Who’s got gas? The question at the heart of European pipeline politics

What constitutes having gas? If you want to build a pipeline, this is obviously one of the most crucial questions to ask. But it’s not usually asked in quite that form.

The point is that it is worth considering what constitutes availability. In theory, of course, there’s lots of gas that can be made available for a pipeline, as the rival stories of efforts to develop the South Stream and Southern Corridor pipelines to Europe show.

The weakness of the Southern Corridor approach — or should one say, its strength — is that it is looking to provide direct access to the European market for a variety of current and prospective suppliers.

Of these, it’s perfectly correct to say that only one, the second stage of the Shakh Deniz gas field in Azerbaijan, actually constitutes a clear, definable, supply project with output to be dispatched into whichever pipeline project wins Azerbaijan’s current competition for a new main gas export pipeline.

But while one can safely say that any of the three contenders for this Southern Corridor approach — Nabucco, the Interconnector between Turkey, Greece and Italy (ITGI) or the Trans Adriatic Pipeline (TAP) — can rely on getting some 10 Bcm/year of gas to carry to Europe (or 16 Bcm/year, if you include six to be dropped off in Turkey en route), where do you place Azerbaijan’s insistence that it wants space for at least an extra five bcm, and preferably for more like ten?

Azerbaijan has a fair number of exploration and production projects in hand and it does seem reasonable to assume that at least some of these will ensure the country has an extra five bcm/y to export.

But does that constitute having gas, at least in terms of filling export lines? And if it does not, then what should one make of the ability of the Southern Corridor’s great rival, the South Stream project, to be filled with gas?

South Stream is being developed by Russia’s Gazprom to carry as much as 63 Bcm of gas to European markets. But in considering the project, one has to bear in mind that no less a figure than Marcel Kramer, the project’s CEO, has said (speaking in Athens on May 30, 2011) that two-thirds of the gas will come from existing sources and that only one-third will come from new supplies.

So while Azerbaijan is seeking to bring wholly new gas into play — which may not be counted as having gas — Gazprom has gas, but only if it takes it out of other export pipelines, notably those crossing Ukraine.

Then there is another issue to consider. Does having gas mean having the resources in the ground — in which case Gazprom is doing very well indeed; or does it mean having new gas resources under development — in which case there is at least a reasonable prospect that with Gazprom’s giant projects at Shtokman in the Arctic and on the Yamal peninsula subjected to repeated delays, Azerbaijan may actually outpace its much bigger neighbor in terms of speed of its gas development over the next five to ten years?

Then there’s the question of what constitutes having gas from the perspective of actual pipeline developers. Of course the developers of Nabucco, ITGI and TAP don’t have gas in the way that Gazprom has gas. These are merchants’ lines.

That’s a relatively familiar concept in North America but less so in Europe where the major lines bringing gas into Europe have either been developed by producer companies or by producer and consumer companies working together.

In the case of the Southern Corridor rivals, their whole raison d’être is to prepare the groundwork, sometimes quite literally, for pipelines that will connect new suppliers to markets in the European Union.

They don’t have gas now, but that’s not the point at all. They will only have gas as and when Azerbaijan makes its decision as to which of them it will choose. And that’s a decision that won’t be taken for some months, as the developers of the Shakh Deniz gas field, notably including the state oil company, Socar, have set October 1, 2011, as the date for submission not only of final pipeline proposals, including tariffs, but of firm offers to buy whatever gas the BP-led Shakh Deniz consortium — and Socar, separately — determine they will provide.

So the Shakh Deniz consortium and Socar will then have to marry offers for Azerbaijani gas to pipeline tariffs and then determine which pipeline project to back. But, of course, until then none of the three competing pipeline projects actually has gas.

While the amount of gas available from Shakh Deniz is clearly enough to fill the planned 11 bcm ITGI system or to get the 20 bcm TAP project started, it’s a legitimate question to ask whether it’s enough to get the planned 31 bcm Nabucco system going.

Even if the six Bcm to be dropped off in Turkey is taken into account, along with, say, an extra five bcm of gas from projects other than Shakh Deniz, that still accounts for only 21 Bcm.

In earlier incarnations of Nabucco, which contemplated building the line in phases determined by volumes, that would certainly have been enough to get it started. But in recent years Nabucco’s developers have concentrated on building it more or less all at one go.

Yet a guaranteed 21 Bcm/year as far as Turkey and 15 Bcm/year beyond Turkey might still be enough to justify a full 56-inch line.

Moreover, none of this takes into account the possibility that Nabucco’s backers may be able to agree deals with producers in Northern Iraq and Turkmenistan to get extra gas for their line.

But this again requires the same basic question to be asked: What constitutes having gas?

Northern Iraq and Turkmenistan certainly have gas, their problem is that much of it is currently or prospectively stranded.

In Turkmenistan, Petronas is stuck with an offshore field in the Caspian that is set to produce far more gas than oil, and has no current taker for the five Bcm of gas it should be producing by the end of this year or the 10 Bcm/year of gas its expects to produce in two or three years time.

Likewise, Northern Iraq is on the verge of producing more gas than it needs to serve its own power stations, and during the second half of this year will also have to work out what to do with up to five bcm/yr of production for which there is currently no agreed outlet.

But therein lies the nub of the problem. With South Stream you have a project that has access to gas but does relatively little to bring new gas supplies on line.

In the Southern Corridor projects, there is Nabucco, and perhaps TAP as well, which may not in the classic sense “have gas” right now, but whose adoption by Azerbaijan would serve to ensure both that European customers had more gas in the future, and that existing producers, including some holding stranded gas supplies, would be able to export the gas they have now, or hope to have in the next few years.

Platts