Prospects for Turkey's imports of FSU gas brightening, but hurdles still on horizon

Jan. 31, 2000
Since discovery of the Shah Deniz gas-condensate field by a BP Amoco PLC-led consortium in the Azeri waters of the Caspian Sea last summer, Turkey's options for importing gas from the former Soviet Union for its fast-expanding economy have increased dramatically.
COMMENT on FSU gas imports to Turkey

Since discovery of the Shah Deniz gas-condensate field by a BP Amoco PLC-led consortium in the Azeri waters of the Caspian Sea last summer, Turkey's options for importing gas from the former Soviet Union for its fast-expanding economy have increased dramatically.

Considering political realities and supply-demand dynamics, however, for Turkey to take advantage of this new opportunity, it must re-evaluate and reshuffle its gas import priorities.

Gas export schemes

A study by Wood Mackenzie Consultants Ltd. (OGJ, Oct. 18, 1999, p. 26) indicates that, of the three hotly debated gas export schemes to Turkey-Russia's Blue Stream pipeline, the trans-Caspian pipeline (TCP) from Turkmenistan, and an Azeri pipeline-the first would be the costliest.

A recent study exploring a number of scenarios has concluded that TCP is also economically viable, even if Turkey is the sole buyer of Turkmen gas (OGJ, Nov. 15, 1999, p. 51).

The Azeri scheme would be the least costly, even considering the relatively higher production costs for this project. With high flow rates registered in the discovery well, reserve estimates of 14-25 tcf and a potential to deliver 1.5-2.5 bcfd gas, Shah Deniz will almost certainly prove commercial. The field can probably be brought on stream by the end of 2003, reaching peak production in 2007-08. Shah Deniz is currently being appraised by a second well. Initial indications from the pay zone are reported to be "very encouraging" (OGJ, July 19, 1999, p. 35). The estimate of reserves is likely to increase.

Shah Deniz has implications beyond gas export: Its condensate will help alleviate the alleged oil-reserve shortfall for the Baku-Ceyhan oil line. If, in addition, oil is found as an oil rim below gas, or independently in a separate reservoir, its impact on Baku-Ceyhan could be very significant. The Shah Deniz discovery, pointing to an alluring gas export potential from Azerbaijan to Turkey, was probably the main reason for BP Amoco's warming up to Baku-Ceyhan in October, after long opposing it (OGJ, Nov. 15, 1999, p. 23). With healthy oil prices, the warm-up is now apparently gaining some sustenance.

If it were based on economics alone, of the three Turkish gas-import schemes, the Azeri proposal would almost certainly rate highest, followed by TCP. Thanks to the political brinksmanship of one of the coalition parties in the Turkish government, however, Blue Stream has been given the highest priority by Turkey. At the OSCE summit in Istanbul last November, the Turkmens managed to have a quadripartite intergovernmental framework agreement signed on TCP, while the Azeris got a brotherly pat on the back and a bilateral memorandum of understanding on Azeri gas. Blue Stream was not even on the agenda. After the summit, the Turkish government gave a speedy green light to Blue Stream by signing a new protocol with Russia.

Blue Stream concerns

Apart from its high cost, Blue Stream poses serious technical challenges and environmental risk to the Black Sea. It will be the deepest subsea pipeline to date, reaching a depth of 2,150 m on the Black Sea's corrosive, soft seabed. Seismic activity, slope failure, sediment instability, mud volcanoes, and gas hydrates pose additional hazards. The deepest subsea pipeline built to date is the tie-back pipeline in the Shell-operated Mensa field in the Gulf of Mexico. But the Mensa pipe- line, in terms of water depth (1,600 m), length (100 km), and diameter (12 in.), bears little resemblance to Blue Stream, and, likewise, the Gulf of Mexico and Black Sea have few similarities.

From an energy-security point of view, as well, Blue Stream should give Turkish politicians food for thought. It will mean high dependence on Russia for a strategic commodity. Russia already supplies 70% of Turkey's gas through a pipeline across the Balkans.

If a new gas export scheme from Russia to Turkey were in the cards, one wonders why a trans-Georgian land route extending more or less along the Black Sea coast, from Izobilnoye in southern Russia across Batumi in Georgia to the town of Erzurum in eastern Turkey, was not chosen instead. Izobilnoye is the starting point of Blue Stream (i.e., Gazprom will bring gas to this point in any case), and Georgia would be the only transit country.

Alternatively, the existing gas line from Russia to Georgia could be expanded and extended to Erzurum. Either option would be cheaper than Blue Stream and would be free of risks attending Blue Stream. As it would serve Russia's interests, political stability in the Caucasus would be an added benefit from a trans-Georgian route. Russia opposes east-west Caspian pipelines that bypass its territory and could try to destabilize this ethnically fragile area to block these projects. Both Georgia and Azerbaijan are already feeling jittery from Russia's current military intervention in Chechnya, where the Baku-Novorossiisk crude pipeline (now closed) passes.

In giving priority to Blue Stream, the Turkish government has faced public sarcasm, and even criticism, as to whether the "Russian" gas delivered through this route may not, in fact, be Turkmen gas in origin. To give some credence to this eventuality, just last month, Russia's Gazprom signed a contract with Turkmenistan to deliver 700 bcf of Turkmen gas to its own gas pipeline system starting this year.

Gazprom will also receive gas from Kazakhstan's supergiant gas-condensate Karachaganak field, currently under its first phase of development. As a gas source, Karachaganak is on its way to replace the nearby Russian Orenburg field (in the Volga region) now in decline.

To feed Blue Stream, Gazprom does not need to move gas all the way from Siberia; Turkmen and Kazakh gas would serve this purpose quite well. (Gazprom may have another prize soon if the Kashagan structure on the Kazakh Caspian shelf, where drilling of the first exploration well is under way, is found to be gas-bearing.)

Contractually, the Italian giant ENI has the right to half of Blue Stream's capacity, and through its subsidiary Agip, ENI is both a shareholder and operator of Karachaganak. So, if ENI opts to exercise its right, it will find Karachaganak also eminently suited for its share of the throughput.

Blue Stream alternatives

Although it has given its contractual seal of approval to Blue Stream, Turkey would find both TCP and the Azeri gas schemes politically irresistible.

To this end, the government has declared it is also determined to take both Turkmen and Azeri gas, starting with the former. But herein it faces a formidable task: balancing its domestic needs against a number of gas-purchase agreements it has signed, with varying degrees of commitment. Buying large amounts of gas and selling to Europe the amount that cannot be consumed domestically, as some politicians have suggested, is no panacea, because, in the coming years, the European gas market will be fiercely competitive.

Europe's own gas reserves, the liberalization of the European Union economy, and abundant supplies from Russia, West and North Africa, the Middle East, South America, and the Caspian region will be factors that will fuel competition. With this in mind, Turkey's energy planners would do well to reevaluate the country's gas import needs and reprioritize the various gas import schemes that it is considering.

In the final analysis, the gas race to Turkey will be dictated largely by timing but also fine-tuned by political considerations. Whether the Turkmen and Azeri gas will be transported through a single pipeline (enlarged TCP), as the economics would dictate, or separately through two pipelines, if political wills between Turkmenistan and Azerbaijan clash, remains to be seen. If the Azeri scheme is delayed too long, however, Turkey may have to act as a transit rather than a recipient country for Azeri gas.

The Author

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Ferruh Demirmen is a consultant and lecturer in petroleum geology, field development, reserves estimation, and appraisal strategy and economics in Houston. Before moving to Houston, Demirmen worked in many parts of the world and held various positions, mainly with Royal Dutch/Shell, over a span of 30 years. He holds a PhD in geology from Stanford University.