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John Daly

John Daly

Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Azerbaijan & Turkey Deepen their Energy Ties

Petro-rich oil state Azerbaijan has decided to invest some of its billions in neighbouring Turkey.

On 7 June State Oil Company of Azerbaijan (SOCAR) Vice President Suleyman Gasimov told participants at the 19th international conference on Caspian Oil and Gas in Baku, “In view of the Trans-Anatolian Gas Pipeline (TANAP) construction project, the total amount of investments in Turkey may exceed $17 billion.”

In 2011 Turkey and Azerbaijan signed a memorandum of understanding to establish the consortium that will build the 1,240-mile long TANAP, estimated to cost $5 billion to $7 billion, which will supply gas from Azerbaijan’s offshore Caspian Shah Deniz natural gas fields westwards through Turkey to Europe. TANAP would then interconnect to other proposed pipeline projects, including Nabucco West, a scaled-down version of the European Union-backed Nabucco venture, which has been stymied up to now in attracting both throughput and investment.

The Nabucco 56-inch, $11.4 billion 2,050-mile natural gas pipeline was first proposed a decade ago. Should it be built, it would be the most expensive pipeline in the world. Quite aside from giving potential investors sticker shock, if Nabucco is to begin operations it will need to locate sufficient input, as currently the sole promised volume for its proposed 31 billion cubic meters (bcm) annual capacity is, like TANAP, Azerbaijan's future offshore Caspian Shah Deniz production, currently estimated to be initially 8 bcm when it comes online.

European investors, ever eager to embrace massive and profitable energy projects, in the last several years have dreamed of somehow persuading Turkmenistan to divert volumes of its ever increasing natural gas production to help fill the Nabucco pipeline, but no concrete deals, much less funding, have been delivered thus far.

Quite aside from the billions in profits that Nabucco would generate, it would have the added political advantage of assisting one of Europe's most cherished ambitions, lessening its energy dependency on Russia, as state owned Gazprom now supplies 40 percent of Europe's natural gas imports. Worse for Brussels, the EU's European Commission projects that the EU's overall gas consumption will increase by as much as 61 percent from its current level of 502 billion cubic meters (bcm) to 815 bcm by 2030. But the reality is that the EU, deeply mired in recession has little spare cash for a project as ambitious as Nabucco, a project that Moscow also strongly opposes.

Accordingly for SOCAR, TANAP represents a pragmatic, viable alternative to Nabucco, for which Baku has awaited action since 2002. Azerbaijan has been wide open for Western investment since September 1994, when then Azeri President Heydar Aliyev signed a $7.4 billion "deal of the century with 11 Western oil companies to develop Chirag and the offshore sections of the Guneshli oil fields.

Of course the issue of throughput could easily be resolved if Iranian natural gas was added to Nabucco’s transit options. This is hardly an option as the United Nations, prodded by the United States and Israel over concerns about Iran’s nuclear activities, attempt to bring more and more of its hydrocarbon exports under increasingly restrictive sanctions.

Turkey’s Boru Hatlari Ile Petrol Tasima AS state-run oil and gas company (BOTAS) has a 20 percent stake in the TANAP and the rest will owned by SOCAR.

Further bolstering the more limited nature of the TANAP project is that both Azerbaijan and Turkey already have one major successful project under their belts, the $3.6 billion, 1 million barrel per day, 1,092-mile Baku-Tbilisi-Ceyhan (BTC) pipeline, which began operations in May 2005. BTC now supplies a million barrels per day to thirsty Western consumers, transiting high-quality crude from Azerbaijan's offshore Azeri-Chirag-Guneshli fields to Turkey's deepwater Mediterranean terminus at Ceyhan, generating transit fees for Azerbaijan, Georgia and Turkey along the way.

An Ankara’s interest in TANAP was underlined by remarks Turkish Deputy Minister of Energy and Natural Resources Murat Mercan made to an Azeri journal, where he said of recent discussions with Baku, "The main objective is to implement the TANAP project. We are not discussing the issue of using Botas infrastructure instead of TANAP to transport Azerbaijani gas to Turkey…  A meeting of the Strategic Cooperation Board between Turkey and Azerbaijan is expected to be held in early July. We hope that the agreement will be signed by that time."

So, it would seem that Turkish and Azeri pragmatism are winning out over more grandiose European platinum-plated options to transmitting Caspian natural gas to Europe. As Turkey will be both a consumer of Azeri natural gas, allowing it to lessen its dependence on Gazprom Russian imports, as well as being able to collect lucrative transit fees, TANAP seems indeed a gift from Allah.

And those penny-pinching European investors low-balling Nabucco had better be prepared to write checks to Moscow for the foreseeable future.

By. John C.K. Daly of Oilprice.com

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