Defining year for Caspian gas
Energy Economist, 01.01.2010
A transformation in Turkmenistan's energy outlook means that 2010 should be a defining year for Caspian gas. An Azeri-Turkish transit agreement would overcome the last political barriers to the Nabucco pipeline, and with Ashgabat disillusioned by Russia, Nabucco could find three sources of gas; Azerbaijan's Phase 2 development of Shakh Deniz, northern Iraq, and even Turkmenistan's offshore Caspian fields. John Roberts
2010 is likely to prove the make-or-break year for Caspian gas. It's the first year in which Turkmenistan knows from the outset that Russia and destinations served via Russia will be a strictly secondary market; it's the year in which Azerbaijan will start the long-overdue second-stage development of the giant Shakh Deniz field – a project inextricably linked with the future of the almost-fabled Nabucco gas pipeline from Turkey to the heart of Europe; and it's the year in which China's cities will start receiving gas via the longest set of pipelines in the world. Meanwhile, Europe will be waiting to see whether it, too, will get access to Central Asian gas by means of a Trans-Caspian Pipeline.
Turkmenistan is the key to all these developments. In 2009, it was forced to undergo a massive readjustment to its energy expectations as Russia engineered a literally explosive resolution to its own major gas problem: an oversupply of Turkmen gas at a time when recession-hit Europe wanted to receive much less gas from Russia than previously expected.
Late on the evening of April 7, Russia's Gazpromexport, the gas recipient, gave 24 hours notice that it wanted Turkmengaz to sharply reduce pressure in the Central Asia-Center gas pipeline system to restrict the flow of gas. Turkmengaz said it would take about three days. Gazpromexport decided not to wait and, on the morning of April 8, its technicians reduced the intake valves.
With Turkmengaz insisting it would have to go round hundreds of individual inputs to ensure a reduction in flow, pressure built up. Early on April 9, some 27 hours after Russia first called for a reduced flow, the pipeline burst. The explosion took place at Kilometer 487, just inside Turkmenistan, close to the Uzbek border.
Although Turkmen technicians fixed the line within a few days, Russia, effectively claiming force majeure, declined to resume deliveries through the line. This was despite the fact that, according to a senior Turkmen official, Turkmenistan had a take-or-pay agreement with Russia and had been expecting to export some 50 Bcm of gas north during the year.
Export reorientation
The explosion reduced daily gas deliveries from Turkmenistan to Russia to just 8% of their previous level and, over the year, led to massive cutbacks in both production and exports. A senior Turkmen official told Platts in November that 2009 output was likely to fall to just 40 Bcm from around 70 Bcm in 2008 and that exports had more than halved to 25 Bcm from 55 Bcm the previous year. Moreover, while Russia agreed in November to resume deliveries from Turkmenistan in 2010, it has limited the volume to just 10.5 Bcm – and with only small incremental increases thereafter.
Russia's action has set the scene for a transformation in the way Turkmenistan looks to its gas sales abroad. In 2010, Iran will be its lead customer, but from 2011 onwards, that honor will go to China. And, since these countries will take time to fill the gap left by lost exports to or through Russia, Turkmenistan can be expected to press on with the development of a project long cherished by European and US energy companies, a Trans-Caspian Gas Pipeline.
As Energy Economist goes to press in mid-December, gas from Turkmenistan had already started its long journey from the Samandepe gas field at Bagtyyarlik in north-central Turkmenistan to China, with the first gas set to cross into China from Kazakhstan on or around December 31. It's a stunning achievement.
The final agreements to construct the 2,200-km Central Asian gas pipeline from northern Turkmenistan to China's Eastern province of Xinjiang and for the China National Petroleum Corp. to develop various Turkmen gas fields at Bagtyyarlik were only signed in July 2007. Yet, in 2010, CNPC itself expects to deliver around 5.5 Bcm through the first of the twin 42-inch pipes and anticipates that in 2013 or 2014 the system will be filled to its full 40 Bcm/yr capacity.
Lu Gongxun, CNPC's General Manager for Turkmenistan, said he expects the line will reach its full projected capacity of 40 Bcm in 2013 or 2014. Some Turkmen accounts of the official opening ceremony on December 14 quoted officials as saying the line would be completely filled in 2012. This seems unlikely, not least because CNPC is understood to have scaled back it's planned upstream investments in Turkmenistan for 2010, while Turkmenistan's own upstream investment program remains sketchy.
As a result of the explosion at Km 487 and the new pipeline to China, in 2010, Iran will purchase around 14 Bcm of Turkmen gas, followed by Russia with 10.5 Bcm and China 6-7 Bcm, depending on how much gas Turkmengaz can insert into the system and the start-up times for various pressure stations along the route. Most of the gas for Iran will flow through the 12-year-old pipeline that runs close to the eastern shore of the Caspian, from the Korpedzhe gas field in Turkmenistan to the junction at Kurt Kui in Iran with the east-west gas pipeline system that runs from Meshed in northeastern Iran to Tabriz in the northwest. However, an additional 6 Bcm is expected to flow through a new pipeline due to open December 20, 2009, connecting the giant Turkmen field at Dauletabad with the Iranian border at Serakhs, near Meshed.
The significance of this is that Dauletabad was always seen as the prime field for provision of gas to Pakistan and India via the long-mooted Turkmenistan-Afghanistan-Pakistan-India pipeline. The allocation of Dauletabad gas to the Iranian market is the clearest indication to date that the Turkmen government, after years of supporting the TAPI project, has finally come round to the view that it is simply not feasible so long as war persists in Afghanistan with little sign of coming to an end.
Trans-Caspian prospects
Just as Ashgabat is dropping TAPI, it is also starting to take seriously the possibility of a TCGP that would enable Turkmenistan to supply Europe by means of Azerbaijan, Georgia and a connection to the proposed Nabucco pipeline. Within two hours of the formal closure of the capital's annual oil and gas conference on November 19 – an event in which speakers from western companies and institutions extolled the virtues of a TCGP to senior Turkmen officials – the government gave its clearest indication to date that it is really getting to grips with the issue.
A senior government source told Reuters that Ashgabat was ready to supply 10 Bcm of gas for Nabucco. In itself, this was not new, since the government had conveyed the same message to EU External Relations Commissioner Benita Ferrero-Waldner in April 2008 and to a number of other western government and corporate officials since then.
But the phrasing was highly significant. Reuters quoted the official as saying: "Obviously we are ready to supply gas for Nabucco when it reaches us." But he then added: "As early as next year, 10 Bcm can be exported from the Turkmen Caspian shelf where Petronas is working." The first line about Nabucco reaching Turkmenistan was no more than a restatement of the classic Turkmen policy that it is for the country's customers to put in place the necessary infrastructure to carry Turkmen gas beyond its borders.
What was new was the second line, concerning Petronas. This was the first time that Turkmenistan had identified a specific source for the gas, and it came just hours after a plea at the conference for Turkmenistan to understand that it was not enough simply to say it would provide the gas if a pipeline were to be laid – it would have to state in advance just where the gas was coming from that would fill the line.
In this context, the Petronas comment was doubly significant. For the last six or seven years, the gas found by the Malaysian company while developing a modest offshore oilfield was expected to head to Russia. Petronas had secured former president Saparmurat Niyazov's permission for this in the first half of the decade. When Niyazov's successor, Gurbanguly Berdymukhammedov, signed an agreement with the then Russian president Vladimir Putin and Kazakhstan President Nursultan Nazarbayev on May 12, 2007 to build a Caspian Coastal Pipeline from Turkmenistan to Russia via Kazakhstan, gas produced by Petronas was expected to be its backbone.
Asked about the CCP – also known as the Pri-Caspy pipeline – the senior official interviewed by Platts initially said cheerfully: "Everything's fine." Then his expression changed, as he added: "But because of the economic crisis interest in this has fallen away." In sum, the crisis occasioned by the Km 487 explosion has led to Turkmenistan stating that gas originally intended for export to or through Russia will now be earmarked for western customers via an export system intended to avoid Russia.
The Petronas development raises interesting questions as to how this offshore gas might reach Europe. Nabucco obviously plays a key role. But while the name 'Nabucco' is commonly-used shorthand for a complete system intended to carry Caspian gas all the way to the heart of Europe, in strict terms, the Nabucco project comprises just the Turkey-Austria section of such a system. To connect into Nabucco, Turkmen gas will first have to go through, under or round the Caspian to Azerbaijan, from whence it would be carried, perhaps by an expanded South Caucasus Pipeline, from Baku through Azerbaijan and Georgia to the Turkish border.
One of the Nabucco partners, Germany's RWE, is pushing hard to get Turkmen gas into Nabucco. Stefan Judisch, the Chief Executive of RWE Supply & Trading, said in Ashgabat on December 7: "We are working with Turkmengaz to agree upon gas supply terms in the first half of 2010." Judisch, who is actively involved in trying to develop a TCGP, also listed the most likely ways by which Turkmen gas might cross from the Caspian's eastern shore to its western coastline.
"The most viable solution, in our view, is a 300 km offshore pipeline that would link Turkmenistan and Azerbaijan," he said. "By building up a capacity of 10-15 Bcm a year, it could match Turkmenistan's uncontracted offshore gas production," he added. As well as Petronas, the UK-UAE company Dragon Oil has found gas in its offshore oil concession.
Judisch also mentioned another option that RWE is considering – "an offshore tie-in connecting Turkmen and Azeri offshore platforms and utilizing existing infrastructure." The attraction of this, RWE sources said, is that the nearest Azerbaijani offshore gas platform is barely 70 km from one of the Petronas platforms, while a line between them would not only serve as a potential interconnector, but as a balancing pipeline, ensuring even field development in the central Caspian.
Another possibility is Kazakhstan, for which 2010 also opens up the prospect of gas exports to the west as a US Trade and Development Agency study on trans-Caspian gas pipelines from Kazakhstan to Azerbaijan is likely to be completed around the middle of the year. Kazakhstan has recently shown renewed interest in potential gas exports after two years in which it focused primarily on connecting up their own internal system via a multi-billion dollar trans-Kazakhstan pipeline that would enable gas produced in Caspian areas in the north-west of the country to access both Kazakh consumption areas in the south-east and the Central Asian pipeline to China.
Azeri-Turkey link
Azerbaijan is currently engaged in extremely tense negotiations for a transit agreement with Turkey that would ensure access to mainstream European markets for output produced by the second stage of its Shah Deniz gas field development project. Officials from Socar, the State Oil Company of the Azerbaijani Republic, have occasionally spoken of the possibility of exporting gas eastwards to China, utilizing a TCGP in a west-to-east direction and then, presumably by means of Turkmenistan's planned domestic East-West interconnector, via the CAGP system to China.
But Azerbaijan's prime concern remains the opening to the West and, in particular, access to the Nabucco pipeline, since this would offer it the opportunity to sell gas directly into the heart of Europe. The BP-led consortium developing Shakh Deniz has already spent more than $500 million on preliminary works for the giant Phase Two project (SD-2), intended to raise production from around 9 Bcm a year at present to close to 25 Bcm/yr.
However, official sanction for the project's start-up has been delayed for around two-and-a half years because of the lack of a transit agreement covering the passage of Azeri gas through Turkey and the price and conditions of Azeri gas sold to Turkey. Both Turkish and Azerbaijani sources say the negotiations have been very tough, but should result in an agreement.
There is still considerable acrimony between Baku and Ankara for two reasons. First, the delays caused to the Shah Deniz project. Second, the widespread belief in Baku that Turkey has somehow betrayed the Azerbaijani cause in the Nagorny Karabagh conflict. This is because Turkey has been readying itself for an opening of the Turkish-Armenian border before Azerbaijan and Armenia have reached any agreement to end the Nagorny Karabagh conflict, and while Armenia continues to occupy substantial parts of Azerbaijan.
Nabucco's backers, together with a host of interested parties, including the European Commission and a cluster of prospective users and beneficiaries of the Nabucco project, had expected the signing of an Inter-Governmental Agreement on Nabucco in July to be the defining moment. All five countries through which the pipeline will pass signed. This was expected to lead within weeks to Turkey and Azerbaijan reaching their all-important transit agreement, but to no avail.
For Azerbaijan, the agreement will be its top priority for 2010, unless of course, it is signed in the dying days of 2009. Once signed, and both sides stress their confidence that it will be signed, the last major political hurdle to Nabucco's development will have been overcome. The Nabucco partners can launch their open season to find out just who is really prepared to make firm commitments to use the line for transshipment of gas to Europe. Some will certainly come from Azerbaijan, and some will almost certainly come from northern Iraq.
Indeed, gas from the Kurdistan Regional Government zone in Iraq may prove sufficient to get actual construction work launched in 2011 and thus ensure the start of physical delivery of gas to the Austrian hub at Baumgarten via Nabucco in or around 2014, some two years before the line receives gas from SD-2. But the way things are going, it's just possible that while Azerbaijan remains the banker on which much of Nabucco's development is predicated, start-up gas from Northern Iraq might yet be accompanied by gas originating in the Petronas concession of Turkmenistan's Caspian shelf.
Filling the Central Asia Gas Pipeline
The brand new Central Asia Gas Pipeline runs for about 100 kilometers from the China National Petroleum Corp.'s gas fields at Bagtyyarlyk in north-central Turkmenistan to the Uzbek border. It then transits Uzbekistan for 490 km before entering Kazakhstan. The Kazakh section, 1,304.5 km long and costed at $7.5 billion alone, ends at Khorgos, west of Almaty. From there, much of the gas entering China will pass through more than 4,500 km of pipe in order to reach destinations as far afield as Shanghai.
How quickly the pipeline will be filled remains somewhat uncertain. Turkmenistan asserts that the twin 42-inch pipes will be filled to their current projected 40 Bcm a year capacity by end-2012, but CNPC says this will not happen until 2013 or 2014.
In its first year, CAGP should carry 6-7 Bcm of Turkmen gas. This will comprise 5.5 Bcm that CNPC says it is putting into the line from its point of origin at the Samandepe gas field. In addition, Russia's StroiTransGaz is completing a 184.5 km feeder line into the CAGP from the Turkmen-operated Malay field in central Turkmenistan, and this should enable Turkmengaz to add around 1 Bcm in 2010.
One curiosity is that this gas will not actually join the CAGP system within Turkmenistan. The new StroiTransGaz pipeline that will be used to carry gas from the Left Bank fields does not meet up with the CNPC line from Samandepe until both pipes reach Uzbekistan. This raises some questions as to whether Turkmenistan will feel the need to install their own monitoring station on the Samandepe line to see just how much gas CNPC is shifting at any given time.
Capacity in the system is limited until new pressure stations come on-line in Uzbekistan in second-half 2010, while additional pressure stations will subsequently be opened in Kazakhstan. Uzbekistan says it will put 10 Bcm/yr of gas into the system, while Kazakhstan has said they will provide 5 Bcm/yr at first, later rising to 10 Bcm/yr. While the Uzbek gas can at least start to enter the system as soon as the new pressure stations are opened, the Kazakh gas will have to wait for the construction of Kazakhstan's giant internal cross-country system, the 1,400-km Beineu-Bozoi-Shymkent pipeline. This is not expected to enter service until 2012 at the earliest.
Kazakh officials attending the recent oil and gas conference in Ashgabat spoke of adding further pressure stations to expand CAGP system capacity to around 50 Bcm/yr in order to accommodate Kazakh and Uzbek exports as well as the Turkmen baseload. While this still falls short of the theoretical maximum of 60 Bcm/yr committed by the three states – Turkmenistan (40), Uzbekistan (10) and Kazakhstan (10) – the issue of the gap between prospective input and projected final capacity is hardly an urgent problem.
The main reason for this is that the build-up of Turkmengaz into the system is likely to be significantly slower than anticipated. CNPC is supposed be providing 13 Bcm/yr from its own fields at Bagtyyarlyk, on the Right Bank of the Amu Darya river, while Turkmengaz is to supply 27 Bcm from its fields on the Left Bank. But Chinese development may be slower than expected. Sources working the field told Platts in Ashgabat in November that CNPC's budget for its Turkmen operations in 2010 had been set at just half the $2.5 billion budget for 2009.
A more significant issue concerns Turkmengaz input. At least 14 Bcm/yr of this is supposed to come from the giant South Yoloten field. But work on developing this high pressure, high sulfur field has only just begun. This complexity, together with the management and technical skills required to develop such a giant field, is the prime justification given by international companies engaged in discussions with the Turkmen authorities for a role in developing South Yoloten.
Chevron, ExxonMobil, Shell and a host of other western companies have been assiduously wooing the Turkmen authorities for the last couple of years to see whether they can secure work at South Yoloten, which the Gaffney Cline audit of 2008 shows to possess a minimum of 4 Tcm of gas in place. However, so far, Turkmenistan is sticking to its position that it does not intend to award any further onshore production sharing agreements, such as that given to CNPC at Bagtyyarlik.
Ashgabat has suggested that South Yoloten might serve to supply both China and Iran, and Chinese drilling teams are thought to have conducted some activity there. But it seems highly unlikely that development of the field will move sufficiently fast to enable it to provide 14 Bcm by 2013 or 2014. Nor is it clear that existing Turkmengaz operations elsewhere on the Left Bank will be able to deliver their intended 13 Bcm/yr for a few years yet.
President Gurbanguly Berdtymukhammedov has constantly upbraided officials for the slow pace of gas development. With the collapse of exports to Russia, it is highly probable that at least some of the fields traditionally used to supply Russia and Ukraine will now send their output to China, but how much is uncertain. Improving the ability to divert gas to different customers is an important area of focus. Turkmenistan has a tender out for an East-West cross-country pipeline to connect all main production areas. It is hoped this will be ready in 2012, which would enable the diversion of gas from any major field to any major customer.
