TAPI Support Slowly Growing

Turkmengaz, the Turkmenistan state-owned corporation responsible for building the TAPI (Turkmenistan-Afghanistan-Pakistan-India) natural gas pipeline, held a series of meetings in September 2012 with potential investors in Singapore, New York and London.  Sakhatmurad Mamedov, the company CEO, announced the project had been "successfully put forward."  At least one oil company, Shell, has begun to review the project, according to Indian sources.  Other companies who have attended the meetings includeCitigroup, Morgan Stanley, Deutsche Bank, Macquarie Bank, and the US Export Import Bank.

Mamedov believes that TAPI will lead to stability throughout Central Asia.  "The realization of the TAPI project will give an impulse to the development of the countries taking part in the project and will also strengthen stability in the region as well as creating new jobs," he said.

Mamedov's optimism is supported by the United States.  At a conference held in Ashgabat in November, Deputy Assistant Secretary of State for South and Central Asian Affairs, Lynne Tracy, stated Washington welcomed the progress made on the pipeline.  "The road ahead is long for this projects, but the benefits could be significant and are certainly worthy of the diligence demonstrated by these four countries so far," she said.

Such positive developments has convinced at least one additional country to express interest in joining TAPI, Bangladesh; but no official request has been made, according to Turkmenistan's acting Minister of Oil and Gas Industry and Mineral Resources, Kakageldy Abdullaev.  "There is a request from Bangladesh to join the project," he reported.  "We require official note, which will be considered by all four governments."

Beside the obvious security problem of running a pipeline through war-torn Afghanistan, however, the proposed pipeline continues to face difficulties.  According to an unnamed Indian oil ministry official, global pipeline companies do not want to invest in the project until Turkmenistan changes its rules and allows the companies to buy into the country's onshore oil and gas fields.  According to Pakistan's Minister of Petroleum and Natural Resources, Asim Hussain, Turkmenistan is meeting the demands.  "Turkmenistan has now agreed to have some form of agreement in the upstream side."  This observation was not confirmed, however, by Turkmenistan's Minister of Oil, Kakageldi Babdulayev, who confined his comments to describing discussions as an "ongoing process."

Another difficulty is that the regional energy superpower, Russia, does not support the construction of TAPI.  According to unnamed European diplomats, Russia cannot conceive of a project that lead to gas export to regions other than to its main market, Europe.  As a result, Moscow has not backed TAPI, which the Europeans characterized as a US proposal to check Russian intentions.

TANAP meets EU criteria

In November 2012, the State Oil Company of Azerbaijan (SOCAR) opened a representation office in Brussels.  EU Energy Commissioner Guenther Oettinger attended the event, and signaled his potential support for the Trans Anatolian Gas Pipeline (TANAP).  Oettinger said the European Commission continued to back the classic Nabucco pipeline through Turkey, but "the TANAP pipeline which SOCAR now promotes may also be able to satisfy the criteria of capacity requirements, dedicated infrastructure, transparency and scalability.  We are therefore eagerly waiting for the necessary agreements to be ratified by both Turkey and Azerbaijan."

The proposed pipeline has undergone several changes since it was originally proposed as a 16 billion cubic meter (bcm) gas pipeline owned 80% by SOCAR and 20% by Turkish operators.  The Azerbaijan state oil fund has agreed to co-finance the project, according to fund chief Shakhmar Movsumov.  Additional funds are being raised by diluting SOCAR's share of the project.  According to SOCAR chief Rovnag Abdullayev, BP and Statoil have each agreed to acquire a 12% share of the project, and Total will purchase 5%.  BP's involvement was confirmed by spokeswoman Tamam Bayatly.  "BP is working with other paraticipants of the project in order to speed up technical and commercial aspects of its implementation," she said.

The project will also have scalability.  According to Gulmira Rzayeva of the Azerbaijani Center for Strategic Studies, the pipeline will be built in three stages.  Each stage will increase the amount of gas that can be carried to European markets.  "It will start with 16 bcm, continue with 20 to 30 bcm and at the end reach 60 bcm.  This is a long-term perspective.  It will also allow for the connection to Central Asian gas."  Rzayeva added that TANAP's headquarters would be in the neutral location of the Netherlands.  This has the possibility of bringing the consortium under the control of the European Union, which would guarantee increased transparency of its operations.

South Stream: Plans Still Premature

Russian President Vladimir Putin travelled to the town of Anapa on the coast of the Black Sea, to participate in the inauguration of the South Stream pipeline.  On December 7, 2012, the first two sections of the long-awaited, multinational, natural gas pipeline were welded together under the gaze of various industry leaders and heads of state.  This fulfilled Putin's December/January directive to Gazprom leader Alexey Miller that the pipeline had to be launched by the end of 2012.  "Today we are attending a very important event, an event that is important not only for Russian energy but for European energy as well," said the Russian President.

Putin's congratulations may be a bit premature.  There are still a number of issues surrounding the proposed pipeline that have yet to be addressed.  The biggest issue, in the middle of the shale gas revolution, is that the pipeline has a capacity that dwarfs any projected European need for Russian gas.  Mikhail Korchemkin, founder and managing director of East European Gas Analysis, noted that once the annual 63 billion cubic meters of South Stream gas is added to Russian current capacity, Gazprom would have the ability to deliver 318 bcm to Europe, twice what the company has promised to Europe by 2020.  "Gazprom has abandoned its guiding principle--sell gas before building expensive infrastructure," he said.   These large infrastructure projects are beginning to pay a toll:  Nordstream is only transporting 30% of its capacity, and Blue Stream is only at 37% of capacity, according to members of the Bulgarian right-wing opposition.

Gazprom currently lacks the supplies to build the pipeline.  According to Jonathan Stern, head of the Natural Gas Research Program at the Oxford Institute for Energy Studies, Gazprom has not yet ordered pipe or organized barges for the pipeline.  He predicts that the offshore section of the pipeline cannot begin until at least 2014.

The gas is being shipped to the European Union, and so the project must meet the demands of the European Commission.  They have not done so, and European Union Energy Commissioner Guenther Oettinger did not attend the ceremony.  Oettinger had previously referred to the pipeline as a "phantom project."

The Commission has, of course, read in the press that South Stream will pass through the Turkish economic zone in the Black Sea, make landfall in Bulgaria, and then proceed though Serbia, Hungary, Slovenia, Austria and Italy.  The reaction from the EC has been telling.  Guenther Oettinger's press spokeswoman Marlena Holzner said, "For the moment we have not seen a plan for South Stream.  We take note of all the media reports but neither our experts nor Commissioner Oettinger have seen a plan where it says South Stream will start here, it will deliver gas to this entry point and it will go exactly following this route and it will deliver gas from Russia.  We have not seen this."  Holzner expanded her comments:  "To the European Commission, it has never been communicated that there is a final route...There is no environmental impact assessment for the whole route.  As far as we can see it, we don't regard this as a final investment decision."  

By 16 February 2013, Russia needs to submit to the EC copies of the intergovernmental agreements it has negotiated with the transit states, and the EC then has nine months to express its concerns.  In addition, before construction can truely get underway each country involved must submit both environmental impact studies, and social impact studies.  Bulgaria, in particular, must submit an environmental impact study on the pipeline's landfall. Countries who are not party to the agreements but who are adjacent to the route also need to weigh in on a transboundary assessment.   Russia appears to be aware of these issues, as the Russian-European Chamber of Commerce President Sergei Shuklin confirmed the 7 December ribbon cutting was only a signal of Russian seriousness about the project.  "Everything will be concluded (according to EU legislation), especially since Russia just became a member of the World Trade Organization."

As of this writing, South Stream consists of two pieces of pipe welded together on Russian soil, with no permission to extend that pipe into European territory.
 

Competing Visions for Turkmen Gas

The legal status of the Caspian Sea continues to divide energy analysts' views on the future of Turkmenistan's gas production.  A senior Turkmen official who refused to be identified by name said the country plans to begin production next year in the Galkynysh (South Iolotan) field, the second largest gas field in the world.  "Right now, three gas-processing plants are being built, and two of them are certain to be ready in January or February," he said.  Such plans again raises the question as to who will buy the oil.  The Turkmen official said the government was holding out for some long-term agreements.  "We would like to receive guarantees on transit and purchase (volumes).  We need to come to a principle agreement on this."

In the West, the United States, Turkey and the European Union appear united that the energy should flow toward the Atlantic.  Patricia Flor, EU representative for Central Asia, urged Turkmenistan "to reach agreement with EU energy companies on a commercial contract."  Such contracts would require the construction of the Trans-Caspian Pipeline (TCP).  Turkey has thrown its support solidly behind this.  On September 3, 2012, Turkish Energy and Natural Resources Minister Taner Yildiz announced that Turkey intended to import and transport Turkmenistan's gas through the proposed TCP and TANAP pipelines.  Turkmenistan President Berdymuhamedov repeated his country's interest in selling to Europe through the TCP.

Russia, however, continues to oppose construction of the TCP.  According to the Russian envoy to the European Union, Vladimir Chizhov, in 2007 the presidents of the five littoral states of the Caspian Sea adopted a binding resolution at the Second Caspian Summit that all major decisions dealing with that body of water would require the consensus of all. The United States disagrees.  Lynne Tracy, deputy assistant secretary of state for South and Central Asian Affairs, said that if Turkmenistan and Azerbaijan agree on a pipeline that crosses only their territorial waters, "no other country has veto power over that decision."

Looking at the controversy and other factors, the energy consultants Wood Mackenzie conclude that Turkmen energy will go to China instead of Europe.  In a Reuters report, WoodMac's senior gas supply analyst is quoted as saying "The practicalities of the project are challenging and without any significant progress in the last decade, the proposed pipeline has been overtaken by competing projects....We forecast that China will have around 50 bcm of gas demand in 2020 that needs to be satisfied by additional imports, and Central Asan gas could play a key role in meeting this demand."

China has another advantage that might prevent the TCP from being constructed:  it finances pipelines headed East and there does not appear to be a white knight on the TCP horizon.

Gazprom Formally Agrees to Build South Stream



The speculation is over:  after years of planning and speeches by Russian President Vladimir Putin, Gazprom has formally committed to the construction of the South Stream natural gas pipeline.  This route, to be filled with natural gas Russia formerly transported to Europe via Ukraine's Cold War-era Peace Pipeline, is expected to deliver 63 billion cubic meters (bcm) annually to Europe.  According to the company, it has signed the final investment agreement with its European partners and will commence construction in December 2012.

The last hold-up before making a financial commitment had been Bulgaria, the first European country the pipeline would transit.  The Bulgarians had little choice except to sign.  They had been receiving Russian gas since 1 April at an 11% discount, but the discount was predicated on Bulgaria's agreement to South Stream.  If Bulgaria had refused to allow Gazprom to build the pipeline, it would have been obligated to repay the discounted funds, estimated at $70 million.  Russia increased the pressure when state-run Atomstroiexport filed a $1.3 billion compensation claim against Bulgaria before the International Court of Arbitration for a planned nuclear power plant at Belene that Bulgaria cancelled.

In the end, the Bulgarians received a sweet deal.  When the government signed the investment agreement with Gazprom, they also signed a long-term gas contract with a 20% price discount beginning January 1, 2013.  While the discount is a plus, Gazprom also got good news:  maintenance of the linkage between oil and gas prices, and a take-or-pay obligation for 80% of the contracted 2.9 bcm annually.  "We've agreed on very preferential prices for Bulgaria," said Gazprom CEO Alexey Miller.  "With South Stream, Bulgaria becomes the biggest transit country for Russian gas in Europe."  Interestingly, Miller denied the price discounts were part of the South Stream negotiations.  "These issues are not related," he said.

Bulgaria does not have to pay anything for construction of its share of the pipeline.  Gazprom will lend the funds to Bulgarian Energy Holding, to be repaid out of dividends earned on the project.

Obtaining financial commitments is not the entire battle, however.  Since the pipeline will go through members of the European Union, the European Commission must approve an environomental impact statement before construction.  Without an official communique to get the review started, the European Commission does not even acknowledge that South Stream is a viable project.  "It was never communicated to the Commision that South Stream has a final route," said EC energy spokesperson Marlee Holzner.  "We don't regard this as a final investment decision."

There have also been various reports that Russia believes a quick start to the project will mean the project does not have to meet the EU's third energy liberalization package, requiring the divestment of the distribution network from the transportation network.  According to the Commission, however, the package is already in effect and South Stream must abide by it.  To that end, it has held meetings with South Stream transit countires to make sure any bilateral agreements with the Russians will comport with EU rules and regulations.

European Commission Challenges Gazprom

With the industry's eyes turned toward the BP-Rosneft deal, little attention is being paid to the  Russian state-controlled natural gas company, Gazprom.  This institution has held a monopoly on the control of gas to Eastern Europe, and a controlling interest in the gas to the rest of the continent.  Now, however, Gazprom's position is being challenged by the European Commission.

On September 4, 2012 the EU's antitrust authories opened a formal investigation into whether the company had blocked fair competition in the natural gas markets of Central and Eastern Europe.  The European Commission said Gazprom may have divided markets by hindering the free flow of gas across European Union member states, and imposed unfair prices on its customers.  "Such behavior, if established, may constitute a restriction of competition and lead to higher prices and deterioration of security of supply," they said.  If found guilty on such charges, the EC could fine Gazprom as much as ten percent of its worldwide income. 

The EC investigation is currently focusing on the Eastern European countries of Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, Estonia, Latvia and Lithuania--although it could be expanded.  It follows last year's raids on the office of Gazprom's European partners, probably in search of evidence to support the charges.

Russian President Vladimir Putin responded quickly, issuing a decree that strategicially important companies--including Gazprom--could not provide information to regulators from "unions of foreign states" without prior approval of the Kremlin.  Further, no approval would be granted if the changes "damage the economic interests of the Russian Federation."  Gazprom spokesman Sergei Kupriyanov characterized the investigation as commercial pressure, and threatened to direct Russian gas away from Europe.  The investigation "can be viewed as pressure from the European Union on Gazprom, with the goal of influencing prices and the results of commercial contracts, which clearly contradict the principles of market," he said.  Kupriyanov added the investigation is encouraging Gazprom to look to Asia for new markets.

The EC's actions are generally popular in Eastern Europe among a population that has been paying high gas prices under "take or pay" contracts.  "It is important what Brussels is doing," said Szymon Kardas, a Russian energy expert at the Center for Eastern Studies in Warsaw.  "This is the Competition Commission that took on Microsoft for its dominant position in Europe."  Lithuanian deputy ambassador to the European Union, Arunas Vinciunas, said, "For a small country it means a lot.  It shows that we can defend our interests through solidarity inside the E.U."  Not everyone agrees that the investigation is a good idea, however.  The Suddeutsche Zeitung called it an unprecedented action and a direct attack on Russia's President Putin.

Anders Aslund, a senior fellow at the Peterson Institute for International Economics, predicted Gazprom will be found guilty on all charges.  "The proceedings can take years," he wrote in the Moscow Times, "but the outcome appears obvious.  The oil-linked prices are likely to be deemed anti-competitive, as the very long-term contracts with fixed prices and volumes.  The Gazprom take-or-pay clauses that force a customer to take the whole volume or pay for it in any case will be prohibited, and prohibitions against reselling are evidently anti-competitive.  Finally, Gazprom will in all likelihood be fined billions of euros for its long-lasting malpractices."

Separate from the investigation, Gazprom is also under pressure because of weak demand in Europe and Asia.  In September, Gazprom announced it was restricting access to their pipelines by independent producers.  "Today the gas market in Russia has an excess of resources over demand," said Gazprom's deputy head of marketing and liquids processing, Alexander Mikheyev.  "In this situation we are looking at cuts to gas intake from independent producers."

The Europeans had long demanded that independents have unrestricted access to the pipeline network, as a way to insure a diversified supply for the European market.  But Merrill Lynch oil analyst Karen Kosanian points out that Russian domestic demand for natural gas is down 3.6 percent so far this year.  "In this environment Gazprom would have to shut in its own production to sustain the independents," she said.

The falling revenues, EC investigations, and competition from shale gas and LNG, have led Gazprom to lose its favored position in the Kremlin constellation of stars.  Gazprom has been the principle source of Kremlin revenue for decades.  The Russian government owns over 50% of the $119 billion company, and Gazprom accounts for 12% of all Russian exports, according to the Washington Post.  Profits were $44 billion in 2011, but have declined more than 23% in 2012.  Russian deputy minister of Economic Development, Andrei Klepach, said the company could face serious problems because of shale gas competition.  Further, the company has not made sufficient investment to modernize their operations.   "It's the nationalization of costs and the privatization of profit," wrote Rusenergy analyst Mikhail Krutikhin.

BP May Open Britain to Russian Gas

Additional ramifications of the BP-Rosneft deal are now coming to light.  With the purchase of TNK-BP by Rosneft, BP's Russian partners have agreed to end their legal battles with British Petroleum.  Sources claim that the two sides agreed to settle all their disputes after BP  made a $325 million payment to the Russian consortium AAR.  Supposedly, this move has been taken to give BP the freedom to pursue the development of Arctic oil.  "BP is not taking an equity position in Rosneft as a portfolio investor," said chief strategist at Sberbank CIB Chris Weafer.  "they are looking at a future relationship through which they can grow production and reserves in Russia."

It appears, however, that this deal has also cleared the boards for BP to work with Gazprom to bring Russian natural gas to Great Britain.  AAR had previously taken the position that their partnership with BP mandated all BP business opportunities in Russia be run through TNK-BP.  With all claims settled, sources report that the consortium has relinquished all claims on BP's future Russian activities.  That could include moving into the natural gas market.  Gazprom's  Chief Executive Alexi Miller reported in June that BP was interested in participating in an expanded Nord Stream pipeline, one that would carry product to Britain.

Such a move is a  questionable investment decision by the British company, given the plummeting price natural gas is commanding, and the large quantities of liquified natural gas (LNG) coming on the market to compete with pipeline gas.

Reprecussions from the sale of TNK-BP

With the recent decision of OAO Rosneft to purchase TNK-BP from its various owners, one of the most strained partnerships in Russian economic history comes to an end.  Rosneft has agreed to pay a total of $54.8 billion to BP plc and the Alfa-Access-Renova consortum (AAR) controlled by four Russian billionaires.  These oligarchs--Mikhail Fridman, German Khan, Viktor Vekeselberg and Len Blavatnik-- defied the stated policy of the Kremlin last year to prohibit BP from entering into an artic exploration agreement with Rosneft.  With ill feelings all around, it was apparent that this business union was headed for a divorce.

Initially, AAR offered to buy BP's 50% ownership in TNK-BP, but this offer was withdrawn when Rosneft offered to purchase AAR's shares instead.  AAR is slated to receive $28 billion for it's half of the company.  Rosneft then offered BP the chance to sell its shares, as well.  Anxious to raise capital to pay its Gulf spill-related expenses, BP agreed to accept $10-$15 billion in cash,and a 12.5% share in Rosneft.  BP plans to use part of the cash payment to purchase an additional 5.66% of Rosneft which, combined with the 1.5% share they already hold, will bring their share of ownership to approximately 19.75%.  75% of Rosneft is owned by the Russian state, while the remainder is sold in the market. 

Analysts believe that the majority stock holder Russian state will help finance the purchase.  "For Rosneft to buy both AAR and BP to form a fully state-owned oil champion would be the cleaner solution for the Russian state, and is likely to require further state injection into Rosneft, given that the company had previously been sounding out the market for a loan to buy part of BP's share," said RBC Capital Markets Corporation's Peter Hutton.  Not as much cash is required for the deal as the original figures would indicate, since BP and AAR are owed about $2.5 billion in dividends from TNK-BP.  According to journalist Paul Whitfield, this means the cash proceeds from the two deals are actually $26.75 billion for AAR and $15.85 billion for BP, falling to $11.05 billion for BP after its acquisition of Rosneft stock.

Russian President Vladimir Putin appears happy with the deal.  "This is a very good signal for the Russian market.  It is a good, large deal.  I would like to thank you for this work," he told Rosneft CEO and longtime ally Igor Sechin.  Putin should be happy:  the deal gives Rosneft a seat on BP's board.  This will give Russia a voice in BP operations outside of Russian territory such as in the Caspian where BP is the lead oil company.

The deal puts Rosneft ahead of Gazprom as the leading energy producer in Russia.  After the deal is consummated, Rosneft will produce 4 million barrels of crude oil a day.  This does not appear to be the result of any inside-Kremlin politics, but economics.  As the price of natural gas declines in the face of the shale revolution, it should be anticipated that Gazprom's importance would also decline.  Moscow needs revenues, however, and the price of oil remains high.  Igor Sechin, driven out of the cabinet by former President Medvedev, is back in the cat bird seat.

Bulgaria Playing Both Sides

Against all expectations, Bulgaria has emerged as a key player in the battle for control of the Southern Energy Corridor.  This Black Sea country is astride the most logical route between the gas fields and European markets for both South Stream and TANAP.  Bulgaria has agreed to cooperate with both consortiums, while playing for maximum advantage.

 

In August 2012, Bulgaria and Gazprom announced they would conclude an investment contract in November for the construction of South Stream.  Simultaneously, Bulgarian Minister of Energy and Economy Delyan Dobrev announced a new gas-supply contract that featured an 11% price in gas for the remainder of 2012.

 

Once having achieved its goal of obtaining Bulgarian cooperation, however, the Russians appear to have upped the ante.  For construction of South Stream to begin, the Russians declared they wanted $1.3 billion in compensation for the Belene nuclear plant.  This was a project that the former Bulgarian government had contracted with Russia, but that current Prime Minister Boiko Borisov cancelled when he took office last year.  Borisov was outraged.  "We are observing all our commitments on South Stream.  For Belene we continue to negotiate...That is why I think we have been absolutely treacherously surprised by that claim."  Bulgarian observers pushed back, threatening that the government would be forced to cancel South Stream.  Ilian Vassilev of Innovative Energy Solutions said, "There is no way Bulgaria can pay both the claim and let South Stream happen."

 

The dispute has led to a delay in a visit by Russian President Vladimir Putin, who was supposed to be present in Sofia on November 9 for the signing of the South Stream papers.  Instead, Putin has postponed his trip until December, possibly signalling his unhappiness with Bulgaria's recalcitrance.

 

Meanwhile, in September 2012 the European Union criticized Bulgaria for  supporting South Stream while lacking sufficient commitment to the EU's version of a Southern Energy Corridor.  The EU's concern was that South Stream only diversifies supply routes from Russia, but does not diversify the ultimate, Russian source of supply.  "Bulgaria needs to complete the ongoing investment projects on gas interconnectors with Romania, Serbia and Greece, and make reverse flows possible on its interconnector with Turkey...Bulgaria also needs to play a more proactive part in opening up the Southern Gas Corridor, which has the potential to diversify supply sources," said a leaked document.

 

The Bulgarian Prime Minister was non-plussed.  In an interview with Euronews, Borisov said he was commited to the European vision.  "It is very important that the Turkish Tanap-pipeline reaches Bulgaria and that Nabucco-West and the South East Europe Pipeline move closer to Europe...Regarding the Nabucco project, Bulgaria has done all it can:  the parliament approved its construction.  We have signed all the documents that are required and we can start construction work tomorrow if necessary.  I am looking forward to the launch of the Nabucco project."

 

Despite any agreement with Nabucco, however, as of 30 September 2012 there was no agreement between Bulgartransgaz and Turkey's Botas to connect with the Turkish pipeline network.  Without such a connection, any discussion of Tanap or Nabucco is moot.  To give the country some negotiating room, Bularia delayed its plans one year to connect its gas network with neighboring Balkan countries.  Bulgartransgaz announced the connection would take place in 2014, instead of the originally-planned 2013.

 

 

Transcaspian Back on the Board

Recent armed spats between Azerbaijan and Turkmenistan in the Caspian Sea placed the future of the Trans Caspian Pipeline in doubt, but European Union-backed talks in Ashkabat appear to have put things back on track.  According to EU spokeswoman Marlene Holzner, the Turkmenistan Energy Minister Myrat Artykow and Azerbaijan Minister for Industry and Energy agreed with EU Energy Commissioner Gunther Oettinger that the project could be an important part of efforts to reduce Europe's dependence on Russian gas supplies. 
Holzner said both Azerbaijan and Turkmenistan had expressed a desire to supply Turkmen gas to Europe, but neither country was willing to make any firm commitments.  "Turkmenistan said it continues to be interested in delivering gas to Europe.  Azerbaijan also confirmed its interest in being an 'enabler', meaning it would also be a transit country for gas."

Despite the expressions of good intentions, who moves first to make the pipeline a reality remains in doubt.  Holzner said that the EU was waiting for a gurantee from Turkmenistan on supply (despite the fact that Turkmenistan President Gurbangulu Berdimuhammedov is on record as promising 40 bcm per year for the project).  At the same time, she said that the EU would neither own the pipeline nor pay for it.  For his part, Berdimuhammedov has previously said that while he would sell the gas to Europe, it would be up to the Europeans to figure how to get it from Turkmenistan.  So, all good wishes aside, no progress appears to have been made other than to get the parties talking again.

Turkmenistan appears to have turned its attention east, with most of its gas sales going by pipeline to China.  For Azerbaijan's part, the pipeline could be seen as either competition for its own future gas production, or for Gazprom's South Stream.  In either case, the benefits of a Trans Caspian Pipeline do not appear to be overwhelming.  The one country that would benefit is Turkey, who would like to see Turkmen gas made available to expand the proposed TANAP pipeline.

"With the TANAP project we have created a structure that will allow gas to transit across Azerbaijan and facilitate trade.  This structure is also targeting Turkmen gas.  We are seeking Turkmen gas," said Turkish Energy Minister Taner Yilmaz.

According to Gulmira Rzayeva of the Center for Strategic Studies of Azerbaijan, an expanded TANAP could increase Turkey's chances of joining the European Union.  "Turkey can achieve political gains with this pipeline; it can be an ace in terms of its European Union membership negotiations.  With the finalization of this project, Turkey will have a whole new position within the region."  Whether Turkey wants to join Europe is, of course, an open question.  Turkey's annual growth continues at around 7%, while Europe continues to stagnate and -- possibly--sink back into recession.

Potential Backers Lose Interest in TAPI

Despite support from both the United States and the Asian Development Bank, potential investors are backing away from the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline.  This proposal has been beset with concerns over security of the pipeline route, which passes through some of the most violent prone provinces in Afghanistan.

In the latest development, China has expressed new interest in Turkmen gas.  First, Chinese President Hu Jintao has proposed a new pipeline route that would bring Turkmen gas to China via Afghanistan.  The benefit of this latest proposal is that the pipeline route would traverse a safer route in Northern Afghanistan.  Second, China also signed in May 2012 an agreement with Turkmenistan to increase deliveries through the East-West Gas Pipeline from 30 bcm  per year to 65 bcm.  This pipeline does not pass through Afghanistan, has no security isues, and has been relatively trouble free since it opened in 2009.  Finally, China has assured Turkmenistan that its demand for natural gas will constantly increase over the next five years.  As a result, Turkmenistan's enthusiasm has "softened" for TAPI, according to Pakistani correspondent Iqrar Haroon.

The Russian National Energy Institute has recommended the Russian government should avoid investing in TAPI because of security concerns, and questions over the viability of the project.  According to the Indian Institute for Defence Studies and Analyses, the proposed increases in Chinese purchases of Turkmen gas will have a negative impact on Russia.  Turkmenistan offers lower-priced gas to China, bringing downward pressure on Russian gas prices.  Russia and China have been in talks since at least June 2009 to import 68 bcm of gas per year, but have not been able to agree on a price.

Trans Adriatic Pipeline Receives Funding Commitment

The Trans Adriatic Pipeline (TAP), the southern competitor for carrying Caspian gas from the Turkish border to Europe, has received an economic boost.  British Petroleum and Total have signed an agreement with the State Oil Company of Azerbaijan (Socar) to fund the pipeline, designed to bring natural gas to Italy.   (The proposed Nabucco West would carry gas from the Turkish border to Baumgarten, Austria).  "These funds will contribute toward continued work in several important areas during the period running up to the final routing decision, expected in 2013," said a TAP spokesman.

Kjetil Tungland, TAP's managing director, issued a statement, "The signing of this agreement is a significant vote of confidence in the quality of TAP's technical and commercial solutions from key industrial players, and underpins the cooperation agreement that was signed between TAP and Shah Deniz in June."

While the Shah Deniz consortium has not yet decided between TAP and Nabucco West, TAP's chances have been improved by both the funding, and by the pipeline obtaining government support.  Both the Greek and Italian governments have agreed to support the pipeline, something they previously had not done.  According to the Greek Foreign Ministry, Greek Deputy Energy Minister Makis Papagergiou and his Italian counterpart reached a "close cooperation agreement" to support the pipeline.  The Italian Foreign Ministry added, "Athens and Rome have decided to back the project after Aszerbaijan's Shah Deniz 2 consortium chose TAP to transport gas to western Europe.  Nabucco West remains an alternative..."

With the Shah Deniz consortium sitting on the fence, other interested parties are also trying to cover all their bets.  the European Commission, which had previously said that Nabucco was a priority European project, has backed away.  It now says that it does not favor any project or route over another, as long as it carries Azeri gas, would diversify EU supplies, and would reduce EU dependence on Russian resources.  Similarly, BP is trying to support both TAP and its rival, Nabucco West.  "Our aim is to be involved in all aspects of the project so the aim is to be involved in Nabucco and TAP as well, and this is still being negotiated," BP spokesman Toby Odone said.

Gazprom May Punish Hungary for Supporting Nabucco

Faced with Hungary's approval of an environmental permit for the construction of the Nabucco pipeline, Gazprom may be considering moving west the route for the rival South Stream pipeline. 

Reinhard Mitschek, managing director of Nabucco, announced on August 14 that Hungary was the first country to issue the project all its permits.  "The granting of this permit is a substantial step forward in Hungary and signifies the advanced stage of development of Nabucco West," he said. 

Within a week, Gazprom announced they were in talks with Croatia over the South Stream pipeline route.  "An intergovernmental agreement between Russia and Croatia on joint participation in the South Stream project was signed in 2010," a spokesman commented.  "Currently, based on the results of a pre-investment stage, Gazprom and Plinacro Ltd. are discussing the terms of a shareholder agreement for a joint compnay project with a view to its subsequent establishment."

The Croatian side is optimistic.  "At the moment the chances are 50:50 that we get the transit route of South Stream," said a source involved in the Gazprom negotiations.  The reasons for changing the route are uncertain.    According to the Voice of Russia, a Croatian list serve, Jutarnji, listed a number of possible concerns:  lower costs, differences between Gazprom and the Hungarian leadership, uncertainty over ownership shares of various Hungarian companies, and slow work on the Hungarian economic feasibility stateement.  Gazprom's board chairman Alexei Miller minimized these reasons, however, calling them "not significant."  An unnamed Plinacro source added that there could be no official confirmation on the status of the talks, as both sides are bound by a mutual confidentiality pledge.

Timing would indicate the talks are retribution for Hungary's cooperation with South Stream's rival, Nabucco.  Whether the talks will result in the route change, or are merely a pressure tactic on Hungary by Gazprom officials, is yet to be seen.

Major Powers Supporting TAPI

Despite the obvious security problems surrounding the potential route of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, major regional and international powers are supporting the project.  According to independent Indian energy analyst Saurav Jha, the United States is supporting the project to isolate Iran from regional integration efforts, and to showcase the potential of the American "New Silk Road Initiative."  Secretary of State Hillary Clinton held a Foreign Ministerial meeting in September 2011 with all of Afghanistan's neighbors to announce the launch of this effort, designed to bring economic development and political stability to the area.

Russian interests appear aligned with the US (although they differ on the rival Iran-Pakistan-India pipeline).  In both cases Russia is offering to participate in the construction of the line.  On the subcontinent itself, the Indian Gail Ltd company signed in May an agreement with Turkmenistan to purchase TAPI gas.  (Kabul signed a memorandum of understanding, but did not sign a formal agreement).

State Gas Systems of Pakistan also signed a purchase agreement in May.  Pakistani President Asif Ali Zardari sent a message to Turkemn President Gurbanguly Berdimuhammadov stating the construction of TAPI was "essential" and the start of a new era of cooperation, according to Trend.az.   Zardari identified the pipeline as a major project:  "Pakistan is considering the construction of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline as a major project, which is the beginning of a new era of cooperation at the regional and interregional levels."

There is little chance of TAPI being constructed until after the United States and NATO withdraw their troops from Afghanistan in 2014, and the Afghan government shows it has the ability to maintain security of the proposed pipeline.

Nabucco West Wins Semi Finals

Nabucco West, the European remnant of the EU supported Nabucco pipeline, has been chosen by the Shah Deniz 2 consortium as their potential northern route.  The original Nabucco pipeline, now known as Nabucco classic, was shorn of its length in Azerbaijan and Turkey by the intergovernmental approval of the TANAP pipeline.

The victory of Nabucco West is not a small one.  The lead investor in Shah Deniz 2 is British Petroleum, and BP had their own pipeline proposal:  the South East Europe Pipeline (SEEP).   Nabucco West was probably able to secure the consortium's support because it has transit approvals from the countries through which it would run; SEEP had not advanced beyond the concept page.

"The Nabucco West project, with a route running from the Turkish-Bulgarian border to Baumgarten (in Austria) has been selected as the single pipeline option for the potential export of Shah Deniz Stage II gas to Central Europe,"  BP announced.

Nabucco welcomed the news.  Reinhard Mitschek, managing director of Nabucco Gas Pipeline Internation, issued a statement that, "This decision is an important milestone for the Nabucco project and a major step towards the final investment decision."

While Nabucco West has been chosen as the consortium's choice for a route to Central Europe, the consortium has also picked the Trans Adriatic Pipeline (TAP) as their choice for a delivery route to Southern Europe.  Nabucco will chose in 2013 whether the gas will go north or south.  So, the semifinals in this competition are over, and the final competition will face off Nabucco West and TAP.

EU Energy Commissioner Guenther Oettinger did not take a position on which route was preferable.  "With this pre-selection, we are a step closer to getting gas directly from Azerbaijan and other countries in the Caspian region.  Whatever the final decison on the whole route from the eastern part of Turkey to Europe, Azerbaijani gas is certain to come to Europe," he wrote.  "This is a success for Europe and for our security of supply."

Higher Priced Gas Not Detering South Stream

Faced with competition from TANAP, Nabucco-West, LNG and alternative fuels, Gazprom is coming to grips with lower anticipated revenues from their proposed South Stream pipeline.  Sergei Komlev, head of price formation for Gazprom Export, believes Europe will buy the gas anyway.  In June, he told the World National Oil Companies Congress in London, "Our estimate is that the difference (between hub-priced gas and South Stream supplies) is $2 per million British thermal units," according to Reuters.  Komlev said the price would be attractive because Gazprom would provide South Stream gas via long-term contracts, which would provide more security of supply than spot-priced hub gas.

Revenues will suffer, however, because of price breaks to various countries.  As an example, to keep Bulgaria in the South Stream consortium, Gazprom has agreed to an 11% price discount for the upcoming year, a loss of USD 115 million.  Bulgarian Economy and Energy Minister Delyan Dobrev gave the results of these negotiations to reporters in June.  "Currently, there is no danger of Bulgaria not participating in South Stream," he said.  "We support the South Stream project.  We believe it is profitable for Bulgaria, but we have to specify all the details."

While Dobrev is pleased with the negotiations, there is a question as to whether Bulgaria can finance its share of the pipeline.  According to an unconfirmed source, Gazprom might pay for the Bulgarian section of the pipeline and then repay itself by deducting the gas transit fees the company would otherwise owe the country.  Regardless of the financing, South Stream has begun the Environmental Impact Statement for the 250 kilometer section that will run off the Bulgarian Coast, according to the Sofia News Agency.

South Stream has also recruited a new member of the consortium, Macedonia.  According to Macedonian Vice Premier and Minister of Finance Zoran Stavreski, membership will secure gas supplies for future generations of Macedonians, although the country was not originally considered for membership.  "This was in fact done (through a myriad of contacts and high-ranging talks) from a position where there were no plans to be included in the project," he said.  "There is no more dilemma--Macedonia is joining the international gas pipeline corridor 'South Stream' as it has been agreed between PM Nikola Gruevski and President Vladimir Putin.  We've received the text of the draft-agreement."

Russian President Putin continues to remain optimistic toward the project, and in June said the pipeline could begin natural-gas flows as early as 2014.  This would inaugerate the pipeline years before the Nabucco-West rival, which is scheduled for completion in 2017-2018.

TANAP Signed Amid Russian Threats

On June 27, 2012, Turkey's Prime Minister Recep Tayyip Erdogan and Azerbaijan's President Ilham Aliyev signed the long-awaited agreement to construct the TANAP pipeline.  This 2,000 kilometer natural gas pipeline will link the Shah Deniz 2 gas field in the Caspian with Turkey's western border.  The original design is for the pipeline to carry 16 bcm of gas annually, of which 6 bcm is for the Turkish domestic market.  SOCAR (State Oil Company of Azerbaijan) will own 80% of the pipeline, with the remaining 20% divided between the Turkish pipeline companies BOTAS (Turkish Petroleum Pipeline Corporation) and TPAO  (Turkish Petroleum Corporation.)  The project is estimated to cost approximately $7 billion, and is scheduled for completion in 2018.

The two signators called the intergovernmental agreement "historic."  Other observers were equally impressed.  Mahmut Mucahit Findikli, head of the Turkish parliament's energy committee, told SE Times, "This is not only a very optimal way to meet European gas diversification needs, but also very important for our country as it increases Turkey's role as a transit country."  Charles University's Caspian energy expert Jan Sir noted the project "Keeps alive the stategic rationale" for a southern energy corridor to provide Europe with non-Russian gas.  "For Azerbaijan, it opens new export opportunities and provides the desired diversification of external relations and stable income...With the opening of the Caspian to the West, Turkey's Caucasus connection would become stronger and Russia would lose much of its influence over the post-Soviet region."  World Energy Council's Hilal Pataci issued a warning, however, that the agreement could turn into a "problem in Russia-Turkey relations in the upcoming years."

Pataci's warning has been echoed by Gazprom, the Russian government-owned gas company.  In response to a Turkish request for additional Russian gas (because of an explosion halting imports on the Iran-Turkey pipeline), Gazprom graciously agreed and noted the company has been a dependable supplier.  It warned, however, that if TANAP were completed in 2018, "Turkey could then apply for help to Baku."

One has to wonder, however, how much impact a mere 10 bcm per year of natural gas will have on Gazprom's European monopoly.  The amount represents only about 2% of European gas consumption.

European Responses to Gazprom Delivery Cuts

In February 2012 Gazprom reduced its deliveries of natural gas to Southern Europe to meet domestic demand in Russia.  This was the third time in six years that Gazprom cut deliveries to Europe:  2006, 2009 and 2012.  Unlike the first two interruptions which appear to have been politically motivated (aimed at influencing Ukrainian politics), this cutoff was precipitated by high demand--and Gazprom's inability to meet that demand.

Following the first two cutoffs, Europe united in demanding the creation of an alternative natural gas source.  Just as the gas outage was different than the first two, reactions have also differed.  In fact, European countries have diverged wildly as to their reactions.

The first to react was Russia itself.  On February 1, Gazprom acknowledged there had been increased demand, caused by the coldest weather to hit Europe in decades.  They pointed out that even though not everyone was getting all the gas they wanted, that Gazprom was honoring all its contractual obligations--a point acknowledged by the Europeans themselves.  Citigroup analysts in Moscow Ronald Smith and Alexander Bespalov released a note that read, "Gazprom will almost certainly meet its minimum contract requirements."  Gazprom Deputy Chairman Andrei Kruglov informed then-Prime Minister Putin that Gazprom could not increase gas deliveries to Europe.  Putin gave orders for Gazprom to do whatever was needed--but not at the expense of Russia's inhabitants.  "I am asking you to make a real effort to supply the demands of our foreign partners given that the top priority of our energy companies, including Gazprom, is to supply Russian customers," he said.

Gazprom's admission that they had cut back on deliveries was given hesitantly, however.  At first, they blamed Ukraine for the shortage--stating that Ukraine was stealing excess gas from the pipeline that passes through that country (See my blog entry "South Stream Advancing", June 12, 2012.)  When it became apparent that domestic demand was taking all the gas, Gazprom's other deputy chair, Alexander Medvedyev, admitted gas demand exceeded expectations by 50%.  Deputy Kruglov then stated the cuts had lasted several days, and had reached up to ten percent.  Officials in Austria and France reported shortages of 30%, and Italy reported shortages of 24%.  Ukraine itself claimed it was receiving 15% less gas.

IHS regional energy analyst Andrew Neff stated the obvious:  "The cold weather spike in demand raises questions about...Europe's apparent expectation that Gazprom can quickly ramp up export volumes as a "swing supplier,"  reported AFP.  East European Gas Analysis chief Mikhail Korchemkin explained why:  "Turkmenistan and storage gas could have contributed some 240 million cubic meters per day--enough to provide a stable gas flow to Europe," noted the same report.  But that gas was not available, because Gazprom has been building its network instead of storage facilities.  Deputy Chief Medvedyev conceded the problem and said, "We cannot promise that this will not happen again next winter or over the next five years..That is why we have given the green light to a program aimed at doubling the volume of our European storage facilities."

Jonas Gratz of the Center for Security Studies in Zurich, notes the paradox that while Russia can no longer play supplier of last resort, many European countries are rewarding Russia instead of seeking alternatives.  "The premise of stable supplies from Russia is crumbling fast," he wrote.  "Gazprom is not the "reliable supplier" that the Soviets may once have been (in the eyes of Western Europe).  Gazprom's market share in the EU turns out to be already too high for the sort of power play Moscow wants to pull off with the EU.  By exploiting irregularities and crises to display and test the EU's vulnerabilities, Russia strives to derail the EU's market liberalization agenda...Many EU member states and institutions have so far rather rewarded Russia's unreliable behavior...Instead of rewarding Russia, the EU and its gas industry have to focus on diversifying suppliers."

Europe's dependency of Russian energy will continue to grow in the future.  A doctoral student at Old Dominion University, Katerina Oskarsson, compiled an interesting report.  She wrote that the EU's gas imports are projected to accelerate due to a depletion of indigenous gas resources.  The European Commission estimates that the proportion of EU gas consumption met from imports is set to rise from 60% to 73-79% by 2020 and 81-89% by 2030.    These statistics, while alarming, need to be kept in perspective.  Russian gas only accounts for 6.5% of the EU's primary gas consumption.  The issue, however, is regional.  In Central and Eastern Europe, all states reply on Russia for at least 50% of their natural gas, and six countries get over 80% of their supply from Gazprom.

The Cold Snap has brought home the European need for non-Russian sources of natural gas.  As Nabucco is replaced by TANAP, however, the only non-Russian sourced pipeline is reduced to delivering less than 2% of Europe's energy needs.  Europe's dependence on Russia appears destined to continue, unless a combination of LNG, shale gas, and unconventional fuels can break it.

Nabucco Reduced to Rump Project

With the announcement of the proposed Trans Anatolian Natural Gas Pipeline (TANAP) in December 2011, Nabucco has recreated itself as a pipeline proposal that begins at Turkey's western border.  Instead of being the European Union's premier pipeline project in the Southern Energy Corridor, it is now a regional competitor to the Trans Adriatic Pipeline (TAP) and the Interconnector Turkey Greece Italy (ITGI).

The weakness of the original Nabucco proposal could never be overcome:  there was no source for the natural gas that the pipeline was supposed to carry.  In January Sergey Pravosudov, Director of the Russian Institute of National Resources, said, "Europe has long been discussing supply alternatives.  However, nothing is being done in their main project Nabucco.  Europeans themselves admit that the more time passes the fewer chances remain to breathe life into Nabucco."

Because of this inaction, Turkey decided it could not wait for the European actors to get their act together, and Azerbaijan did not want their market to be limited to Russia.  According to a report in Hurriyet Daily News, a Turkish Foreign Ministry official stated, "With the economic slowdown that will reflect in the use of natural gas, Europe put the breaks on."  A Turkish Energy Ministry official added, "Azerbaijan wanted to sell the gas that it will produce from Shah Deniz 2 gas fields.  It did not want to sell it to Russia and did not have the time to wait for the EU to decide."  Azerbaijani parliamentarian Valeh Alasgarov characterized Europe's approach as indifference.  "No one takes care of this project," he said.  The result was TANAP, an abridged Nabucco to carry 16 bcm of natural gas from the fields.  Turkey would consume 6 bcm themselves, and pass 10 bcm to its Western border for onward movement to Europe.

Mark Adomanis, a contributor to Forbes magazine, declared Nabucco a failure.  As a project to demonstrate European unity against Russian energy policy, the pipeline showed the European Union as "almost comically incompetent and incapable."  Adomanis noted that in 2012 Gazprom was arguably more deeply entrenched in Europe than it ever had been.  Jamestown Foundation's Vladmir Socor noted that while the Nabucco shareholders would never leave the consortium, there were chinks in the armor.  German shareholder RWE was making overtures to TANAP, and the Turkish government (owner of the shareholder Botas) was prioritizing TANAP which was "easier to implement" than Nabucco. Hungary's MOL went on record that as long as there was no definite source of natural gas supply, no final investment decision could be reached on the project.   Julian Lee, an analyst at the Center for Global Energy Studies, declared the project dead.  "I think that Nabucco in the way that it was originally envisaged as a pipeline running from Turkey's eastern border all the way to Europe...is probably over.  I don't think that is going to happen.

In April, Hungary's Prime Minister Viktor Orban met with Gazprom CEO Alexey Miller.  Less than a week later, he announced that MOL would leave Nabucco in favor of South Stream.  In an email, they held out hope that they could rejoin a Nabucco in a different format.  MOL cited "uncertain costs and gas sources and, with the current structure and project management, the implementation of the Nabucco project is not secured.  We believe in the South Corridor concept, that could eventually also include a re-considered Nabucco."  

Austrian shareholder OMV began to consider a Bulgaria to Austria version of Nabucco.  It would use the intergovernmental agreements and regulations that had been negotiated for the original Nabucco, and would cost considerably less since the distance would be shorter.  The consortium submitted the modified proposal for a 1,300 km pipeline to the Shah Deniz consortium.  Nabucco's Managing Director Reinhard Mitschek put the best face he could on it:  "We are convinced that we have submitted a competitive and comprehensive proposal...and that this proposal represents a win-win situation for our shareholders and for suppliers alike."  In changing its size, Nabucco West may have lost the support of the EU.  European Commission spokeswoman Marlene Holzner told the press it did not matter whether Nabucco or a rival won, as long as the EU got direct access to the Caspian gas, and that the initial 10 bcm capacity could be increased in the future.

Nabucco's construction costs for a 10 bcm pipeline are now approaching the per kilometer price of the 63 bcm South Stream pipeline, according to Investcafe's Grigory Birt.  Given the convergence in price, he predicted the new Nabucco had little chance for success.  "The lower the capacity of the project, the less profitable that project will be," he said.

While the final decision rests with the Shah Deniz consortium, the question remains if the European Commission will bring enough political pressure to bear to keep Nabucco-West in the game.  The original Nabucco was designed to carry only 5% of the projected natural gas needs of Europe, and Nabucco-West has less than one-third of the original capacity.  The new proposal does little to meet Europe's desire for a modicum of energy independence from Russia.

After over a year of wrangling over price, India and Pakistan have signed a gas purchase contract with Turkmenistan.  This is the first step in the creation of the TAPI (Turkmenistan Afghanistan Pakistan India) pipeline.  Interestingly, transit country Afghanistan did not sign a contract although they did initial a memorandum of understanding.

The Asia Development Bank (ADB) celebrated the development.  "After more than 20 years of diplomacy, the 1,800 kilometer (818 miles) natural gas pipeline that connects one of Central Asia's largest energy suppliers with South Asia's critically underserved market has moved a step forward," it said in a press release.  Klaus Gerhaeusser, Director of the ADB's Central and West Asia Department, was enthused.  "The pipeline represents a win-win scenario for each member country, as it will give Turkmenistan more diverse markets and help fuel the energy hungry economies to the South."

In theory, Gerhaeusser is correct.  The pipeline is designed to take 33 bcm per year for 30 years of natural gas from Turkmenistan to feed the energy hungry subcontinent.  The pipeline is also supposed to help Afghanistan develop economically, thereby helping the peace process.  Not only would Afghanistan purchase 5 bcm of gas from the consortium (India and Pakistan would get 14 bcm each) but they would also earn transit fees.  Turkmen President Gurbanguli Berdymukhamedov has said Afghanistan could earn more than $1 billion annually in transit fees, and Afghan President Hamid Karzai predicts pipeline maintenance could provide employment for 50,000 Afghans, according to the Associated Press.

The cost of the project is estimated to be between $10 billion and $12 billion to construct, and it has attracted US interest.  Daniel Stein, senior adviser to the US State Department's special envoy for Eurasian energy, said that two major US oil companies were interested in participating in the project.  The US government also supports the project, both because of the positive contributions to Afghanistan and because it would detract from a competing project to service South Asia with Iranian gas.

Despite American support, TAPI does not appear to have fallen prey to the US-Russian rivalry for Central Asian energy resources.  Russia is also interested in investing.  Gazprom has gone on record as saying they wanted to be involved in any way the project envisions.  In reply, leaders of the governments involved issued a statement that, "The parties welcome Russia's interest in participating in implementation of the Turkmenistan-Afghanistan-Pakistan-India gas pipeline project."

One would think that with American and Russian support, that TAPI would be a done deal.  Unfortunately, its transit of the worst parts of Afghanistan and Pakistan makes the project problematic.  Andrew Neff, the Moscow-based senior energy analysts, said the instability in Afghanistan meant the project was unlikely to attract financing from Western banks.  "The main hurdle is the security concerns in Afghanistan," he said.  Neff's colleague at IHS Global, Lilit Gevorgyan, concurs.  "With the Western troops' pullout by 2014 from the still volatile Afghanistan, building an expensive pipeline in country with very weak central government seems almost unattainable."

Trans Anatolian Gas Pipeline Strongest Game in Town

The Trans Anatolian Natural Gas Pipeline (TANAP) is the latest proposal to bring Shah Deniz II gas to Europe.  It currently holds the inside track, since the owners of the project are the state owned oil and gas companies of Turkey and Azerbaijan.  The pipeline will originate at the Caspian, and will take natural gas to Turkey's western border.  Ever since it was proposed in December 2011, it has frightened competing pipeline projects.

According to Olgu Kumus, an analyst at CERI Sciences Politiques in France, TANAP is the main competitor for Nabucco, and not the Gazprom-supported South Stream.  "The Trans-Anatolian pipeline aims to transfer the same gas source to Europe as Nabucco," he told SE Times.  "The most important partner in the Trans-Anatolian pipeline is SOCAR (the State Oil Company of Azerbaijan), which manages the Shah Deniz II gas field with BP.  In other words, the Trans Anatolian pipeline will not have a supply problem because the region's dominant supplier is a stakeholder."  Faced with such competition, Nabucco has now proposed a scaled-down version of its pipeline that starts at the western Turkish border, aptly named Nabucco West.

Not only is TANAP a threat to Nabucco, however, but as more Shah Deniz II gas comes on line the pipeline could expand its capacity.  This puts it in competition with South Stream.  SOCAR president Rovnag Abdullaev said that Azerbaijani gas production would reach 30 bcm by 2015, and 50 bcm by 2025.  He claimed that TANAP, originally planned to carry 16 bcm per year, would have the capacity to carry 60 bcm annually with a possibility of an increase.   Such expanded capacity would leave room for Turkmen gas if the Trans Caucasian Pipeline were to be built.

As plans proceed, SOCAR has invited other companies to join in the TANAP project.  "We would like other large international companies to be part of the project as well," said Abdullayev.   Ukraine's Ambassador to Turkey, Sergiy Korsunsky, told reporters that Ukraine would like to take a stake of up to 10% of TANAP and could pay for it with cash, or by supplying the project with pipes.  In addition, competing pipeline consortiums TAP (Trans Adriatic Pipeline) and ITGI (Interconnector Turkey Greece Italy) said that their projects were compatible with TANAP.  "TAP will be happy to work with the developers of TANAP for any required coordination between the two pipelines, thus providing a fully integrated solution for the delivery of Caspian gas to Europe," External Affairs Director Michael Hoffman told Reuters.  Similarly, the CEO of IGI Poseidon, ITGI's operator, said "The ITGI project starting at the Turkish-Greek border is fully compliant with any option to transit Azeri gas through Turkey, including TANAP."

Trans Adriatic Pipeline Chosen for Italy

Trans Adriatic Pipeline (TAP) Managing Director Kjetil Tungland told EurActiv he has received a letter from the State Oil Company of the Azerbaijan Republic (SOCAR), inviting TAP to enter into "exclusive negotiations" with the Shah Deniz consortium.  SOCAR added the invitation was supported unanimously by all the members of the consortium, and the decision is final.  What this means is that the Interconnector-Turkey-Greece-Italy (ITGI) project, an alternative route to Italy supported by the Italian and Greek governments and whose members are primarily Greek corporations, has been eliminated from consideration because of the continuing economic turmoil in that country.  The Shah Deniz consortium is a group of companies led by Statoil and British Petroleum (BP).  Other members include SOCAR, LUKOIL, NICO (Iran), Total and TPAO (Turkey). 

TAP is sponsored by the Swiss energy company EGL, Germany's E.ON AG, and Statoil ASA from Norway.  A weakness of this consortium is that it lacks an Italian partner but, with the Shah Deniz decision supporting TAP, ITGI supporter Enel SPA of Italy has expressed interest in joining the TAP group.  "Enel is interested in all projects that bring gas to the country, includiing TAP," said Enel CEO Fulvio Conti. 

If built, TAP will carry 16 bcm of natural gas from the second phase of the Azeri offshore gas field, Shah Deniz.  They would pick up the gas at the Turkish border, and carry it 800 kilometers. While the Shah Deniz consortium has agreed to use TAP if it sends gas to Italy, it still has not made a decision to use that corridor, at all.  Harry Sachinis, CEO of the Public Gas Corporation of Greece (DEPA-an ITGI member) said, the Italian pipeline portion of the Southern gas corridor is only a "provisional decision."

Critics of the project point out that TAP has no intergovernmental agreement among the three countries (Greece, Albania and Italy) through which it would pass, although it was included in an Albanian-Italian bilateral from 2009.  They also says that unless Enel or another Italian firm joins the TAP group, it would be difficult to get Italian government permission for the project, according to Reuters.

South Stream Advancing

While Western companies still compete over which route will be the Southern energy corridor, Gazprom's South Stream continues to plan for its construction.

In December, the company made a slight modification to its originally-planned route.  Following the EU's blocking of Gazprom's purchase of 50% of the Central European Gas Hub in Austria, a Gazprom spokesman told Reuters the project was no longer considering that country as a transit route.  "Only a spur will run to them," he said, adding that the route would now end in Italy instead of Western Europe.  Whether this decision will hold is uncertain, however, since in April 2012 the head of ENI (Italian energy company and South Stream partner) announced that the northern leg of South Stream to Austria will be built before starting work on the southern leg to Italy.  This report was contradicted by Gazprom in May, when they published a story that they might abandon the offshore section of the pipeline to Austria entirely.  The report added that the line would end in the northeastern Italian city of Tarvisio.

Gazprom CEO Alexei Miller confirmed in February that final investment decisions on the pipeline would be made in November, with construction scheduled to begin in December.  "We have entered into the stage of actual construction of South Stream," he said in a statement.  "I can say without exaggeration that Gazprom is working on the project 24 hours a day."

There had been a discussion within Gazprom whether it should be built for its maximum capacity of 63 bcm per year, or if the project should be started with a smaller pipeline that could be expanded at a later time.  In Winter 2012, however, Italy shivered without natural gas during some of the coldest weather in recent years.  Many analysts believed Russia had cut back deliveries to foreign customers while servicing their domestic customers.  In their review of the situation, however, Gazprom blamed the shortages on Ukraine's siphoning fuel from the transit line.  Gazprom CEO Alexei Miller told Russian president Demitri Medvedev, "On certain days, as much as 40 million cubic meters of gas remained on Ukraine's territory...  Our Ukrainian partners took as much gas from the export pipeline as they felt necessary."  In reply, Medvedev told Miller to build the pipeline at full capacity.  This decision will eliminate the need to use the Ukrainian pipeline to export Russian gas to Europe.  (Ukraine denied any diversion had taken place).

Julian Lee, senior energy analyst at the Center for Global Energy Studies in London, theorized as to why South Stream's tempo has increased.  In an interview with New Europe, he said "We are seeing a general sort of shift at the moment in the region of countries that are favoring South Stream.  There is a realization that Nabucco is not going to happen, at least in its original form...I think supporting or at least voicing support for South Stream is no longer perhaps seen as undermining Nabucco because I think the idea of Nabucco has largely evaporated now."

The European Commission continues to oppose South Stream because it is only a diversification of supply routes, instead of a diversification of suppliers.  Others, such as Russian energy consultant Mikhail Krutihin, oppose the project because of the price.  Citing a potential cost of construction of $40 billion, he told Nezavisimaya Gazeta, "This is madness.  It would be cheaper to strike a deal with the Ukranians."