TCGP's woes multiply with threat of competing Caspian gas export line

BP Amoco PLC, operator of the Shah Deniz development in the Caspian Sea off Azerbaijan, has revealed its intention to export natural gas from Shah Deniz field to Turkey starting as early as 2002. The plan sets up yet another hurdle for Turkmenistan and the backers of the planned Trans-Caspian Gas Pipeline, which has been plagued by setbacks in recent months (OGJ Online, May 30, 2000).

MOSCOW�BP Amoco PLC, operator of the Shah Deniz development in the Caspian Sea off Azerbaijan, has revealed its intention to export natural gas from Shah Deniz field to Turkey starting as early as 2002. The plan sets up yet another hurdle for Turkmenistan and the backers of the planned Trans-Caspian Gas Pipeline, which has been plagued by setbacks in recent months (OGJ Online, May 30, 2000).

The new gas export plan is a consequence of last year's surprise discovery of a huge deposit of gas at Shah Deniz, far larger than the proven oil reserves there. That bonanza turned Azerbaijan potentially into a major exporter of gas, besides oil, to Mediterranean and Black Sea countries.

As detailed by BP Amoco's chief executive in Azerbaijan, Andrew Hopwood, the new proposal envisions supplying Turkey with 5 billion cu m/year of gas from the winter 2002-03 onward, for a first-stage period of 5 years. The investment is projected at $1.3 billion for that first stage. Deliveries can increase to as much as 16 billion cu m/year in the second stage, with Turkey acting as both buyer and transit country.

The Shah Deniz consortium intends to offer Turkey a multiyear supply contract. The engineering work, due to begin in the second half of 2000, would includes installation of platforms at the offshore field, laying of a subsea pipeline to shore, renovating and adding compressor capacity to an existing 490-km pipeline from the Baku area to the Georgian border, and laying of a new, 280-km line across Georgia to Turkey.

Gas reserves at Shah Deniz are estimated at 700 billion cu m after the testing of two wells. A third well, due for completion in the second half of this year, may well increase that estimate.

The field is about 70 km southeast of Baku in water depths ranging from 50 to 600 m. The project owners are operator BP Amoco and Norway's Statoil, each with a 25.5% interest; Elf Aquitaine SA, the Lukoil-Agip SPA joint venture, Iran's Oil Industries Engineering, and State Oil Co. of Azerbaijan Republic (SOCAR), 10% each; and Turkish Petroleum, 9%.

Threat to TCGP
Formed in 1996, the Shah Deniz consortium had planned to invest $4 billion in the 25-year oil project. The gas find probably changes not only that investment picture but also the broader picture of gas exports from the Caspian basin, with repercussions on Turkmenistan and the planned TCGP.

For Turkmenistan, with its huge and unused gas export potential, the Turkish market represents the sole viable export option, at least in the short term. The TCGP�to be laid from Turkmenistan, across the Caspian, and through Azerbaijan and Georgia to Turkey�is intended to deliver 16 billion cu m/year of Turkmen gas to Turkey starting in 2002. In addition, another 16 billion cu m is to be shipped onward to other markets in a follow-up stage.

Turkmenistan, Azerbaijan, Georgia, and Turkey, with strong support from the US, recently signed a set of agreements on the TCGP and have been negotiating the details of the final documents. Project developers are Royal Dutch/Shell Group, Bechtel Enterprises Inc., and GE Capital Structured Finance Group.

However, Azerbaijan and the Shah Deniz consortium are now competing for the same Turkish market. That market, while continually expanding, is being targeted by Russia and Iran as well. The combined supply offers far exceed Turkey's projected gas demand for the decade ahead.

Assuming Turkey, for political reasons, ultimately chooses Turkic countries as suppliers�an assumption that remains far from certain�Azeri gas can easily outcompete Turkmen gas for the Turkish market by dint of geography. The Azerbaijani source of supply lies much closer to Turkey, enabling Baku to charge substantially lower prices than Ashgabat could.

Azeri officials sound determined to exploit that competitive advantage over Turkmenistan. Shah Deniz means that a trans-Caspian gas pipeline is no longer an economic priority to Azerbaijan, even if it retains political importance.

Anticipating the possibility of a land gas export route to Turkey, Azerbaijan has played hardball in the recent negotiations with Turkmenistan over the TCGP. Baku has demanded that 50% of TCGP's capacity on the Azerbaijani and Georgian stretches be dedicated to Azeri gas�a clear departure from the pipeline's original dedication to Turkmen gas. Turkmenistan, loath to see its projected export income dwindle, has offered to yield to a fixed quota of 5 billion cu m/year for Azeri gas.

Washington's best efforts have not resolved the dispute. The Shah Deniz consortium's planned export route abandons the TCGP route. Ashgabat now seems to doubt Baku's willingness to permit the transit of Turkmen gas to Turkey, except on Baku's own terms. Consequently, Turkmen President Saparmurat Niyazov announced recently his intention to mend fences with Russia's Gazprom, in the hope of obtaining transit rights through Russia for Turkmen gas.

US attitude shifting
A US official says the United States is taking a wait-and-see attitude toward Turkmenistan President Niyazov's refusal to approve terms for building the TCGP.

Speaking from Washington in a recent telephone interview with an OGJ Online correspondent on condition of anonymity, the US government official denied reports that the administration of President Bill Clinton has abandoned hope for the pipeline project. The official said: "We're not de-emphasizing the trans-Caspian pipeline in the policy. We're saying we've gone as far as we can in making it attractive to Turkmenistan."

Most analysts believe that prospects have dimmed dramatically for TCGP since February, when Niyazov criticized the US envoy on the Caspian, John Wolf, during a ceremony broadcast on Turkmen television. The US-backed project appeared to suffer a further setback in May, when Russian President Vladimir Putin visited Ashgabat and committed his country to buy more of Turkmenistan's gas. With the direction of Turkmen exports now moving northward instead of westward, the TCGP consortium has decided to freeze spending for the project.

The US official confirmed that the Clinton administration's patience with Niyazov has run thin since the Wolf visit 3 months ago. The official said, "We've changed our approach. We don't have any plans to go back until we hear from Mr. Niyazov."

Officials believe that Niyazov will soon realize that he has made Turkmenistan too dependent on Russia, which may be in a position to dictate a low price for Turkmen gas.

Niyazov's refusal to renew the mandate for the trans-Caspian project is seen as a bargaining tactic with the companies behind the venture. But the US has apparently had enough of Niyazov's tactics. The official said: "We don't want to be part of this bargaining. We're just going to sit there quietly and watch him self-destruct if we have to."

One of the reasons for impatience is that Niyazov has reportedly changed his own terms. The official confirmed that Niyazov has again been pressing the project developers for a bonus payment of some $500 million after he agreed to drop the demand during a recent visit of former Turkish President Suleyman Demirel to Turkmenistan. The official agreed that the failure of the 2,000-km project would leave the US and Turkmenistan with few common interests. Niyazov has shown little taste for democracy or economic reform, the official noted.

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