgive energy debts in return for expropriation of the physical plant. It appears that Russia has never taken its eyes off Ukraine's.

Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.

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