Zurab GARAKANIDZE, PhD^
Nata GARAKANIDZE, PhD^

INTRODUCTION

The European Union is supplied with natural gas by four active corridors: the first is the so-called North Sea route (Netherlands, Norway, Great Britain), the second one is the North African corridor with three underwater gas pipelines of Tunisia and Algeria; the third one includes gas pipelines from Russia to Belarus, the Balkans, Ukraine and Turkey; the fourth one is formed by the pipelines connecting with the Southeastern part of the European Union through the South Caucasus, Turkey, Greece and Albania. Turkey’s importance is already clearly visible within these routes – the country is the main connection point within the both third and fourth gas corridors.

This has contributed to Ankara’s role as an important potential regional player. Moreover, the current ambition of the Turkish government is not only being a gas transit country but to become a regional gas hub. The latter involves the combination of gas storage and distribution, wholesale and spot-trading, and most importantly, the function of a regional price-setter. In Central Europe, this function is performed by the hub located near Vienna, the capital of Austria – Baumgarten. President of Turkey R.-T. Erdogan has been dreaming for a long time that Turkey will become not only a gas transit route for South and South-Eastern Europe, but also the so-called gas hub. Bellow we try to explain how the implementation of above mentioned plan will face serious objective and subjective obstacles, and one of the objections is related to South Caucasus…

AZERBAIJANI’S SUPPLY POTENTIAL

Turkey receives natural gas mainly through pipelines from Iran, South Caucasus (Azerbaijan, Georgia) and Russia. However, the country is also somewhat dependent on liquefied natural gas (LNG) imported from Qatar, US, in order to meet the domestic demand. In 2020’s, the annual Turkish customs tax on imported gas of 45 billion cubic meters (bcm) amounted to 41-42 billion US$.¹ The country is strategically positioned as a potential transit hub with inter-regional pipelines carrying hydro-carbons from the South Caucasian Caspian region to the Mediterranean port of Ceyhan (oil) and a small amount of gas via the Dardanelles to the European networks.

This increase in transit is also beneficial for Georgia, since 2007 until 2026 according to the so-called Century Contract, Georgia receives 5% of the gas transported through the “South Caucasian Gas Pipeline” (which is connected to TANAP in Erzurum, Turkey) for free, and 5% at a preferential rate, – as a transit fee.

From first decade of XXI century Turkey has traditionally been a transit country supplying gas to Europe from Azerbaijan and Russia. Ankara plans to increase its transit role in the delivery of Azerbaijani gas to the EU, doubling the shipments up to 20 bcm annually by 2027. The main obstacle in this respect is the limited ability of Azerbaijan to produce and export the sufficient amount of gas in the near future. Also, it is still questionable whether Baku will obtain gas from Russia and then secretly divert it to Europe. These doubts are somewhat confirmed by the start of Russian gas exports to Azerbaijan in late autumn 2022. On November 18, 2022, Russia’s Gazprom announced that it would supply Azerbaijan with up to 1 bcm of natural gas from December 2022 to March 2023 according to the new contract signed with the Azerbaijani state-owned company SOCAR.

Since 2020, the supply of Azerbaijani gas to Europe has been carried out through the EU’s Southern Gas Corridor (SGC) pipelines – South Caucasus Pipeline (SCP), Trans-Adriatic Gas Pipeline (TAP) and Trans-Anatolian Gas Pipeline (TANAP) – all of them crossing Turkey’s territory and all are feeding by the Azerbaijani Shah Deniz (SD) Caspian Gas fields; therefore, Ankara’s role has been decisive in terms of the transit, but it completely depends on the delivery from the SD deposits. According to the memorandum of understanding signed between Baku and Brussels in July 2022, the Azerbaijani side promised to increase exports to the EU from 10 to 12 bcm by the end of summer.² Both Brussels and Baku welcomed this new agreement as an extension of energy relations between the EU and Azerbaijan. The European Commission called the agreement a victory in efforts to diversify the EU’s gas supply. It was never specified what the source of the additional supply would be, and Baku is able or not to deliver even 12 bcm of gas to Europe. This has further raised Turkey’s importance both for Azerbaijan (supplier) and the EU (buyer) since the increased volumes will pass the Turkish territories. Also, the current war in Ukraine has created beneficial perspectives for Baku and Ankara: longer the war drags on, the more Azerbaijan will be able to use cheap Russian gas to cover its domestic demand and freeing up more Caspian gas, if there is enough gas in Caspian deposits, to boost exports to Europe. Let’s take a closer look at the availability of gas in Azerbaijan!

From December 31, 2020 to the beginning of 2023, the volume of Azerbaijani gas exported to Europe through the Trans-Adriatic Gas Pipeline (TAP) and the Trans-Anatolian Gas Pipeline (TANAP) passing through Turkey, exceeded 18 billion cubic meters, according to the report of the pipeline company TAP AG. “…the TAP’s capacity can be doubled in stages to further contribute to Europe’s energy security,” writes TAP AG company.³ Starting from 2021, Azerbaijan launched supplying natural gas to Southern Europe – Italy, Greece and Bulgaria through the TAP gas pipeline. The volume of supply in 2021 amounted to 8.2 bcm. In 2022, the export volume was forecasted to be 22-23 bcm, including 11.5 bcm to Europe and the rest to Turkey. The forecast was fulfilled and 18 bcm were exported to Europe. However, it still remains a question: how has Azerbaijan managed such a sharp increase in gas exports, when the promising gas fields – Absheron, Babek, Umid, Karabagh – are still at the initial stages of development, and the main sources of the EU Corridor (Shah-Deniz 1 and Shah-Deniz 2) are almost fully exploited?

TURKEY’S TRANSIT POTENTIAL

Since Jan 2020, Russian gas has been imported to Turkey through the 62 bcm capacity Turk Stream pipeline, which supplies the South-Eastern European markets as well. The Turk Stream pipeline with a capacity of 31.5 bcm annually is too weak… It passes through the bottom of the Black Sea and rises in Western Turkey. One of its two pipes is used to supply gas to the Turkish market, leaving only 15.75 bcm (annually) to Europe. This pipeline could not play an important role for Moscow to increase its supplies to Europe given the fact that some of the South and Eastern European countries almost fully depend on Russian gas.

President Vladimir Putin discussed the proposal with his Turkish counterpart Recep Tayyip Erdogan during a summit of regional leaders in Astana: “If Turkey and our potential buyers in other countries are interested, we can discuss the construction of another gas pipeline system and the creation of a gas hub in Turkey to sell gas to third countries, especially to European countries, if they are interested in this”, Putin said.⁴

Erdogan noted that both Turkey and Russia have instructed their energy ministries to immediately begin feasibility studies for the project. According to Alexey Miller, CEO of Gazprom, the project may involve the construction of new pipelines parallel to the existing Turkish Stream pipeline. “Together with Mr. Putin, we instructed our Ministry of Energy and Natural Resources and the relevant institution from the Russian side to work together,” Erdogan said.⁵

In 1997, Russia and Turkey began construction of the Blue Stream pipeline, which was completed in early 2003. It brings Russian gas to the Eastern Turkish markets. Moreover, Turkey has three operational liquefied natural gas (LNG) terminals – one of them is located in Marmara Ereglis (west of Istanbul), while the other two can be found in Aliaga, near Izmir.

Worth noting that Turkey already intends to produce the annual 40 bcm of its own natural gas, which means that the country could soon become a gas exporter as well. Ankara is eager to position itself as a major regional exporter of natural gas through the development of Sakaria offshore gas field. Mr. Fatih Donmez, the Turkish Energy Minister, voiced this ambition in an interview with TRT TV on March 19, 2023.⁶ Indeed, through the implementation of these ambitious plans, Turkey will make a serious bid to turn the Black Sea East coast into a gas hub. “Now we have our own gas. We consume about 55-60 bcm annually. We may soon start producing 100 bcm annually, and if we plan it right, we will export some 40 bcm annually”, – said the minister.⁷

Sakaria was discovered by the Turkish state-owned company TPAO in August 2020. It was reported that the field had initial reserves of some 320 bcm; this number was increased to 405 bcm after two months. In June 2021, the company announced that it had discovered another field – Asmara 1, with the proven reserves of 135 bcm. The two gas fields could have the total reserves of 540 bcm.

At the same time, Russia is looking to Turkey as a potential source of additional gas supplies to Europe, since there is no way to restore the only pipeline that survived the Nord Stream explosion in September 2022. Moscow proposed to Ankara to increase the capacity of the “Turkish Stream” pipeline to 62 billion cubic meters annually. However, it remains to be seen how willing European gas buyers to continue using Russian gas in the coming years.

Meanwhile, Turkey plans to increase its transit role in the delivery of Azerbaijani gas to the EU – doubling shipments from Azerbaijan annually to 20 billion cubic meters by 2027. But there are concerns in Europe to which Azerbaijan will be or not able to supply the agreed additional gas from Azerbaijani fields, and whether this gas will be obtained from Russia and then secretly diverted to Europe. These doubts are confirmed by the start of Russian gas imports to Azerbaijan in November 2022!

RESET OF THE RUSSIAN GAS SUPPLY IN AZERBAIJAN

On November 18, 2022, Russia’s Gazprom announced that it would supply Azerbaijan with up to 1 billion cubic meters of natural gas from December 2022 to March 2023 under a new contract with the Russian gas monopoly, state energy company SOCAR.⁸

Gazprom has supplied gas to Azerbaijan in 2000-2006, but later the country rapidly expanded its gas production at the Shah Deniz field operated by BP, which allowed it to cover not only its own gas needs, but also to export it to Turkey via Georgia. When much of its gas already bought by foreign companies, Azerbaijan returned to receiving gas from Russia in 2017-2018, but purchases from Russia stopped again after gas from the second stage of the Shah Deniz field was sent to Turkey in 2019.

Azerbaijan has long prioritized selling its gas abroad over domestic needs to maximize export earnings. The new 2022 agreement with Gazprom was signed when Azerbaijan prepared for the mid-winter peak. However, the resumption of Russian gas imports now raises additional questions, given that Azerbaijan recently committed to pumping more gas to Europe, like in 2017-2018. In a statement to the Azerbaijani news agency APA, SOCAR noted that it has a long history of cooperation with Gazprom and that the two companies are “…trying to optimize their infrastructure by organizing mutual exchange of gas flows.”⁹

In the same time, from 2020, the supply of Azerbaijani gas to Europe is carried out through the EU’s “Southern Gas Corridor” (SGC), i.e. 10 billion cubic meters of natural gas annually will reach European consumers. According to the memorandum of understanding signed between Baku and Brussels in July 2022, the Azerbaijani side promised to increase exports to 12 billion cubic meters in 2022.¹⁰ Both Brussels and Baku welcomed this new agreement as an extension of energy relations between the EU and Azerbaijan. The European Commission called the agreement a victory in efforts to diversify the EU’s gas supply. But it was never specified what the source of the additional supply would be. In fact, Baku was able to deliver not 12, but 18 billion cubic meters of gas to Europe last year!

According to Eurasianet, based on a source close to the Shah-Deniz consortium (which is responsible for Azerbaijan’s gas exports), additional export deals to sell gas from the field, above the 10 billion cubic meters of gas annually already agreed, have not been agreed with the operating consortium.¹¹ This raises a legitimate question: is Russian gas being quietly, secretly sold as Azerbaijani gas to comply with the EU-Azerbaijan July 2022 memorandum? On the one hand, the resumption of Russian gas supplies to Azerbaijan may simply indicate that Baku is concerned about increasing its domestic demand. And indeed, the agreement between Azerbaijan and the EU is only a memorandum and therefore non-binding. But the timing raises suspicions that the longer the war in Ukraine drags on, Azerbaijan will be able to use cheap Russian gas to cover its domestic demand, freeing up more Caspian gas to boost exports to Europe. And even adding Russian gas to his own one – after all, hydrocarbons cannot be distinguished by origin…

On the other hand, Azerbaijan is of course free to buy as much Russian gas as it wants. But it turns out that it is using Russian gas to send more volumes of Caspian gas to Europe (in fact, the deal is a “swap” contract). Thus, the import of gas from Russia to Azerbaijan somewhat undermines the spirit of the Baku-Brussels agreement. It will also be another example of how difficult it is for Europe to provide an alternative to Russian gas in the nearest future, and how Moscow will try to use the EU’s Southern Gas Corridor (SGC) gas pipelines for its own purposes.

FAR-REACHING PLANS OF BAKU

According to the memorandum of July 2022, the European Union intends to increase the purchase of Azerbaijani gas to 20 billion cubic meters annually by 2027. In the long term, Azerbaijan may have the potential to achieve this goal even without purchasing Russian gas. At first glance, the country has a number of un-exploited deposits that can be developed at this time. In particular, “Absheron”, “Umid” and “Karabakh” offshores have been confirmed among the unexploited deposits of the Caspian Sea. Also, the 3rd stage of “Shah-Deniz”, which includes gas reserves that are in the pre-exploitation stage. Deepwater gas deposits in the Azeri-Chiraghi-Guneshli (ACG) oil field have been scouted but not confirmed. The prospect of “Babek” gas field has not been confirmed yet. The “Karabakh” field, operated by Azerbaijan’s SOCAR and Norway’s Equinor under a risk service agreement, can reach 2 billion cubic meters of gas annually. However, this offshore field will be ready for production only in 2025-26. “Absheron”, which is being developed by a joint venture between SOCAR and France’s TotalEnergies, can extract 5 billion cubic meters of gas annually, but only after 2027. Also, the existing “Umid” field currently produces 1.7 billion cubic meters of gas annually, and its output can be increased to 3 billion cubic meters. Meanwhile field “Babek”, which is adjacent to “Umid”, can produce annually 3-4 billion cubic meters of gas, according to the Azerbaijan government, but it also takes several years to develop.

The new Shah Deniz Stage 3 and Azeri-Chiraghi-Guneshli (ACG Deepwater) fields are expected to start drilling in late 2023, and the results of their development will help determine the resource volume and production potential. But in any case, it seems that Azerbaijan actually has the potential to supply Europe with the amount of gas it wants. However, in all the above-mentioned projects, foreign investments, technology and know-how will be needed for their further development. This is especially true for “Umid” and “Babek”, which are geologically difficult fields, and in which no western company-investor participates in exploitation.

Attracting western investment could be a major problem for Azerbaijan, as many western companies have announced plans to cut capital expenditures on oil and gas in the coming years in favor of renewable energy and other low-carbon technologies. This applies to the BP, the largest investor in Azerbaijan’s oil sector, whose current strategy calls for a 40% reduction in oil and gas production over the next decade. Many western financial groups, like the BP, have made commitments to phase out fossil fuel investments. Among them is the European Investment Bank (EIB), which at one time played a crucial role in the EU’s “Southern Gas Corridor” (SGC) project of the century, which already connects Azerbaijani gas to the European market. On the other hand, the SGC succeeded at a time when gas prices in Europe were generally low. Thanks to the political support of European states receiving Azerbaijani gas, long-term contracts have been agreed, even though Azerbaijani gas prices have not always been competitive with Russian or liquefied natural gas (LNG) prices at European terminals.

Now the situation is completely different. On the ground, prices in Europe are high, and supplies of the small remaining volume of Russian gas are now unreliable, and will probably be cut off altogether in the coming years, according to the EU plans. This gives an additional chance to Azerbaijan gas, which is priced with long-term contracts, and it therefore gains a competitive advantage. Even if there is less political support from Brussels for new fossil fuel projects, European market conditions may lead to an increase in Caspian gas supplies there.

WHETHER OR NOT REGIONAL GAS HUB IS FORMED ON THE BLACK SEA?
GAZPROM MAY RECALL THE IDEA OF JOINING THE EU SGC

It is interesting that before the idea of a Turkish hub, there was an idea of a Georgian hub!

Taking into account the financial problems of the EU gas supply diversification projects, experts did not rule out their transformation in various forms in order to make the EU Southern Gas Corridor projects cheaper and attract additional volumes of gas. One such transformative idea was to combine European and Russian gas flows to improve Europe’s gas supply. This issue was raised among experts for the first time in early 2010. On January 10, 2011, it was raised again by the US Ambassador to Italy D. Thorn. Unfortunately, there was no discussion on this project in the government or parliament of Georgia, and the discussions took place only in expert circles. The idea of such a union was openly rejected in Russia at the time, but according to behind-the-scenes information, now the halving of the capacity of the gas pipelines of the western route in Ukraine and Belarus, as well as the problems faced by the North Stream 1 and 2, can play the role of a catalyst and force Gazprom to sell its gas to the European market. Not by building a new gas pipeline, but by much less expensive gas routes to send part of it to the EU. Of these projects, only the least developed, still at the idea level, White Stream – the Georgia-Ukraine-Romania gas pipeline was associated with Ukraine, which cannot be implemented under the conditions of the annexation of Crimea and ongoing war in the country. In addition, the capacity of the Ukrainian gas network (GTS) is limited, and in the conditions of war, it is superfluous to even talk about the inclusion of new volumes in this network. According to experts’ calculations, the post-war transit through Ukraine will not be able soon to meet the growing demand for gas in Europe.

Therefore, Russia can now support the unification of Russian and European projects not through Ukraine, but in another format. Russian expert circles have already voiced the opinion that they can start looking for a place to connect Russian gas to the gas pipelines of the EU gas Corridor in Moscow, and the agreement signed between Gazprom and SOCAR on the supply of 1 billion cubic meters of Russian gas to Azerbaijan from November of this year to March 2023, should be considered as the first step taken in this direction.

In today’s conditions, the only place where the western routes of Russian and Caspian gas intersect is Georgia. On the one hand, the so-called North-South Magistral Gas Pipeline runs through Georgia, which starts from Mozdok and connected to Armenian gas network through the territory of Georgia. On the other hand, between Gardabani and Jandara, it crosses the EU Corridor project – the South Caucasian Gas Pipeline (SCP), which currently supplies gas from both stages of Shah-Deniz not only to Turkey, but also to EU member states through the TANAP and TAP gas pipelines.

The so-called North-South Magistral Gas Pipeline from Mozdok (Russia) to the border of Armenia consists of two parallel pipes – the diameter of the main pipe is 1,200 mm, and the spare one’s is 700 mm. Recently, through the main pipe of this gas pipeline gas is supplied to Armenia and some large enterprises operating in Georgia. The population of Georgia gas has been received from Azerbaijan since 2007 – part from SCP, as a fee for the transit of Shah-Deniz 1 and Shah-Deniz 2 gas, and part of it is purchased from SOCAR, which Georgia receives through the Kazimagamed – Gazakh-Tbilisi gas pipeline.

After the collapse of the USSR, the Mozdok-Armenia Magistral Gas Pipeline works with a much lower load (on average annually 1.93-2.50 billion cubic meters) compared to the projected capacity (18 billion cubic meters per year). However, even in the Soviet period, its load did not exceed 9.5 billion cubic meters annually. Until 2018, the JSC International Gas and Oil Corporation of Georgia received 10% of the Russian transit from the Magistral Gas Pipeline, which ranged from 200 to 250 million cubic meters per day in 2008-2022. This is 11.0-11.2% of Georgia’s gas consumption. Since 2018, “Gazprom” pay Georgia for gas transit in USD.

It is worth noting, that from the materials of the audit of the energy system of the country by the Chamber of Control of Armenia in 2009-10 becomes clear, that part of the Iranian gas imported to Armenia was also delivered to Georgia, in exchange for the exported electricity to the Yerevan Thermal Power Plant in the ratio – 1 cubic meter of Iranian gas for 4.5 kW/h Georgian electricity.

From the above mentioned, we can conclude that a small amount of Iranian gas through Armenia was already reversed to Georgia through one of the pipes of the so-called Magistral Gas Pipeline in 2009. If the 1,200 mm pipe of Magistral (North-South) Pipeline will be connected to the South Caucasian Gas Pipeline (SCP) of the European Corridor near city Gardabani (Georgia), then it can become a new export route of a part of the Russian gas to the West. This gas will be sent from Turkey to Europe through the SCP. And for Armenia’s consumption, gas can be sent from Mozdok (Russia) through a spare 700 mm pipe. This scheme may not raise objections from Brussels in conditions of wartime when gas imports from Russia dramatically decreased. It is likely that the idea of combining gas pipelines will continue to be supported by the US, as this project aims to weaken competition between gas export routes in Europe. For the same reason, in light of the financial problems of the European Union, this idea may soon be attractive to Brussels. This will make it easier for Europe to implement alternative gas supply routes, since Moscow will be interested in the strengthening of the EU Southern Gas Corridor, and Russia’s antagonism to this Corridor will be removed. Moreover, some Georgian experts believe that this connection will make Russian and European projects mutually complementary, thus Georgia can also see benefits. In particular, in these conditions:

Firstly, will increase Russian, Azerbaijani and Iranian gas flows passing through Georgia. Accordingly, the amount of free and subsidized gas remaining in the country will increase. This will fill the semi-unloaded SCP and Magistral (North-South) gas pipelines, and the transit facilities of Georgia will increase, so that additional costs will not be required either from the country’s budget or from Western donors – will be enough interconnector construction in the village Jandara of Gardabani Municipality (Georgia), at the crossing point above mentioned pipes.

Secondly, the energy security of Georgia will increase, because by connecting to the SCP, Russia will be interested in the maximum filling of the Magistral (Russia-Armenia) Pipeline and its smooth operation, since this pipeline will connect Russia with a new route, high-performance Western export gas pipelines. Also, the West’s interest in using Georgia as a safe transit corridor will increase, because Georgia (and not Turkey) will turn into a regional gas supply hub.

Thirdly, the interconnection of the SCP and the Magistral gas pipelines will also satisfy the ambitions of Iran and Armenia. The director of Iran’s National Gas Export Company recently announced that Iran plans to triple its gas exports and increase its share of world gas trade from 2% in 2012 to 10% by the end of 2023. The official emphasized that it is not excluded that Tehran will transfer its gas to Russia (through which pipe, it is not known?!), as was in 2006. In that case may will be raised question of privatization of the Magistral Gas Pipeline on the territory of Georgia, which is unacceptable, so that this pipe can be reversed to divert Iranian gas to Russia.

The publications of Georgian energy experts (D. Eliashvili, T. Gochitashvili, L. Jervalidze)¹² indicate that the main pipe of the so-called Magistral Gas pipeline, through which it will be connected in Gardabani (Georgia) to the SCP, possible to reverse from the other end, through the Tabriz (Iran) – Megri (Armenia) Gas Pipeline and the gas network of Armenia, to receive Iranian gas from the south in the future Georgian hub. This idea is acceptable to the government of Armenia, because in this case it will fulfill its long-standing dream and join the pan-european project. Moreover, Yerevan will receive a traditional, stable source of gas supply from Russia and gas transit fees from Iran. In addition, the gas supply to Armenia from Russia will continue with the 700 mm spare pipe of the so-called Magistral Gas Pipeline, the capacity of which will fully meet Armenia’s current needs (2011-2022, this indicator was approximately 2.5-3.5 billion cubic meters annually on average). Thus, the gas hub in Gardabani (Georgia) will satisfy the interests of all countries of the region.

CONCLUSION

Turkey has raised the ambition to play the potential regional gas hub role. This is to be achieved through increasing the transit role carrying more Azeri, Iranian and Russian gas towards the EU, given that the necessary infrastructure is already in place: all of the EU’s SGC pipelines, also Turk Stream and Blue Stream pipelines serves as the carrier of Russian gas, and Tabriz – Erzurum gas pipeline pumps Iranian gas.

Moreover, Turkey is developing its own gas production; it expects to launch its own offshore gas fields on the Black Sea coast. The country also has several LNG import (regasification) terminals. Ankara itself does not need any additional imported gas. It can negotiate with Russia only for the purpose of carrying the Russian gas to Europe playing the role of a gas hub. Some European countries that are heavily dependent on Russian gas and have closer political ties to Moscow are likely to push for a more distant deadline for ending Russian gas imports, or to continue importing gas indefinitely.

But, in light of the current strained the EU – US – Turkey relations, it is unlikely that in the coming years Washington and Brussels will support the idea of establishing Turkey as a monopoly hub for Caspian gas and will try to diversify gas flows to Europe. As can be seen from the above-mentioned geo-economic processes, the formation of Turkey as a Black Sea regional gas hub has serious problems, both from the north and from the east. Therefore, probably, the European Union will take more efforts not to Turkey’s so-called gas hub development, but on the diversification of the EU energy supply routes via the Black Sea.