BLACK SEA LNG PROJECT TO DRAW ON GAS FROM AZERBAIJAN

2010/10/06

by Vladimir Socor

Presidents Ilham Aliyev of Azerbaijan, Mikheil Saakashvili of Georgia, and Traian Basescu of Romania, as well as Prime Minister Viktor Orban of Hungary, meeting on September 13-14 in Baku, announced the launching of a liquefied natural gas (LNG) project. Designated as the Azerbaijan-Georgia-Romania Interconnector (AGRI), and linking up with Hungary, this is the first-ever LNG project in the Black Sea (Trend Capital, News.az,Day.az, September 13, 14).

AGRI envisages five steps: 1) transporting Azerbaijani gas by an existing pipeline, eastward across Georgia to the Black Sea port of Kulevi (oil terminal owned by Azerbaijan); 2) liquefying the gas at Kulevi; 3) shipping the liquefied product by tankers to Romania’s port of Constanta;  4) re-gasifying and delivering the product into Romania’s pipeline system, partly for that country‘s consumption; and 5) delivering the remainder into Hungary‘s gas transport system, whether for use in that country, in Austria, or farther in EU territory.

Basescu took the initiative of bringing Hungary into this project, as well as Orban to the Baku meeting with the three presidents. Basescu made this move spontaneously during the September 1 gathering of Romanian diplomats from around the world in Bucharest, where Hungarian Foreign Affairs Minister Janos Martonyi was the guest of honor  — an event fraught with symbolism in Romanian-Hungarian political relations (Agerpres, September 1).

The heads of Azerbaijan‘s State Oil Company, Georgia‘s Oil and Gas Corporation, and Romania‘s Romgaz adopted, at the Baku meeting, a draft charter for the new joint venture AGRI. This shall be headquartered in Romania, with each of the three state companies holding an equal share in the joint venture. Other companies will be able to join AGRI as shareholders in the future. Basescu is keen for Turkmenistan to be included.

AGRI necessitates rehabilitation of that pipeline across Georgia and its prolongation for a short distance to Kulevi; building a liquefaction and a regasification terminal in Kulevi and Constanta, respectively; and investing in a shuttle line of small-capacity LNG tankers in the Black Sea. Meanwhile, Romania and Hungary are about to complete the short pipeline link Arad-Szeged, connecting the two countries’ gas transport systems.  Thus, AGRI can open the way for Azerbaijani gas exports into Central Europe, in a different mode than the Nabucco pipeline project.

Kulevi features an oil export terminal, installations with a throughput capacity being doubled to 20 million tons per year, a railroad link for crude oil and products, a reservoir park (oil-tank farm), and two moorings for tankers of up to 120,000 dwt. Azerbaijan‘s State Oil Company owns the port and installations. Kulevi handles some oil volumes produced by TengizChevroil at the onshore Tengiz field in Kazakhstan (Oil and Gas Journal, April 30, May 10, September 2).

According to Azerbaijan‘s Industry and Energy Minister, Natig Aliyev, the AGRI project should start with a liquefaction capacity for 2.5 billion cubic meters (bcm) of gas per year, rising to 8 bcm per year in the next stage and up to 20 bcm ultimately. For his part, Basescu hopes to develop the Constanta LNG terminal in three successive stages, involving 10 bcm in annual regasification capacity with each stage (Mediamax, September 14).

Romania and Hungary intend to ask European Union authorities to tender out a feasibility study for the project. Meanwhile, “preliminary” cost estimates range widely from 1.2 billion Euro to 5 billion Euro. No sources of financing have been identified as of yet. The duration of construction work is estimated to last four years.

AGRI answers to certain specific interests of each of the three stakeholders, at least theoretically. For Azerbaijan, it would provide the most direct transportation route for gas to Europe, apart from the Nabucco pipeline project. Georgia, already criss-crossed by operating and potential transit routes, welcomes any additional project for confirming the country’s reliability and buttressing Western interest in Georgia’s stability. Romania would gain an additional import option through LNG, while Basescu (a former merchant marine captain) perceives in this an unprecedented opportunity for development of his native city, Constanta.

Basescu is a long-time proponent of LNG transportation in the Black Sea with a terminal in Constanta. For nearly a decade, Romania had hoped for an LNG deal with Qatar. Eventually Bucharest realized that Turkish authorities would not allow LNG tanker traffic, on top of the oil tanker traffic, through the over-congested Bosporus Strait. Thus unable to share in the global LNG expansion, Romania is adopting an LNG solution internal to the bottled-up Black Sea. Cut off from global LNG markets, and inaccessible to ocean-going LNG tankers, the Black Sea basin may become a local market for small LNG volumes originating in Azerbaijan and, potentially, Turkmenistan.

The AGRI project, if pursued seriously, can undermine Nabucco by reducing the volumes of Azerbaijani gas available to that pipeline project. Azerbaijan‘s existing output level (reported at 23.5 bcm in 2009, anticipated at 28 bcm in 2010 — Trend Capital, September 14), its internal consumption (10 to 11 bcm per year in 2009-2010, and set to rise), and its export commitments (some 8 bcm annually to Turkey and Georgia combined, 2 bcm annually to Russia), do not seem to leave sufficient gas volumes to support both Nabucco‘s first stage (at 8 to 10 bcm per year) and the LNG project at the same time.  The planning for Nabucco is based on a solid pre-commitment for 8 bcm per year from the Shah Deniz project’s Phase Two by 2016.

While Nabucco (mainstay of the EU-backed Southern Corridor) is strategic to European consumer countries and Caspian producer countries, AGRI is not of strategic significance to either group of countries. Within the current parameters of production and supply, and pending a boost in Azerbaijan‘s gas production or a trans-Caspian flow of Turkmen gas, a choice must be made between pursuing Nabucco or AGRI.

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