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№ 1 (January 2012)

Azeri-Georgian Interconnector Would Kick-Start Black Sea LNG Market

   The latest of the projects aiming to supply gas directly from the Caspian to Europe circumventing Russia has lately attracted a lot of interest on behalf of the post- Soviet states though initially they were not envisioned as participants of the new gas supplying system.

By Vladimir Shlychkov

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Gas Route Around Russia

   In April 2010 Romania, Azerbaijan and Georgia signed a memorandum on a project known as AGRI (Azerbaijan – Georgia – Romania Interconnector) aimed at creating an alternative gas supply route to Europe from the field at Shakh Deniz. Shortly after signing the memorandum, Hungary joined the project.

In technical terms АGRI means building a pipeline for transportation of natural gas to the Georgian Black Sea coast. In the Georgian port Kulevi, gas will be liquefied at a special terminal and then delivered by tankers to the Romanian port of Constanta. There LNG is to be transformed to the initial gas substance and directed to local and other European consumers using already existing gas infrastructure.

   To implement the project, it is  necessary to build at least two facilities: one is natural-gas liquefaction plant in Georgia and one regasification terminal in Romania. The AGRI project is believed to be more profitable if interconnector Romania – Hungary is built (Arad – Szeged). It is obvious that one of the key goals of the project is to ensure energy supplies to Europe and circumvent Russia.

   Currently all work on technical specification of the new project and search for new financial donors for the project is supervised by a joint company ARGI LNG Co. This stage is planned to be completed by April 1, 2012. Equal participants of the project are Azerbaijani SOCAR (GNKAR in Russian), Oil and Gas Corporation of Georgia, the Romanian ROMGAZ and Hungarian MVM. Each has a 25 percent of shares.

   According to Natik Aliev, Minister of Industry and Energy of Azerbaijan, three options of interconnector’s capacity are currently under consideration: 2 billion, 5 billion or 8 billion cubic meters per year. Depending on these figures investment for the project is estimated from €1.2 billion to €4.5 billion. The project is supposed to be implemented within 20 months.

Ukraine is Striving to Go for LNG

   Ukraine has been in conflict with Moscow over the gas supplies for years and is desperately striving to change its dependency on Gazprom supplies, including partial switching from Russian pipeline gas to LNG.

   A number of countries including Egypt, Libya, Algeria, Qatar and even a distant Indonesia have been considered as possible suppliers. LNGwas meant to be delivered by tankers to Ukrainian shores via Bosphorus.

   Nevertheless, a detailed analysis shows that these alternatives tend to be quite difficult if real to implement. It’s unlikely to get permission from Ankara for oil tankers to go through Bosphorus that has very intensive traffic and strict ecological regulations. To cover it all, lately Turkey started reconsidering its energy policy. In the opinion of Rovshan Ibragimov from Caucasus University, Turkey is trying to become some sort of a regional energy terminal and resell Azerbaijani gas to European markets.

   Today Kiev is looking at Azerbaijan as the main LNG supplier. As Ukrainian experts believe, the main advantages of such choice will be a relatively short distance of delivery (approximately 2,300 kilometers) and minimal political risks compared to North Africa and the Middle East.

   In early 2011, within the framework of AGRI Ukrainian Cabinet of Ministers and Azerbaijani government signed a memorandum on 5 billion cubic meters LNG supplies by tankers via the Black Sea route. It speeded up the project of LNG terminal construction on the Ukrainian Black Sea coast coordinated by a specially founded state company, National Project – LNG Terminal. Socoin Ingenieria y Construccion Industria (Spain) won the tender for a development of technical and economic study for the project.

   In the interview to Oil and Gas Eurasia the PR representative of Ukrainian Prime Minister Nickolai Azarov pointed out that construction of a regasification plant will proceed in two stages: the first stage envisages the construction of a terminal with the estimated capacity of 5 billion cubic meters, and the second stage up to 10 billion cubic meters. The construction is scheduled to start January1, 2012. According to the press-service representative preliminary costs of LNG terminal construction (with infrastructure and connection to existing gas transportation system) were estimates as $1.5 billion. On the average similar projects are known to bring the return of investment in 7 to 15 years.

   Technical and economic study for the LNG-Terminal project should be completed in the third quarter of 2012 as it is mentioned in the presentation of the project. Within the framework of the project, international consortium will be set up in the third or fourth quarter of this year. Three locations are currently considered as future sites: the area in the vicinity of Yuzhny port’s oil terminal (Odessa region), in the city of Ochakov (Nikolaevsky region and in Feodosia (the Crimea). The State Agency of Ukraine for Investment and National Projects Management is planning that the first LNG capacities will be in operation as early as 2014. Additionally, Kiev intendeds to develop and build national tanker fleet that can guarantee operation of the terminal.

   The idea to be part of the AGRI project is widely supported by business and political communities in Ukraine. “It’s crucially important to diversify gas supplies regardless of the fact how much gas we actually buy from Russia,” Mikhail Gonchar, the Director of Energy programs to Nomos center explains. Valery Borovik, the Chairman of the New Energy Alliance shares his viewpoint: “LNG is vital for us, and the more of it we get, the better. One of the main reasons is because on a spot market it is a lot cheaper than natural gas supplied by pipelines.”

   Finally, on September 19, 2011, ambitious plans of Ukraine to join the AGRI project were made public at the meeting of Natik Aliev, the Minister of Industry and Energy of Azerbaijan, and Yuri Boiko, his Ukrainian counterpart. The parties agreed that Ukraine will get up to 2 billion. cubic meters by 2014 and up to 5 billion cubic meters in 2015 of Azerbaijani gas. A joint venture for transportation of LNG to the Ukrainian Black sea coast is to be set up by the end of this year.

Belorussian Alternatives

   Annual gas consumption in Belorussia amounts to 21.5  billion cubic meters. All of the gas supply is coming from Russian because possessing some oil reserves, Belorussia has no gas fields of its own. According to Belorussian Minister Alexander Ozerets, 95 percent of electricity the country gets from burning natural gas.

   Lately, Minsk has been rather unhappy with such high dependency on Russian gas monopolist. Energy strategy of Belarus till 2020 is targeting to diversify energy supplies. Meanwhile if Russia loses even part of Belorussian market it will be quite problematic for Gazprom. Belorussia rates third in the list of countries buying gas from Russia after Germany and Ukraine, but surpassing Turkey, France and Italy.

   Minsk has even considered scenarios of independent gas development in Venezuela and Iran. With such schemes all money got from such projects will still be directed for payments of Russian gas, so it’s hardly a profitable alternative even if such plans come true. Furthermore, amount of gas is unlikely to be significant.

   Perspectives to get Kazakh, Uzbek or Turkmen gas via major pipeline Central Asia – Center (taking into consideration long term contracts of Gazprom to buy out all export production of the region and lack of independent transport structures) seem really unrealistic. In this context LNGsupplies from the Caspian region to Belorussia look as a real competition to Russian gas monopoly.
So far, Minsk has been very reserved about these issues. Only a few months ago Valentin Velichko, the Belorussian Ambassador to Kiev, cautiously approached the subject.  On July 9, the diplomat told the journalists that his country was interested in LNG construction on the Black Sea coast.

   “It is going to be one other important area of activity where interests of Ukraine and Belorussia merge. It will ensure diversifying of energy supplies to our countries,”   the Ambassador said. According to Velichko, Belorussia is ready to invest over $500 million hoping to increase terminal capacity up to 17-18 billion cubic meters. The project will be invested in stages during three years approximately $167 billion per year.

   Independent Belorussian analyst Alexander Shapranov said in his interview to OGE that in a long-time perspective LNG supplies will allow the country to cut almost half of its gas export from Russia. In his opinion this is inevitable even of Moscow changes its price policy for Belorussia. “President Lukashenko stated many times that Russia is using its energy resources as an instrument to force Belorussia to be less independent and said that his country was eager to find alternative oil and gas supply sources,” the expert reminded.

   Speaking about perspectives of Minsk involvement into the AGRI project is a good reason to remind about close relations of Alexander Lukashenko and Geidar Aliev. Once the Azerbaijan leader helped Belorussia to pay off the country’s debt for Russian gas. Recently Belorussian president personally thanked him and Mikhail Saakashvili for their refusal to take part in an “anti-Belorussian resolution” at the Eastern partnership’s energy summit. In this regard it will be logical to assume that any steps by Minsk will be taken by Baku with a great interest and understanding.

Moldova to Ensure EU Interests

   So far Moldova is also fully dependant on Gazprom supplies. Late in September, Prime Minister of Moldova Vladimir Filat had a meeting with Trayan Besesky, the President of Romania, country that will be hosting the interconnector opening so many perspectives for all sides. At the meeting Filat said that “Moldova has a strategic interest to the AGRI project that will supply gas from Azerbaijan to Romania and is strongly investigating possibilities to join it.”

   In order to become part of the AGRI project, Moldavian and Romanian gas transportation systems need to be interconnected by a pipeline from Ungenu (Moldova) to Yassy (Romania). It will cost approximately 20 million euros according to preliminary estimations. A joint work group has already chosen a route for the future pipeline that will be as long as 40 kilometers with 31 kilometers on the Romanian territory and 9 kilometers in Moldova.

   Moldavian supporters of the project largely count on European investment within the framework of the EU program of Eastern Partnership and they have reasons for that. On October 6, 2011, EU representatives who took part in the summit on energy cooperation held in Chisinau announced that European countries were ready to give a grant to Moldova as big as €7 billion. In the opinion of experts from Movdova Energy Ministry a pipeline connecting Ungenu with Yassa can be completed in 2012. For the first time ever this will ensure direct access of Moldova to natural gas supplies circumventing Russia and connects it with EU gas transportation system.

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