Leading expert on energy issues of the Strategic Studies Center under Azerbaijani President, expert of the Oxford Institute of Energy Studies, Gulmira Rzaeva, discussed the future of Azerbaijani pipeline project Southern Gas Corridor and prospects of the development of European and Turkish gas markets as main consumers of Azerbaijani gas in an interview with Vestnik Kavkaza.
- Can other, alternative gas projects become competitors with the Southern Gas Corridor?
- Right now there's nothing to say about other projects that can transport gas from alternative sources and using new routes to Europe. Currently there are no plans to implement them, they're not even at the stage of making investment decisions, although there are many options of supplying gas to Europe via alternative routes. European countries are literally surrounded by states rich with energy resources - Iran, which can export to Europe in the future, gas from the eastern Mediterranean, in other words, from Israel and Cyprus, as well as Turkmenistan and so on. But the Southern Gas Corridor and Shah Deniz is the only project under implementation right now. 70% of all works have already been implemented: development of the second stage of Shah Deniz is 80% completed, upgrade of the South Caucasus Pipeline is 85% completed, the Trans-Anatolian pipeline (TANAP) is 70% completed and the Trans-Adriatic Pipeline (TAP) is 50% completed. As of today, this is the only project that has specific dates of beginning of gas supplies to Turkey and Europe - this will happen in 2018 and 2020 respectively. Since the situation on the market is quite complicated due to low energy prices, especially for investors, and considering high level of competition, it's unlikely that new alternative projects can receive investments and begin implementation. This process will take at least 7-8 years.
- In your opinion, how much Azerbaijan contributes to the energy security of Europe?
- In addition to gas supplies it's extremely important to create an infrastructure, a pipeline network, which pumps gas to Europe from neighboring regions. Let me remind you that the Southern Gas Corridor project is being built with the support of Azerbaijan and consortium companies, including the State Oil Company of Azerbaijan (SOCAR). If Europe needs additional volumes of gas for its market in the future and still wants to diversify supply sources using new routes, it will need an expensive pipeline track. We and consortium are building it right now. Basically, as long as gas pipelines exist, we provide Europe and Turkey, which also has a growing gas consumption market (albeit at a slow pace), with an infrastructure for long-term gas transportation from neighboring countries through the Caspian region for many years to come. There would be no pipelines like that without Azerbaijan, and the European Union itself would have to invest billions in the construction of a new pipeline system due to the growing demand for imported gas. In other words, the Southern Gas Corridor has freed the European Union and European companies from multibillion investments in the creation of strategically important pipeline infrastructure. After issues between the "Caspian Five" countries will be resolved, it will be especially useful for gas supplies to Europe from Turkmenistan via the Caspian Sea. If desired, this issue can be bypassed - it's enough to build a pipeline from an offshore field in the Turkmen sector to an offshore field in the Azerbaijani sector. They are close, and such infrastructure won't be considered an international pipeline, just two connected fields and infrastructures. No special permissions are needed for is, just like no permissions are needed for the Azeri-Chirag-Guneshli and Shah Deniz pipeline connections. So Turkmenistan doesn't need permission to build a pipeline from any of its fileds to our nearest field. It's just internal affairs of the country. This way, we can supply Turkmen gas to Europe via the Southern Gas Corridor and without using the Trans-Caspian pipeline, if it will be economically profitable project.
- Will low prices of hydrocarbons affect the implementation of the Southern Gas Corridor in any way?
- I don't think so. The prices are at a low level for 1.5-2 years both in Europe and Turkey, and in the first quarter of this year they rose by 15-20% compared to the fourth quarter of the previous one. Overall, despite the fact that gas prices have dropped both Europe and Turkey, it didn't affect the construction of Azerbaijan's export projects. Financial institutions and international banks didn't begin to refuse to issue long-term loans to the Azerbaijani side in order to finance their share in the projects, almost all banks we contacted either agreed or are considering our offers, which means that low prices didn't affect the financing of the Southern Gas Corridor, Eurobonds are still being sold pretty successfully. On the contrary, we receive loans at better conditions: this year, the rate was 5.8%, while last year's rate was 7.5%.
As for the profitability of Shah Deniz project and the transportation of gas, there's no doubt that investors don't like prices, since they haven't reached the level, at which they would like to sell gas. However, no one is selling gas until the project is fully implemented: sales to Turkey will begin in 2018, to Europe - in 2020. Until that time, everyone hopes that prices will rise or that there will be a different situation in the market. The oil prices growth with a 6-9-month lag will help gas prices to rise. In other words, the formula for calculating prices has already been determined, but the final gas price will be known only when it's sold to consumers.
- Is the fact that the consumption of hydrocarbons in Turkey currently declines a short-term or a long-term trend?
- BOTAS 2012 forecast of gas consumption in Turkey shows that the republic's demand for gas will grow very rapidly in the future: by 2030 consumption will grow from then 45 billion cubic meters per year to 80 billion cubic meters per year. This is one of the fastest growing forecasts in the entire Europe. We at the Oxford Institute of Energy Studies also carried out and published an analysis in 2014, in which we gave a more restrained forecast: by 2030 Turkish gas demand will reach no more than 67-70 billion cubic meters per year. Our expectations turned out to be more correct: since mid-2014, gas consumption has dropped due to state policy: Ankara is concerned by the fact that growing demand for gas leads to even greater dependence on external players, on import from Iran, Russia and Azerbaijan. Don't forget that just the deficit from purchase of hydrocarbons amounts to $60 billion a year in the annual debt. In other words, there's a concern that Turkey may not be able to ensure gas supplies and there will be a shortage.
That's why Ankara has taken a number of steps, changed several laws, adopted programs, which support production of electricity using renewable sources at the state level. The results appeared pretty quickly: in 2015 the share of such energy grew to 6.6%, in 2016 - 7.8%. It's quite significant figure. In addition, Turkey began to replace gas with coal, both local and imported. Thanks to that which the drop in gas consumption was 1,5% in 2015 and 4% in 2016.
This year, Turkey's Energy Market Regulatory Authority predicts that consumption will remain at the level of 46 billion cubic meters. As a result, it's necessary to understand that Turkey is a huge market that always changes, including as a result of government intervention. In the future, it will be difficult for Ankara to restrain gas demand, but it will grow at a very slow rate, about 1.5-2% per year. Azerbaijan needs to take this into account, because for us, Turkey is the main market. It's also the most financially profitable market due to distance and prices.
- How will Azerbaijani gas change situation in the markets of those countries that will buy it?
- Our share in the Italian market will be 40% of Gazprom's supply, in Greece - 38%, in Bulgaria - 36%. As for quantity, there's a contract with Bulgaria for slightly less than 1 billion cubic meters per year and for 1 billion cubic meters per year with Greece. These are pretty small markets. There's a contract with Italy for 8 billion cubic meters per year. All three markets have one major supplier - Gazprom. If we look at the share in Bulgarian, Greek and Italian markets, which we will have, it becomes clear that the diversification of supplies will become a reality for these countries. Of course, Europe's total gas demand now stands at about 450 billion cubic meters per year, but Azerbaijan doesn't intend to supply its gas to the entire Europe, only three countries. Right now it's necessary to analyze these markets in order to understand what will happen to them after the deliveries via the Southern Gas Corridor will begin, because by 2020 the demand in these countries won't grow significantly.
- Do you think Azerbaijan has any interest in the participation of Russian companies in the Southern Gas Corridor project, in its European part - TAP?
- TAP is European project, it's located on the territory of Europe and is regulated by European laws. According to the Third Energy Package, if a third party wants to use existing pipeline, even if this pipeline is fully owned by the company, was invested in and built by it, it's still obliged to allow other companies to transport gas via it for a certain fee. At the same time, Shah Deniz received an exception: for the next 25 years Azerbaijani gas will be transported via TAP, and no other company will have the right to occupy this niche. The exception was made only for the TAP's first stage, so when the capacity of pipeline will be expanded from 10 billion cubic meters to 20 billion, consortium will have to consider all applications from companies that want to export gas via TAP. This is probably what Gazprom expects when it says that it wants to join TAP. Of course, it won't affect the transportation of gas from Shah Deniz, but there may be certain problems with expanding supply of Azerbaijani gas from Absheron, for example. There may not be a niche in the pipeline for this, or SOCAR won't be able to use TAP's full capacity for its gas export to Europe. Gazprom in TAP can also be seen as good cooperation, and the Russian company will be able to use this opportunity - paying for the transportation of Russian gas will be enough.
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