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Global Energy Policy Against Georgian Interests

Growing Perspectives of Shale Gas in the USA

Inauguration of US liquid gas exports to Europe becomes more and more relevant to shrink Brussels’s dependence on Russian energy resources. US liquid gas export to Europe is considered a main leverage for maintaining the global security.

At the end of 2013, only two companies had been licensed to export liquid gas from the USA. Therefore, the competition against GazProm sharpened on the European energy market, even more so when Russian Federation suspended gas transit to Ukraine and announced the new Turkish Stream. The number of the export license seekers has extremely grown in the USA. Therefore, liquid gas export to Europe poses a threat to both GazProm and the EU Gas’ Fourth Corridor, crossing the Georgian territory.

On April 26, 2015 the Telegraph published a letter by Evans-Pritchard: The US to launch blitz of gas exports, eyes global energy dominance. The article reads that in 2015 the US Department of Energy will issue a huge number of liquid gas exports licenses to shrink the Russian domination on the global market (according to the recent report, Russia’s ratio on the European gas market makes up 39%). The Telegraph asserts that this way the US will generate geopolitical flood of liquid gas on the energy market.

Ernest Moniz, the US Secretary of Energy, says the construction of four liquid gas terminals will end in the US in the near future. At the Huston energy summit he noted the first wave of tankers will transport liquid gas to Europe at the end of 2015. At the end of the current decade the US will catch up with Qatar in terms of liquid gas exports. Qatar today is the world leader in terms of liquid gas exports, with annual 100 billion cubic meters. Australia will soon catch up with Qatar as well, extracting gas from Gorgon giant offshore field. At the meeting Moniz stressed that extreme upturn in gas extraction in the USA has already affected the global gas market.

Importers have already directed the gas from the USA to Asia and Europe and caused important changes on the market. It should be noted for Russian energy pessimists that the USA joined the 150 year global gas extraction process only 15 years ago. Only Marcellus shale gas fields stretched to western Virginia, Pennsylvania and New York give 113 billion cubic meters of gas a year: that is about 40 billion cubic meters a day, which equals to consolidated supply volumes through Northern Stream, Yamal and Soyuz gas pipelines to the European market. At the same time, for the last three decades the extraction cost price at the Marcellus field has shrunk five times. Even if one million British thermal unit equals 3 USD, gas profitability will not fail in the USA. The price of American gas in Europe is 7 USD, Asia – 10 USD. In Europe the price of Russian gas is 12 USD for 1 million British units.

Despite this advantage, according to the GazProm 2014 results, net profits shrank by 86% compared to 2013 and totaled 159 billion Rubles.

The US Energy Information Agency expects that by 2020, the US domestic market price for the British unit will rise to 4.88 USD, by 2040 – 7.85 USD. American experts say today 280 drills can extract by one/third more gas than 1200 drills did in 2009. Currently, the USA extracts 350 billion cubic meters of shale gas a year and this is over a half part of the US gas extraction total volume.

Starting 2011, a total of 33 oil chemical plants were built from Huston to New Orleans and the value of each of them marked 1 billion USD. In this region, before 2023 the US chemical safety board expects 130 billion USD investments. According to the existing information, the US department of energy  will soon issue licenses for exports of 70 billion cubic meters of gas to four gas liquefying terminals, including, the construction of the major one Cheniere with 18 billion cubic meter output terminal will end in the near future in Louisiana.

The West’s Problems in the Caspian Region

Amid similar tendencies, it is not surprising that western companies show less and less interest in the Caspian Region, consequently, in carbon dioxide transportation through Georgia. Namely, BP has purchased only 12 % stake in SOCAR’s 80% stake in TANAP, while Total and StatOil refused buying 10% stakes. Turkish Botas has bought a 10% stake from SOCAR in this consortium.

TANAP shares are distributed in the following way: SOCAR – 58%, BP – 12%, BOTAS – 30%. At the same time, in 2014 German E.ON sold its 9% stake in TransAdriatic Gas Pipeline (TAP), an extension of TANAP, while French Total sold 10% stake. The stakes were purchased by Belgian and Spanish companies that have no relation with the Caspian basin.

According to the recent information, in June 2015 ASCO Caspian Holding, a see platforms construction company, a subsidiary of ASCO Logistics Company, will leave Azerbaijan. This company has failed to receive orders from Shah-Deniz 2 field and about 400 citizens of Azerbaijan employed in May will be expectedly fired.

Norwegian StatOil is also expected to leave the Caspian Basin. In 2014 the company sold its stakes in Shah Deniz field and South Caucasian Gas Pipeline to Malaysian Petronas. Despite anti-Russian sanctions, this company broadens business in western Siberia and two offshore projects of the Okhot Sea.

Europe’s Attitude to Changes in Caspian Region

Europe’s energy commissioner Maroš Šefčovič  plans to visit Ashgabat concerning TransCaspian project of the South Gas Corridor through which Turkmenistan will transport 30 billion cubic meters of gas to Europe. In March 2015 Turkish President Erdogan visited Turkmenistan and offered Turkmen President Gurbanguly Berdimuhamedov to join the TANAP project. Ashgabat refused allocating 3-5 billion USD for construction of TransCaspian Gas Pipeline.

It is interesting that even the EU does not show much support for TransCaspian project. Negative appraisals derive from the status of the Caspian Sea, problems with delimitation borders on the shelf and ecology. In 2016, a new summit of the Caspian Countries will be held in Astana where the aforementioned problems will be discussed. Before then, experts expect Iran’s activity amid expectations the west will remove sanctions and warm relations with Iran. Teheran plans to join TANAP and this country does not take competitors in this respect. This signifies Iran will try to thwart implementation of Trans-Caspian projects in Georgia. For the same reason, Iran will not concede its territory to Turkmenistan for gas transit.

The European Union has changed its attitude to the South Gas Corridor too. After the Arabian spring Brussels has revised the Neighborhood Policy and in 2011 developed strategy of A New Response To a Сhanging Neighborhood. EU sets an implementation of deep democratic reforms as a main precondition for economic cooperation. Turkmenistan does not participate in the Neighborhood Policy, but Europe stresses an authoritarian character of the Ashgabat regime.

Chinese Competition

Unlike the European Union, China has no problems with internal political problems. The country receives 50 billion cubic meters of Turkmen gas a year. Beijing will increase financial participation in the Turkmen gas transportation networks construction to 10 billion USD in Asian countries so as to receive 80 billion cubic meters of gas a year starting 2017. Turkmenistan covers credit liabilities to Beijing in the form of gas.

The EU report on European Alternatives for Russian Gas reads Turkmenistan has changed exports policy in the interests of China. Surprisingly, a new competitor has appeared in the face of the USA to Europe in the Caspian Region. Along with military evacuation from Afghanistan, Washington supports the Turkmenistan-Afghanistan-Pakistan-India Gas Pipeline (TAPI) project.

Hence, EU competes with all regional players in the Caspian Region.  Therefore, only BP remains among European companies in the EU South Gas Corridor, which unites South Caucasian and TransCaspian gas pipelines crossing Georgia. Azerbaijani and Turkish energy companies are main players in this corridor instead of European companies.

On the other hand, the same Turkish company Botas actively cooperates with GazProm on the new project  of the Turkish Stream connecting Russia and Turkey. It is not accidental Russia has replaced Russia-Bulgaria route by South Stream gas pipeline. The point is that Russia and Turkey are not EU member countries, that is, the EU requirements for the third energy package on admitting third party to the gas pipeline does not refer to them and this factor has suspended the South Stream construction in practice. But the extension of this gas pipeline in Greece is related to the requirements of the third energy package. Therefore, it will be necessary for Russia that its European clients purchase gas from the hub on the Turkey-Greece border.

New European HUB

The new left-wing government of Greece welcomes the Greek extension of the Turkish Stream. To this end, GazProm needs the already forgotten Turkey-Greece-Italy InterConnector, TransAdriatic Gas Pipeline, one of the projects of the South Gas corridor. In this case, the Russian giant will need to use DESFA-Greece national transportation network (NGTS). By the way, the European commission has been investigating the lawfulness of the deal, when SOCAR purchased 35% stake in this network in 2013.

According to the existing information, the Turkish stream gas pipeline will reach the Ipsala District of Turkey to the border with Greece, where TANAP will be connected to TAP. This fact will generatedgrowing competition between these two systems because of market stake if we take into account an expected growth in the output of TANAP (16 to 31 billion cubic meters) and TAP (10 to 20 billion cubic meters).

In practice, Russia has got the chance to transport gas through TAP from the Turkish Stream without violation of the EU requirements for the third energy package, because:

1) Russia does not hold a stake in TAP;

2) Initially TAP’s output will be 10 billion cubic meters a year and the volume will increase to 20 billion cubic meters at the second stage (100%);

3) The European commission has left 50% of the TAP’ total output open for admitting the third party to the second stage;

4) Under the EU regulations, TAP must unveil additional ingoing and outgoing points for Shah-Deniz gas reception by the request of the third party.

Under the third energy package Russia may receive access to TAP as supplier to the second stage ( not as owner) or request for creating ingoing and outgoing points for additional pumps in TAP.

If Russia only sells gas at the Turkey-Greece border without having its own infrastructure, it will not violate the requirement of the EU third energy package (contrary to the South Stream). However, Shah-Deniz consortium has ensured to fill TAP with 10 billion cubic meters of Azerbaijani gas at the first stage until 2018 as part of the 25 year contract. Russian gas will not be admitted to TAP for at least 25 years. Even more so Azerbaijan plans to increase gas exports from Azeri-Chirag-Guneshli, Absheron and Shah-Deniz fields. .

Greece wants the Turkish Stream to be extended to Europe through InterConnector Turkey-Greece-Italy (ITGI) route. After the Turkish Stream operation, the transit agreement with Ukraine until 2019 will not be expectedly continued. Therefore, the Russian TransBalkan gas pipeline (TBP – called as Progress in the Soviet Union) constructed to the west part of Turkey becomes useless, because it will be replaced by Turkish Stream with 300% higher output compared to BP’s. GazProm is expected to transform TransBalkan Gas Pipeline into a reverse regime after cessation of gas transit through Ukraine and supply Russian gas to Balkan countries through Turkish Stream pipeline. Through this step Russia will emerge as competitor to the Caspian gas where it had got the least chances after suspension of NABUCCO and inauguration of TANAP and TAP. At the same time, the advantage of Turkish Stream gas pipeline compared to the South Stream is that is does not violate the EU’ requirement for third energy package and proves its loyalty to Brussels.

Hence, Russia is expected to use Turkish Stream to hinder Azerbaijani gas exports via Georgia to EU through the fourth gas corridor so as Turkish Stream be put into exploitation ahead of TANAP and TAP (2020). Moscow will easier implement these plans as the interest of the USA and EU multinational companies shrink in the Caspian Region.


Zurab Garakanidze
Doctor of Economics