Depressed crude oil prices won’t necessarily doom ambitious transportation projects west from the Black Sea and beyond if participating countries and investors don’t panic, speakers said at an Atlantic Council forum.
“It’s an exciting time to be working in the Black Sea. We should remember that when the idea of the Bakhu-Ceyhan pipeline was proposed, many of us were praying for $20/bbl oil,” observed Steve Nicandros, chief executive of Houston-based Frontera Resources Corp., which operates primarily in emerging eastern European markets.
“What’s key to the region is a willingness by governments to clear the way for the necessary investment,” Nicandros said at the Feb. 1 event. “Azerbaijan laid out a great incentive 20 years ago to develop a resource which justified construction of infrastructure that will provide supplies for decades. We’re in the greater Black Sea region’s early days.”
A second speaker, Elin Suleymanov, Azerbaijan’s ambassador to the US, said, “The lesson in constructing the Southern Gas Corridor is that you have to have a strong political and financial commitment from the companies as well as the countries. Fortunately, 95% of the gas already was sold and helped finance the project itself. Regardless of prices, Azerbaijan is fully committed to completing it.”
The Southern Gas Corridor was a unique project spanning 6-7 countries that involved several companies, Suleymanov said. “The initial pipeline exceeded everyone’s expectations because of the strong political commitments in the countries involved,” he said. “Its success has been extremely telling. It’s not just hydrocarbons or pipes, but political will which is getting this done.”
But a third speaker said depressed crude prices still will have an impact on proposed transportation systems. “We don’t see any mega-energy projects being built with lower oil prices,” said Tugay Tuncer, deputy chief of mission at the Turkish Embassy in Washington. “There’s not enough profit to justify the interest. We also don’t expect European energy needs to increase. With the projects that are being implemented, we expect demand for Russian and other gas to drop in Europe.”
Supply diversity matters
Supply diversity remains crucial for Europe, with some countries reaching deals with new sources sooner than others, two nonresident senior fellows at the Atlantic Council’s Dinu Patriciu Eurasia Center separately suggested. “There’s a much greater supply, particularly from the shale boom. Markets are becoming increasingly connected, and people are talking about a single global market,” said Agnia Grigas. “This means more liquidity, more competition, and more pressure on prices. It all spells bad news for Russia and Gazprom.”
Ariel Cohen, meanwhile, said, “There’s plenty of gas washing around. But if you don’t have a pipeline bringing it to you, you’re vulnerable. A country like the Czech Republic gets gas from Russia, but also can get it from the West. Ideally, countries like Bulgaria, Romania, the Balkan countries, and Greece will get gas from multiple sources. The alternative sources, first, are in the Caspian basin.”
Cohen said the situation in the region is fundamentally the same as it was in November when he originally issued his report, “Developing a Western Energy Strategy for the Black Sea Region and Beyond,” at the council’s 2015 Energy and Economic Summit in Istanbul in November.
“One of this paper’s findings shows that many countries still depend on Russian gas to varying degrees,” Cohen said. “If you want cheap gas, you accommodate Moscow. If you want to be independent, you pay a premium.”
But new suppliers are poised to emerge, Cohen said. “Iran will be the big player in the next 10 years, because it has the second most reserves. Qatar, which is a huge exporter already, won’t want to lose its market share,” he said. “Amounts first from Iraq’s Kurdish region, and then from Iran, will put pressure on Gazprom to become a corporation and not simply an extension of the Russian government.”
Russia outlined its export plans extensively in its latest strategy, Grigas said. “First, it acknowledges that Russia and its gas face difficult competition from global energy markets. Second, it intends to hold onto these markets as best as it can. Third, it will start emphasizing gas exports to the Asia-Pacific region. Fourth, it will start exporting LNG in addition to pipeline gas,” she said.
Varying chances of success
Its prospects for success vary, Grigas said. “It could have the most opportunity to grow in LNG exports, where it has lagged behind and is trying to catch up,” she said. “It only built its first LNG export terminal in 2009, compared to Malaysia which opened its first in the 1980s and Qatar which started in the 1990s.” With Russia still constrained by Western sanctions, a shortage of capital, and limited access to equipment and technology, it may be forced to rely on holding onto its European markets, she said.
Nicandros said, “The challenge is whether the [European Union] will manage a penchant for regulation and allow that energy to reach consumer. We’re seeing what happens when it does here in the US when the government tries to regulate excessively.”
He said if Europe can encourage construction of transportation systems into the Black Sea region, it will improve its own security but still face the challenge of protecting infrastructure during periods of aggression when several billion dollars are involved.
“There needs to be compensation for huge financial risks companies like ours take to uncover resources there,” Nicandros said. “Overall, I think it’s a good news story coming out of the Black Sea region. I’m certain infrastructure projects which are being proposed in Europe will increase demand, not decrease it, by providing a catalyst for greater [gross domestic product] in many countries.”
Cohen said more contracts are decoupling from crude oil prices, and spot markets continue to emerge. “This will take a long time to sink into Gazprom’s top minds,” he said. “The neglect of LNG and very wrong oil price projections would suggest that the generation which was appointed 15 years ago for political reasons no longer is coping with challenges Gazprom is facing.”
Contact Nick Snow at [email protected].
