The future of European gas resources may run through the South Caucasus. 2016 is likely to be a pivotal year in determining the extent of the region’s importance in gas transit, as well as the role of Central Asian states, and potentially even Iran, in supplying these routes. Geopolitical concerns, the development of regional divides, historical animosities, disputes over international treaties, and price competition will determine how these plans advance.
The South Caucasus has been a area of interest for the development of natural gas transit routes since the South Caucasus Pipeline was launched in 2006. The pipeline has a capacity of 25bln cubic metres per annum and runs from Azerbaijan’s gas-rich fields in the Caspian Sea to eastern Turkey. Over the last decade a number of competing projects have been touted, leading to the beginning of construction of the Trans-Anatolian (TANAP) and Trans-Adriatic pipelines (TAP) in 2015. However, the collapse in energy prices, the lifting of international sanctions on Iran, and rising local demand for gas has driven up competition. 2016 may well prove to be a critical year for shaping the future of these projects.
The interest in turning the South Caucasus into an alternative route for gas supplies to Europe, to compete with Russia, is long-standing and EU-endorsed. The development of new gas routes in the region stands in stark contrast to the only other envisaged major expansion of natural gas supplies in Europe – Russia and Germany’s plan for a doubling of the Nord Stream pipeline capacity – which faces substantial uncertainty given fierce resistance from southern and eastern EU members. In contrast, European backing for the ‘Southern Corridor,’ which resulted in the launch of TAP and TANAP, was first outlined in 2008 in the European Commission’s Second Strategic Energy Review. The document envisages the region as the hub of a future ‘Southern Corridor’ delivering billions of cubic metres of gas from the Caspian and Central Asia.
At present, Azerbaijan is the sole supplier to the South Caucasus pipeline and is at the core of the TANAP-TAP project. European firms have been working closely with the Azerbaijani authorities since shortly after independence, when BP secured a number of advantageous contracts to tap the country’s resources and lead construction of the Baku-Tbilisi-Ceyhan oil pipeline. As a result, Azerbaijan will likely maintain a central role in all future projects; however, alone Azerbaijan cannot fulfil the ambitious gas targets laid out by the EU.
In a little noticed development, on 23 December 2015, Turkmenistan’s President Gurbanguly Berdymukhamedov opened a new US$2.5bln natural gas pipeline. The pipeline, which Turkmenistan financed and built independently, has a reported maximum capacity of 30bln cubic metres per annum; however, it does not meet a major gas terminal, or even a major port. The pipeline, fittingly known as East-West, currently has no economic value. Instead it is a costly show of Turkmenistan’s intentions as it delivers gas to the edge of the Caspian Sea, the first step in the country’s long-term strategic goal of a trans-Caspian pipeline that would allow it to join Azerbaijan in selling gas to European markets.
Disputes over the legal status of the Caspian Sea remain arguably the single largest challenge to turning the South Caucasus into the EU’s Southern Corridor. Since the dissolution of the Soviet Union, the Caspian Sea’s legal status has been debated by its five littoral states: Kazakhstan, Turkmenistan, Russia, Azerbaijan, and Iran. Iran and Russia currently only acknowledge the Soviet-Iranian Treaties of 1921 and 1940 and thereby claim they have a veto over proposed projects. However, all five states organise and attend collective summits on the Caspian’s legal status. Whether the Caspian Sea is indeed a ‘sea’ or a ‘lake’ is a question of considerable international significance. If the Caspian is a sea, it would fall under the jurisdiction of the United Nations Convention of the Seas and its waters and seabed would be divided into national sectors proportional to each littoral state’s coastline length. This status would enable Turkmenistan and Azerbaijan to pursue construction of a trans-Caspian pipeline. If the Caspian is a lake, while littoral state would retain exclusive rights over defined national sectors, the rest of the waters would be common property and could only be developed by mutual consent of all the littoral states.
Progress on a five-party agreement, however, is no longer a pipe dream. The parties reached agreement on the legal status of surface waters in March 2015. Officials from Azerbaijan, Kazakhstan and Iran are on record publicly stating they believe an agreement could be reached at this year’s summit in Astana. However, it remains to be seen whether Iran will offer Russia concessions on the issue, likely in the form of supporting a legal regime that would hinder the construction of a trans-Caspian pipeline, or use the talks to pursue its desire to also become a major European gas supplier in the post-sanctions environment.
Conversely, however, some have suggested Iran could propose a joint project with Azerbaijan to construct a natural gas pipeline linking Turkmenistan’s new pipeline with Azerbaijan via terrestrial pipelines in Iran. Russia’s desire to avoid this scenario is an underappreciated factor in its support for Iran on the international stage and in Syria in particular. Yet Russia made the decision to intervene in Syria before the outlook for gas prices was as bleak as it is today. Furthermore, while Moscow will continue to strive to be seen in Tehran as a leading ally, how deeply Iran will engage with Russia, or look to compete with in gas markets, remains to be seen. In the coming weeks, the fate of a US$5bln loan Russia has committed to Iran, specifically if it is amongst those cut following Deputy Finance Minister Sergei Storchak’s warning that Russia could freeze all foreign loans, may offer an indication of where Russian-Iranian relations are headed.
Regional tensions are also an issue in the South Caucasus itself. Armenia has little hope of ever benefitting from the Southern Corridor, as its unresolved conflict with Azerbaijan and historical animosities with Turkey preclude the development of pipeline projects that would run through Armenia. Georgia does not have diplomatic relations with Russia as a result of their 2008 war. While talks between Georgia’s Energy Ministry and Gazprom regarding expanding Georgia’s gas purchases from Gazprom dominated regional headlines in recent weeks, Georgia has regularly sought to purchase small amounts of gas from Gazprom during periods of peak demand. Georgia’s government, however, is focused on expanding imports from Azerbaijan and the Caspian. Even the US Ambassador to Georgia has publicly downplayed opposition concerns the Georgian government would the country become reliant on Gazprom. The Georgian government’s desire not to allow the opposition to capitalise on these concerns, as well as the struggling economy in Azerbaijan, may see the two countries look to incentivise BP to accelerate the South Caucasus Pipeline Expansion project.
Although 2016 is increasingly likely to be a year of low energy prices, at least in the South Caucasus it will also mark a return to energy politics. Major questions and issues remain, most prominently the status of the Caspian and Iran’s willingness to either partner, or spoil, Russia’s interests. Yet it is clear that once again headlines, political relationships, and investment decisions in Central Asia and the Caucasus will turn on the development of gas and pipeline politics in 2016 and beyond.