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The southern corridor: competition for gas

Projects to bring gas from the Caspian region to Europe all have problems. One has gas but no Turkish transit rights, another has those but no gas, while the third, and the largest, has neither. And that is the one that the EC is devoting most time to.

The greater Caspian region has "gigantic potential" for gas production, with resources estimated at some 82 trillion cubic meters.
-- Wolfgang Peters, RWE

The fact that Russia is now considering delaying its South Stream project should come as good news for the three plans to bring gas from the Caspian into Europe. (See: Russia's long term plan for gas production, import and export (Bcm/yr).)

But none of the other projects are looking particularly promising either.

All the pipelines will eventually be needed, the argument goes, including South Stream, whose 30 billion cubic meters/year was due on line at about the same time as the same-sized Nabucco project.

South Stream was to have been financed from the balance sheet without the need to go to western banks and put up long-term export contracts as collateral; but now Gazprom, which last summer confidently spoke of the likelihood of oil at $250/barrel, cannot count too many chickens before they hatch.

Nabucco needs a transit agreement but crucially it also needs far more gas than is going to be produced in the near term. Iran is an obvious contender, geographically and geologically but not politically.

The change in government in the US might prove the first step in the long process of thawing relations between Iran and the western world, but even bringing Iran into the fold will not quickly solve Iran's own gas supply problem.

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The European Commission's talk of the European Union's buying gas at market prices from Azerbaijan puts that country in a good position to bargain with Russia.

The netback price from Baumgarten is not likely to yield as good a price for Baku as the price it receives from Russia, and Gazprom will have excellent intelligence about the price at Baumgarten through its participation in the gas hub company and gas exchange to be developed there.

But that provides the floor for Baku's price negotiations.

All are first among equals

Participants at Platts' 2nd Annual conference "Developing European Gas Supply Infrastructure" held in Vienna, November 3 asked how the various projects could be prioritized.

The time for investment decisions is approaching and the EU appears to have regrets over its earlier decisions to give its blessing to all planned projects and let the market players work out the details for themselves.

Shareholders of the planned 31 billion cubic meter Nabucco pipeline, the up to 12 Bcm/year Interconnector Turkey-Greece-Italy (ITGI) led by Italy's Edison, and the 10 Bcm/year Trans-Adriatic Pipeline led by Swiss EGL and Norway's StatoilHydro, were among those participating there.

Conversely, the second two project owners are probably wishing that the EC would focus on the more advanced projects than on the Nabucco scheme.

The chief origination officer for gas at Germany's RWE Supply & Trading Wolfgang Peters said that eventually all three projects would be needed.

RWE is a sixth, equal member of the consortium, along with Austria's OMV, Hungary's MOL, Romania's Transgaz, Bulgaria's Bulgargaz and Turkey's Botas.

In the short term, however, the various projects to bring gas from the Caspian region are in fact competing for the same reserves that can be brought into immediate production, he said. (See: Proposed and existing gas export routes to the west.)

The greater Caspian region has "gigantic potential" for gas production, with resources estimated at some 82 trillion cubic meters, compared with just 6 Tcm in Norway, according to Peters.

"But to fill a pipeline we need not just resources, we need readily producible reserves... and there are not enough of those now." Producible reserves in the region amount to only some 15-20 Bcm/year from Azerbaijan by 2020, Peters said.

However, this Azeri supply "has been sold many times already," Peters said in reference to the fact that Nabucco and IGTI are counting on the same reserves, but that Turkey and Georgia also have claims on the supplies.

EGL has a deal to buy some gas from Iran, which brings its own dilemmas.

While they compete for resources on the supply side, Peters also noted that all the planned infrastructure projects here and elsewhere, such as the Nord Stream project to bring gas to Germany from Russia under the Baltic Sea, "by and large correlate with projected demand growth." (See: Russian gas infrastructure: the main arteries of future exports.)

By 2020, demand in the EU should be some 200 Bcm/year higher than it is now, he said, roughly in line with the capacity of planned infrastructure projects. RWE's own demand is set to grow from some 40 Bcm/year to about 60 Bcm/year in the next three to four years, he said.

Next page: Setting priorities and transit terms

Created: November 20, 2008

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