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112th Congress } { S. Prt.
2d Session } COMMITTEE PRINT { 112-42
_______________________________________________________________________
ENERGY AND SECURITY
FROM THE CASPIAN TO EUROPE
__________
A MINORITY STAFF REPORT
PREPARED FOR THE USE OF THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
One Hundred Twelfth Congress
Second Session
December 12, 2012
Printed for the use of the Committee on Foreign Relations
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COMMITTEE ON FOREIGN RELATIONS
JOHN F. KERRY, Massachusetts, Chairman
BARBARA BOXER, California RICHARD G. LUGAR, Indiana
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland JAMES E. RISCH, Idaho
ROBERT P. CASEY, Jr., Pennsylvania MARCO RUBIO, Florida
JIM WEBB, Virginia JAMES M. INHOFE, Oklahoma
JEANNE SHAHEEN, New Hampshire JIM DeMINT, South Carolina
CHRISTOPHER A. COONS, Delaware JOHNNY ISAKSON, Georgia
RICHARD J. DURBIN, Illinois JOHN BARRASSO, Wyoming
TOM UDALL, New Mexico MIKE LEE, Utah
William C. Danvers, Staff Director
Kenneth A. Myers, Jr., Republican Staff Director
(ii)
C O N T E N T S
----------
Page
Letter of Transmittal.......................................... v
Maps........................................................... vii
Executive Summary.............................................. 2
U.S. Interests in the Southern Energy Corridor................. 6
The U.S. Special Envoy for Eurasian Energy Security.......... 7
Connecting the Caspian and Europe.............................. 9
European Natural Gas Vulnerability........................... 9
Policy Response by the Euro-Atlantic Community............... 12
Azerbaijan: The Southern Corridor's Supply Anchor............ 13
TANAP Overtakes Nabucco...................................... 15
Turkish Domestic Energy Dynamics............................. 17
Security for European Allies: Nabucco West vs. Trans-Adriatic
Pipeline................................................... 18
Future Gas Supplies............................................ 22
Turkmenistan, the Trans-Caspian Pipeline, and the ``Take our
gas at the border'' Policy................................. 22
Iraq, Kazakhstan, and the Eastern Mediterranean: Future
Supplies in Need of Policy Attention....................... 29
U.S. LNG: Putting Molecules Where Our Mouth Is............... 30
A P P E N D I X E S
Appendix I.....................................................
The Lugar Energy Report, ``Lugar Travels Pipeline Route,''
August 2006................................................ 39
The Lugar Energy Report, ``Importance of the Nabucco
Pipeline,'' July 2009...................................... 46
Appendix II....................................................
Transcript of Senator Lugar's keynote address at the German
Marshall Fund Conference, delivered at the NATO Summit in
Riga, Latvia............................................... 53
Appendix III...................................................
Letter to Secretary of State Condoleezza Rice from Senator
Lugar and then-Senator Biden regarding the appointment of a
U.S. Special Envoy for Eurasian Energy Security............ 61
Appendix IV....................................................
Liquefied Natural Gas (LNG) for NATO Act..................... 63
(iii)
LETTER OF TRANSMITTAL
----------
United States Senate,
Committee on Foreign Relations,
Washington, DC, December 12, 2012.
Dear Colleagues: For years, I have pressed for greater U.S.
diplomatic engagement to realize the immense strategic and
economic benefits of opening an oil and natural gas Southern
Corridor from Central Asia and the Caucasus to European and
global energy markets. I asked my Foreign Relations Committee
professional staff members, Neil Brown and Marik String, to
travel to Azerbaijan, Turkey, and Turkmenistan to assess
progress on the next installment of the Southern Corridor to
bring Caspian basin natural gas to Europe. This strategic U.S.
initiative would advance U.S. interests by alleviating Russian
gas-fueled pressure against NATO allies, bolstering bilateral
relations in the Caspian Sea region, and further isolating
Iran.
After years of infighting between energy companies involved
in the project, the Southern Corridor for gas to Europe appears
within reach. This result likely would not have occurred absent
U.S. energy diplomacy over the last decade. Revitalized U.S.
leadership is needed to fully realize strategic benefits for
the United States.
This SFRC Minority Staff report provides background
analysis and recommendations that will advance U.S. national
security and economic interests. I would highlight three
recommendations for Congressional consideration. First, the
State Department should restore the dedicated, high-level
position of U.S. Envoy for Eurasian Energy Security to ensure
that U.S. interests are advanced at the highest levels of
government in the Caspian region where energy decisions are
made. Indications that the Envoy position will be subsumed, as
opposed to better coordinated, within the State Department's
new Energy Bureau threaten to undermine confidence in U.S.
resolve regarding energy security and our broader commitment to
the region.
Second, the United States must make clear that our
strategic interest lies in Caspian gas reaching our NATO allies
in Turkey, Central and Southeastern Europe, and beyond, who are
in acute need of energy diversification due to vulnerability to
Russian energy cutoffs. If the gas instead arrives at
destinations in Western Europe with multiple supply options,
Congress should reexamine the merits of a statutory exemption
from Iran-related financial sanctions for the further
development of Azerbaijan's Shah Deniz gas field, the source
for initial stages of the gas corridor.
(v)
Finally, Congress should swiftly pass the Liquefied Natural
Gas (LNG) for NATO Act. My legislation would place NATO allies
on equal footing with free trade partners under U.S. law in
providing for automatic licenses for U.S. LNG exports. Unlike
in past years, U.S. domestic shale natural gas production
affords us the opportunity to directly alleviate the dependency
of our NATO allies in the Baltics, Central and Southeastern
Europe, and Turkey on Russian supplies, and further isolate
Iran, while benefiting the U.S. economy by opening new markets.
This staff report provides further background on the
Southern Corridor. I welcome any comments you may have.
Sincerely,
Richard G. Lugar,
Ranking Member.
MAPS
----------
EXISTING AND PROPOSED NATURAL GAS INFRASTRUCTURE IN THE CASPIAN REGION
(vii)
THE SOUTHERN CORRIDOR FOR NATURAL GAS
ENERGY AND SECURITY
FROM THE CASPIAN TO EUROPE
As Chairman and Ranking Member of the Senate Foreign
Relations Committee, Senator Richard G. Lugar has prioritized
energy diplomacy as a major element in meeting current and
future challenges to U.S. national security. This has spurred
both policy and structural change within the U.S. diplomatic
apparatus to elevate energy security to be a central component
of American foreign policy.
As a continuation of efforts to link European NATO allies
and friends to the Caspian oil and gas basin, Senator Lugar
directed Senate Foreign Relations Committee professional staff
members Neil Brown and Marik String to undertake a mission in
October 2012 to Azerbaijan, Turkey, and Turkmenistan to assess
the status of the Southern Corridor to Europe and related U.S.
diplomatic efforts. Staff met with State Department officials
in Washington and overseas, host government national security
and energy officials, representatives from international and
state-owned energy companies, third-country embassy officials,
independent experts, as well as foreign embassy officials in
Washington, D.C. Specifically, the purpose of the visit was to:
Investigate the impact of the Obama Administration's
decision to effectively eliminate the position of U.S.
Envoy for Eurasian Energy Security;
Assess the status of competing pipeline proposals to carry
gas from the Caspian basin to Europe as part of the
Southern Corridor;
Examine the prospect of including gas from Turkmenistan,
Iraq, Kazakhstan or the Eastern Mediterranean in the
Southern Corridor; and
Evaluate what opportunities the United States has to
increase the effectiveness of its policy on the
Southern Corridor;
This trip was timely for several reasons. First, the State
Department has signaled that it is unlikely to appoint a new
Envoy for Eurasian Energy Security, calling into question
whether a part-time or lower-level appointment will carry
sufficient weight with regional leaders. Second, growing
concern that the Obama Administration is being too risk-averse
in support of specific export routes for natural gas makes that
staffing decision even more potentially problematic. Third, the
world's evolving natural gas markets invite a reassessment of
the Southern Corridor's strategic benefit and commercial
viability. Fourth, with the coming departure of Senator Lugar
from Congress, it will be important that new Members of
Congress champion the Southern Energy Corridor project from the
legislative branch. Finally, Congress is set to re-assess the
scope of Iran sanctions, and it is useful to evaluate whether a
continued sanctions exemption for the Shah Deniz project (with
its minority Iranian stakeholder) is warranted.
Executive Summary
U.S. strategic interests in linking the nations of the
Caspian Sea region with European and global markets have long
been recognized and supported on a bipartisan basis. Energy is
the economic lifeblood of many NATO allies and partners in the
Europe and Eurasia region, and dependence on Russia and Iran
for energy imports or exports remains a central detriment to
those nations' sovereign independence in policymaking, economic
development, and security. When U.S. allies and partners are
made vulnerable in this way, it undermines our own bilateral
relationships and weakens our multilateral diplomatic and
military efforts.
Development of a Southern Corridor to link the Caspian to
Europe with oil and natural gas pipelines was an early element
of a U.S. strategy to end that dependence. The first stage was
achieved with the completion of the Baku-Tblisi-Ceyhan (BTC)
oil pipeline from Azerbaijan to a Turkish Mediterranean port
and the South Caucasus Gas Pipeline (SCP) from Azerbaijan to
Turkey.
This report examines the next stage of Southern Corridor
development. Utilizing expanded production of natural gas in
Azerbaijan as a supply anchor, this stage envisions the
expansion of the South Caucasus Pipeline, a new pipeline route
across Turkey, and construction of one or more pipelines from
the Turkish border further into Europe. The United States and
our allies have also pressed for additional gas from
Turkmenistan and Iraq to supply the Southern Corridor.
The next phase of the Southern Corridor would advance
several U.S. and NATO foreign policy objectives: it would
further isolate Iran, assist in cultivating partners in the
Caucasus and Central Asia and bolster their sovereign
independence, and perhaps most importantly, curtail Russia's
energy leverage over European NATO allies. Among EU countries,
Austria, Bulgaria, the Czech Republic, Estonia, Finland,
Latvia, Lithuania, Poland, and Slovakia all depend on Russia
for over 60 percent of their gas imports; EU aspirants such as
Moldova, Turkey, and Ukraine rely on Russia for over 65 percent
of their imports. Instead of allowing the market to produce a
windfall for the Russian economy, the Kremlin has undertaken a
series of astonishingly antagonistic policies. Russian energy
cutoffs in the cold of winter, energy contract coercion, and
use of the Nord Stream and South Stream pipelines to further
isolate certain European markets have underscored the need for
an alternative gas corridor to Europe.
Natural gas imports are likely to occupy an increasingly
central role in Europe's energy portfolio, necessitating
multiple alternatives such as a new Southern Corridor. Europe's
reliance on natural gas imports has been exacerbated by a steep
decline in natural gas production within Europe, Germany's
decision to phase out nuclear power (France, too, is
considering a scaling back of nuclear energy), and opposition
to shale gas in several EU countries. Although Europe's
unconventional shale gas resources could impact Central
European energy markets in the future, the results of
exploration have been uneven, and significant production is not
expected in the near term. Numerous European nations are also
ramping up capacity to import liquefied natural gas (LNG).
Turkey's rapidly growing domestic energy demand has been a
central dynamic to the Southern Corridor and merits more
priority in the U.S.-Turkey bilateral relationship. In
particular, its willingness to allow transit of significant
amounts of natural gas to Europe, even when its own domestic
market could easily consume the gas, has bolstered the
prospects for the Southern Corridor. The small amount of
Turkish trade in Iranian gas is a growing area of concern as
sanctions are further tightened. However, Turkey currently has
no capacity to fully replace Iranian natural gas imports, which
would require both new supplies and new domestic pipeline
capacity to move gas between regions.
Azerbaijan is the pivotal supplier for the Southern
Corridor and is positioned to be a long-term transit hub for
potential trans-Caspian supplies from Turkmenistan and
Kazakhstan. For the past two decades, Azerbaijan's leadership
has made the strategic calculation to use new pipelines to
forge closer ties with the West. BP is the largest foreign
investor and principal operator of Azerbaijan's oil and natural
gas projects, including the major offshore field, Shah Deniz.
The Shah Deniz consortium is scheduled to make a final
investment decision for expansion (Shah Deniz II) by late 2013,
gas from which will be the anchor for expanding the Southern
Corridor to Europe.
With its 2009 Intergovernmental Agreement, the Nabucco
Pipeline had once been envisioned to be the onward Southern
Corridor route to Central Europe from SCP's Turkish terminal.
Though its original concept has faced subsequent delays, the
Nabucco pact was momentous symbolically because, for the first
time, Turkey, other transit nations (Bulgaria, Romania,
Hungary, and Austria), and the EU demonstrated a willingness to
assert their common political interest in natural gas supply
diversification.
In 2011, the Turkish and Azerbaijani Governments seized the
initiative to put forward their own government-backed proposal,
the Trans-Anatolian Pipeline (TANAP), the most significant
development for the Southern Corridor since 2009. TANAP would
replace the portion of the Nabucco Pipeline concept through
Turkey, delivering 10 bcm of Shah Deniz II gas to the Turkish-
EU border and leaving 6 bcm for consumption in the Turkish
market. TANAP's management structure is far simpler than
Nabucco with only two governments driving initial strategic
decisions, and Azerbaijan will invest the majority of capital
required. However, TANAP's terms also have potentially worrying
implications. SOCAR's controlling 51 percent stake raises
concern that Azerbaijani gas may receive priority in TANAP,
potentially precluding westward throughput capacity for
additional trans-Caspian gas from Turkmenistan or Iraq.
From TANAP's terminal at the EU border, a decision must
still be made on the final westward route of this stage of the
Southern Corridor, determining the project's ultimate strategic
value. Two options remain: the Trans-Adriatic Pipeline (TAP)
from Turkey through Greece and Albania and under the Adriatic
Sea to Italy; and the Nabucco West Pipeline, a scaled-back
proposal that follows Nabucco's original route through the EU,
transiting Bulgaria, Romania, Hungary, and delivering gas to
the distribution hub in Austria.
Nabucco West would most clearly advance U.S. foreign policy
interests, directly providing energy to those countries in
Central and Southeastern Europe in greatest need of
diversification away from Russian supply. Specifically, Nabucco
West would introduce international competition in the region
that would improve negotiating posture with Russia, reduce the
potency of potential supply disruptions, and bolster the
political and economic sovereignty of NATO allies and partners.
By contrast, the strategic benefit that the EU and United
States would derive from facilitating a TAP pipeline would be
exceedingly narrow, resulting principally in a gas glut in
Italy. As the pipelines are currently proposed, Nabucco West is
clearly superior to TAP for U.S. foreign policy interests in
the region.
Thus far, the United States Congress has granted a narrow
exemption for the Shah Deniz consortium from financial
sanctions, which have been considered due to the 10 percent
share in Shah Deniz held by the National Iranian Oil Company as
a ``passive investor.'' Congressional support for sanctions
exemptions is based on compelling benefits for U.S. national
security interests, and these interests will be advanced by an
expansion of the Southern Energy Corridor, irrespective of
whether the Shah Deniz consortium selects TAP or Nabucco West.
However, Iran sanctions will inevitably be reviewed and
tightened in the coming months, and the standards for sanctions
exemptions will become increasingly stringent. Selection of TAP
as currently proposed would weaken the argument that Shah Deniz
II and its ancillary projects are of such immense benefit to
U.S. security interests that they should trump further
sanctions against Iran.
Beyond Shah Deniz II gas, securing additional supplies for
the Southern Corridor is crucial. Turkmenistan's conventional
natural gas supply, the world's fourth largest, has high
potential for being joined to the Southern Corridor by
constructing a Trans-Caspian Pipeline from Turkmenistan to
Azerbaijan's energy infrastructure. However, a combination of
inscrutable leadership, geopolitical pressure by Russia, and an
investment climate unfriendly to energy majors has hampered
progress, and the window for Turkmenistan's participation in
the Southern Corridor may be closing. Most critically, the
President of Turkmenistan must be willing to assert his
nation's political independence from Russia by executing the
necessary reforms that will make increased production and
trans-Caspian transit a reality.
The need to embolden former Soviet states in making
strategic energy decisions is not unfamiliar. The United
States, Turkey, and the European Union have a key role to play
in building an international political and commercial coalition
in favor of trans-Caspian natural gas flows. An intriguing
near-term possibility would be for Turkey to purchase Turkmen
gas, possibly through small sub-Caspian Sea connections to
Azerbaijan, which would increase confidence and help meet
Turkey's domestic needs. Concurrently, the United States and
the EU should press ahead on facilitating a longer-term
multilateral Caspian gas transit agreement. Russia could also
be invited to play a constructive role in these talks.
Iraqi gas could also reach Europe through the Southern
Corridor. In 2009, Iraqi Prime Minister Nouri al-Maliki
suggested that Iraq could contribute up to 15 bcm to the
Southern Corridor, but little progress has been made towards
this goal due to deep internal Iraqi disagreements on energy
revenue sharing and flagging progress on domestic
electrification within Iraq. U.S. policy should be under
constant review to ensure that internal political disputes are
not unduly hindering projects beneficial for Iraq, regional
stability, and U.S. private investment.
Elsewhere, Kazakhstan already participates in the Southern
Corridor by exporting oil trans-Caspian and then through the
Baku-Tblisi-Ceyhan pipeline, but its 1.9 tcm of natural gas
reserves remain relatively underdeveloped. In the Eastern
Mediterranean, discussions on Southern Corridor linkages should
also begin with Israel, given its abundant reserves, ready
access to capital, and strong rule-of-law protections.
The United States, too, has an opportunity to directly
address the energy insecurity of our NATO allies in Europe.
U.S. shale gas reserves have already transformed European gas
markets since LNG previously destined for the United States has
now been made available for Europe. The United States can do
much more to allow LNG trade with NATO allies in need of supply
diversification and, in doing so, to promote economic growth in
the United States. The LNG for NATO Act, introduced by Senator
Lugar, would achieve this objective by placing NATO allies on
an equal footing with other free trade partners with respect to
access to U.S. natural gas trade.
Extension of the Southern Corridor is particularly
advantageous now. Some critics may argue that the Southern
Corridor should be a lower priority: U.S. shale gas and global
LNG trade is producing more market liquidity, thus tending to
lower prices and improve Europe's negotiating position with
Russia. Russia's Gazprom has been forced to change its domestic
strategy, including abandoning its flagship Shtokman project in
the Arctic, and it has had to contend with plummeting market
value and a new EU antitrust investigation. These trends may or
may not last, but their existence today gives the United States
an unprecedented opportunity to advance broad natural gas
diversification and break Russia's control over European gas
markets. The Southern Corridor and approval of U.S. LNG exports
are vital for achieving these strategic objectives in Central
and Southeastern Europe and Turkey.
These many dynamics to the Southern Corridor and Eurasian
energy security will require constant attention by the United
States. Thus, the preliminary State Department decision to
discontinue the dedicated position of U.S. Special Envoy for
Eurasian Energy Security, with direct reporting authority to
the Secretary of State, is particularly disappointing and
threatens to undermine U.S. engagement. Indeed, the need for
continuing the Special Envoy position was roundly supported in
staff's discussions with NATO allies and partners throughout
the region. The State Department should restore the dedicated
Special Envoy position to ensure that U.S. energy diplomacy can
reach the senior levels of government in the Caspian region and
within the U.S. bureaucracy. Much is expected of U.S.
leadership, and exceeding those expectations comes at little
cost but offers great gains.
U.S. Interests in the Southern Energy Corridor
U.S. strategic interests in linking the nations of the
Caspian Sea region with European and global markets have long
been recognized and supported on a bipartisan basis. Energy is
the economic lifeblood of many NATO allies and partners in the
Europe and Eurasia region, and dependency on Russia for energy
imports or exports remains a central detriment to those
nations' sovereign independence in policymaking, economic
development, and security.
Development of a Southern Corridor to link the Caspian to
Europe with oil and natural gas pipelines was an early element
of U.S. strategy. The first stage was achieved with the
completion of the Baku-Tblisi-Ceyhan (BTC) oil pipeline and the
South Caucasus Pipeline (SCP) for natural gas. Both pipelines
carry energy resources from Azerbaijan's offshore fields to
Georgia and onward to Turkish markets for natural gas and to
global markets for oil. The BTC pipeline has also served as the
first non-Russian energy bridge across the Caspian, providing
market access for trans-Caspian tankers carrying Kazakh oil.
This report examines the second stage of Southern Corridor
development. Utilizing expanded production of natural gas in
Azerbaijan as a supply anchor, this stage envisions the
expansion of the South Caucasus Pipeline, a new pipeline route
across Turkey, and construction of one or more pipelines from
the Turkish border further into Europe. The United States and
our allies have also pressed for additional gas to supply the
Southern Corridor from Turkmenistan and Iraq.
The United States, regional NATO allies, and other
production and transit states have all reaped benefits from the
first stage of the Southern Corridor, and those benefits would
be enhanced significantly with successful expansion of natural
gas trade.
First, regional energy diplomacy has opened a new venue for
U.S. engagement in the region. The Southern Corridor has
strengthened ties, in particular, with Azerbaijan, a secular
majority-Shi'a Muslim nation that borders Iran, and has
bolstered the foundation for cooperation on non-proliferation
through Nunn-Lugar Global and counter-terrorism, even as
Azerbaijan must still make progress on civil society and
governance issues. Moreover, the entrance of numerous
multinational energy companies has exposed the governments in
the Caspian region to the importance of rule-of-law and
investment climate issues.
Second, the Southern Corridor has provided post-Soviet
nations with internal strength to assert their independence
from Russia. Additional states not currently connected to the
Southern Corridor remain vulnerable. Several NATO allies have
been susceptible to energy supply cutoffs and political
manipulation from their over-reliance on Russia, and the
Southern Corridor, along with a broader diversification and
energy efficiency strategy, will alleviate this dependence. For
energy producing nations in the Caspian basin, the Southern
Corridor offers export diversity and stable consumer markets in
Europe to ameliorate the effect of the whims of Russian energy
policy.
Third, the Southern Corridor could, somewhat paradoxically,
encourage the Russian energy sector to assume a more market-
oriented trajectory. Even as the Kremlin strengthens control
over its state-dominated energy industry and uses the Nord
Stream and proposed South Stream pipelines to tighten its grip
on Europe, if energy becomes less effective as a tool of
political coercion, the Russian energy market will have a
stronger chance of reorientation towards market dynamics. This
development would be beneficial to the United States, Europe,
and Russia since market-led Russian economic growth will
encourage stability. With respect to the Southern Corridor,
Russia could even be granted the chance to be a constructive
partner by bidding its natural gas in competition for excess
pipeline capacity.
Fourth, the Southern Corridor will further isolate Iran.
While Iran's natural gas exports are relatively small compared
to oil (the latter is currently subject to U.S. sanctions), gas
sales nonetheless provide economic receipts and political
leverage, particularly in relation to Turkey in winter.
Fifth, future pipelines linking the Middle East to the
Southern Corridor could foster cooperation and stability. In
the future, gas from Iraq, Egypt, and Israel, and perhaps other
Eastern Mediterranean countries could all be linked to Europe,
creating mutual dependence and creating new export routes
beyond the Persian Gulf.
Extension of the Southern Corridor is particularly
advantageous now. Some critics may argue that the Southern
Corridor should be a lower priority: U.S. shale gas and global
LNG trade is producing more market liquidity, thus tending to
lower prices and improve Europe's negotiating position with
Russia. Russia's Gazprom has been forced to change its domestic
strategy, including abandoning its flagship Shtokman project in
the Arctic, and it has had to contend with plummeting market
value and a new EU antitrust investigation. These trends may or
may not last, but their existence today gives the United States
an unprecedented opportunity to advance broad natural gas
diversification and break Russia's control over European gas
markets. The Southern Corridor and approval of U.S. LNG exports
are vital for achieving these strategic objectives in Central
and Southeastern Europe and Turkey.
The U.S. Special Envoy for Eurasian Energy Security
Regrettably, following completion of the first stage of the
Southern Corridor, U.S. energy diplomacy in the follow-on
stages lost priority. While a few talented U.S. diplomats kept
the project moving forward with suppliers in the Caspian and
consumer nations in Europe, a diminishment of high-level
attention was incongruous with the key U.S. national interests
at stake and ignored the reality that energy decisions in the
Caspian region are made at the most senior levels of
government.
In 2006, Senator Lugar, as committee Chairman, authored and
led broad bipartisan support for the Energy Diplomacy and
Security Act, a bill designed to invigorate diplomatic
engagement on energy issues throughout U.S. foreign policy
around the world. In December 2007, portions of that bill
became law, leading to the creation of the post of
International Energy Coordinator and eventually precipitating a
2011 State Department reorganization to establish a Bureau of
Energy Resources (ENR), which is ably led by Ambassador Carlos
Pascual.
Even as these measures enhanced U.S. energy diplomacy
broadly, Senator Lugar pushed for breakout progress on high
priority areas, including the Southern Corridor. He led
Congressional Delegations focusing on energy to Azerbaijan,
Brussels, France, Georgia, Germany, Romania, Russia,
Kazakhstan, Turkey, Turkmenistan, and Ukraine (see Appendix I)
and called for energy security to be incorporated into NATO's
Article Five mutual defense commitment (see Appendix II). In
partnership with then-Senator Joseph Biden, Senator Lugar
encouraged the Bush Administration to re-establish high-level
U.S. engagement on Eurasian energy security (see Appendix III).
In response, Secretary of State Condoleezza Rice named
Ambassador C. Boyden Gray as Special Envoy for Eurasian Energy
Affairs. Secretary of State Hillary Clinton continued and
enhanced this position by appointing a close confidant,
Ambassador Richard Morningstar, whose outstanding work led to
major breakthroughs in recent years, including the 2009 Nabucco
Intergovernmental Agreement.
The Office of the Special Envoy assured governments in the
region, and the U.S. Congress, that the United States was
engaged on Eurasian energy security at the most senior levels
with direct reporting authority to the Secretary of State.
Beyond the Caspian region, the Special Envoy played a critical
role in advocating for internal energy reform in Europe, as
well as encouraging the EU's external energy diplomacy. The
Special Envoy position also benefitted from the ability to take
ad hoc trips to specific capitals when additional prodding was
needed, as opposed to being permanently based in one capital as
with bilateral U.S. ambassadors.
Regrettably, the State Department has recently indicated
that it will not retain the dedicated Special Envoy position
but that the Assistant Secretary for ENR will be dual-hatted as
Special Envoy. The ENR Bureau serves critical roles in ensuring
that energy security is systematically prioritized across U.S.
foreign policy and bolstering needed energy-related expertise
to meet U.S. security and economic interests. Yet, it is a
small bureau with global responsibilities.
The preliminary State Department decision to not re-appoint
a Special Envoy for Eurasian Energy threatens to undermine
recent progress on the Southern Corridor and could be
interpreted as an attempt by the United States to retrench from
many years of strong engagement. Indeed, the need for high-
level U.S. engagement was roundly supported in discussions
throughout the region. As one foreign official said, ``There is
a perception that U.S. engagement is fading away, so not having
a Special Envoy would confirm this view.'' Another foreign
official noted that Secretary Clinton and Ambassador
Morningstar were perceived to be carrying the entire energy
security portfolio for the U.S. Government, with scant
engagement from the White House: ``With the Obama
Administration, we don't have the leadership we had under
President Clinton for energy in this region,'' one official
remarked. Another European official noted that the European
Union cannot replace the United States on these energy issues,
given that the EU's energy policy is fragmented and backed only
by soft power, underscoring the need for U.S. energy engagement
in Brussels and European capitals. Much is expected of U.S.
leadership, and exceeding those expectations comes at little
cost but offers great gains.
Although it does seem logical to house the Office of the
Special Envoy in the new ENR Bureau, this aspect of the
reorganization must meet at least three criteria to be
successful. First, high-level representation is essential to
access the decision-making levels of government in the region.
If a U.S. energy envoy is not speaking directly with presidents
or prime ministers on a regular basis, then the mission will
fail. Second, continuing the U.S. role as key arbiter in the
region requires shuttle diplomacy and constant on-the-ground
care in order to cut through misinformation and misperceptions
between capitals. The Assistant Secretary for ENR will be busy
tending to a demanding global portfolio, and our bilateral U.S.
ambassadors have a full-range of bilateral issues on their
agendas and lack the mandate for this type of diplomacy.
Finally, the Special Envoy must be able to ensure the Southern
Corridor remains on the agenda at highest levels of the State
Department, which is assisted by direct reporting authority to
the Secretary.
Recommendation: Restore the dedicated position in the
State Department for U.S. Envoy for Eurasian Energy
Security. While no doubt led capably by an Assistant
Secretary, the ENR Bureau will face myriad challenges,
detracting from the high-level and consistent attention
required to facilitate the conclusion of the Southern
Corridor and secure additional sources of gas from
Turkmenistan, Iraq, and beyond. Energy decisions in the
Caspian region are made by the senior national
leadership, making it all the more important to have an
interlocutor from the United States with ambassadorial
rank who reports directly to the Secretary of State.
Finally, an Envoy based outside of the region possesses
a better ability to objectively assess progress and
avenues for U.S. advocacy compared to U.S. ambassadors
in the region, who, despite their competence, will
necessarily be focused on a wide array of bilateral
issues.
Connecting the Caspian and Europe\1\
European Natural Gas Vulnerability
The European Union (EU) is the world's largest importer of
energy,\2\ and its overall energy and climate strategy has
exacerbated its reliance on natural gas imports. Due to
ambitious carbon reduction goals, EU member states are shifting
consumption away from oil and coal. Increased dependence on
natural gas imports has been furthered by declining indigenous
gas production as well as certain national decisions, such as
Germany's decision to phase out nuclear power by 2020. European
shale gas may offer a domestic alternative in the future, but
progress has been uneven and faces political headwinds
exemplified by French and Bulgarian prohibitions.\3\ Meanwhile,
national capitals have historically encumbered EU efforts to
unbundle natural gas markets, thereby reducing pricing and
supply benefits of competition. For example, lack of price
competition in Italy is partly driving rivalry on the future
destination of Caspian gas (discussed below).
EUROPEAN AND OTHER CONSUMPTION OF RUSSIAN NATURAL GAS (PERCENTAGE)
Natural gas is generally traded in regional markets under
long-term contracts linked to global oil prices, with European
Union import supplies dominated by Russia, Norway, and Algeria.
However, European markets are slowly evolving with the rise of
spot markets, which are breaking traditional natural gas
pricing linkages to oil prices. A major factor in this dynamic
is the rise of shale gas in the United States. Liquefied
natural gas once destined for U.S. markets is now seeking new
consumers, and Europe is attractive for shipments via tanker
from diverse locations in Africa and the Middle East. Even
Gazprom has been forced to begin renegotiating rates in
selected European markets. Yet, the European market is not
fully integrated for pricing or trade, so many nations,
particularly Central and Southeastern European countries, face
the cold reality of ongoing over-dependence on Russia.
Among EU countries, Austria, Bulgaria, the Czech Republic,
Estonia, Finland, Latvia, Lithuania, Poland, and Slovakia all
depend on Russia for over 60 percent of their gas imports; EU
aspirants such as Moldova, Turkey, and Ukraine rely on Russia
for over 65 percent of their imports. But instead of quietly
capitalizing on its position as supplier of 36 percent of the
European Union's gas, Russia has undertaken a series of
astonishingly antagonistic policies, which produce a compelling
case for Europe and the United States to take far-reaching
steps to reverse Europe's reliance on Russian gas.
For many years, Russia exploited its ability, quite
literally, to freeze a nation's population and economy. Between
1998 and 2004, Russia curtailed or cut off energy supplies
nearly a dozen times to influence the sale of Lithuanian and
Latvian energy infrastructure to Russian companies. In 2006,
Russia undertook a barrage of energy intimidation against
nearly every one of its neighbors. After Lithuania declined to
sell certain oil facilities to a Russian company in favor of a
Polish one, Russian energy supplies were cut due to ``technical
difficulties.'' Moldova and Georgia faced an ominous Russian
demand that same year: pay double the price or have your gas
cut off in the cold of winter; Moldova would not initially
accede and had its gas cut temporarily.
Most infamously in 2006 and 2009, Russia cut gas supplies
to Ukraine in the middle of winter following a dispute over gas
prices, debts, and broader political disagreements (and
threatened to take similar action in other years). As a major
transit country, cutting off gas to Ukraine had ripple effects
throughout Central and Western Europe. In 2008, Russia cut
supplies to the Czech Republic the day after Prague agreed to
host a U.S. missile defense radar on its territory. In 2010,
Russia halted gas flows to Belarus amid a purported pricing
dispute, affecting gas supplies to Poland, Germany, and
Lithuania and then bought Beltransgaz in late 2011, giving
Gazprom control of major Belarusian pipelines. Also in 2010,
Russia coerced a 32-year lease extension for its Black Sea
Fleet in Crimea in exchange for a $40 billion discount to
Ukraine on gas over 10 years. Several European nations,
including Bulgaria, Moldova, Hungary, Croatia, Greece, and the
Czech Republic, face a unique window of vulnerability given
that they will all experience an expiration of certain long-
term contracts with Gazprom in the next five years (before
political diversification would occur through the Southern
Corridor in 2017) and may be forced to again be locked into
long-term contracts with Russia.
Across Europe, Russia has sought to expand its monopolistic
position by seeking to purchase distribution and storage
infrastructure. Gazprom has also developed business linkages
with many major European oil and gas companies. Although this
is expected (and can have certain benefits) due to Russia's
massive oil and natural gas reserves, policymakers should
recognize that these arrangements inevitably create internal
pressures on those companies to avoid projects outside of
Russia that might not be viewed favorably by the Kremlin.
Furthermore, Gazprom's insistence on long-term contracts with
rates indexed to oil prices has created acrimony with European
consumers as prices on the spot gas markets across Europe have
fallen well below global oil prices.
Meanwhile, Russia's planned South Stream pipeline across
the Black Sea to Bulgaria is widely seen as an attempt to
stymie Europe's efforts at energy diversification towards
Caspian and Middle Eastern gas. The principal rival to the
Southern Corridor for natural gas, South Stream is a
technologically complex and massively expensive proposal
(costing an estimated $21 billion) that has the personal
backing of Russian President Vladimir Putin, who presided over
its ground-breaking on December 8, 2012. South Stream would
stretch from Russia under the Black Sea to Bulgaria with
northward connectors to Serbia, Hungary and Austria; and
southward connectors to Greece and Italy. Few interlocutors
possessed concrete details on South Stream, but it appears that
South Stream would by no means preclude the Southern Corridor
and itself faces several major economic and regulatory
obstacles.\4\ South Stream comes on the heels of Nord Stream's
direct sub-Baltic Sea connection of Russia and Germany, which
was viewed by some in the region as a move to isolate Poland
and others.
Policy Response by the Euro-Atlantic Community
Russian provocations in the mid-2000s exposed that the
European Union and United States had few tools to come to the
energy aid of allies and partners in the region. In recent
years, however, the Euro-Atlantic community has begun to take
more concerted action.
The EU has deployed an increasingly robust internal policy
toward energy security reform and strengthened its resolve to
respond to Russia's energy intimidation. In 2011, the EU took a
decision that would force energy companies operating in Europe
to unbundle their pipeline operations from their downstream
sales companies, which may force Gazprom to sell equity in many
distribution networks; last year, the EU invalidated Gazprom's
acquisition of a 50 percent stake of Central European Gas Hub
in Baumgarten, Austria (the very hub at which Southern Corridor
gas may arrive). The EU has also sought to fully liberalize the
internal European energy market by 2014, to connect all EU
states to a common grid by 2015, and to build a series of gas
interconnectors (with progress particularly in Hungary) to
create fluid regional markets instead of isolated national spot
markets dependent on one supplier. The European Commission also
recently opened an investigation into Gazprom's anti-
competitive practices in Europe, including allegations of
having ``divided gas markets by hindering the free flow of gas
across member states'' and ``prevented the diversification of
supply of gas.''
U.S. energy policy can also address Europe's gas
vulnerability through the export of U.S. liquefied natural gas
(LNG) to countries in need (discussed at length below). Europe
relied on LNG for about 26 percent of its gas imports in 2011,
but this is expected to increase as additional LNG import
terminals and interconnections are being built throughout
Europe. Although LNG remains a relatively more expensive
solution than gas delivered via pipeline, it is becoming
increasingly economic and oftentimes more reliable than
pipelines, whose taps can easily be switched off. With a view
toward trans-national planning, strategically placed LNG
terminals in the Baltics, Poland, Croatia, and Bulgaria, along
with expanded storage capacity and pipeline network
recalibration, would be particularly useful.
The United States and the European Commission have also
worked cooperatively on various elements of the Southern
Corridor for oil and natural gas as means of diversification.
The first major success was opening of the Baku-Tbilisi-Ceyhan
(BTC) pipeline. The EU and United States also joined in
encouraging the 2009 signing of the Nabucco Intergovernmental
Agreement between Turkey, Bulgaria, Romania, Hungary, and
Austria, solidifying the political foundation for a natural gas
corridor. Furthermore, in September 2011, the EU Council
provided a mandate for the European Union to facilitate an
agreement on trans-Caspian energy shipments.
Some skeptics of the Southern Corridor refer to ``marginal
downstream economics.'' Under this reasoning, high transport
costs associated with a lengthy pipeline, the forced
renegotiation of Gazprom's long-term oil-indexed contracts in
Europe, global LNG trade, and the potential for shale gas in
Europe all suggest falling gas prices in the coming years,
potentially washing out any margins for Caspian gas. However,
for the foreseeable future, pipeline transit remains more
economical than LNG, and shale gas in or near European markets
is not likely to be produced in quantities ready for export
for, potentially, over 20 years.\5\ In light of the EU's carbon
emissions decisions, investment in natural gas infrastructure
for Europe appears to be a safe bet for decades to come.
Azerbaijan: The Southern Corridor's Supply Anchor
Fully committed to energy trade with the West, Azerbaijan
is the pivotal supplier for the Southern Corridor and is
positioned to be a long-term transit hub for potential trans-
Caspian supplies from Turkmenistan and Kazakhstan. For the past
two decades, Azerbaijan's leadership has made the strategic
calculation to use new pipelines to forge closer ties with the
West, a decision that was by no means inevitable given the
substantial cost of vast new pipeline infrastructure and
geopolitical pressures from neighboring Iran and Russia.\6\
However, Azerbaijan's main alternative to westward trade would
be with Russia, which is not an attractive prospect: as one
senior official said, ``gas is a matter of survival for our
country'' because of the independence it provides.
Azerbaijan has developed close ties with BP, which has
become its largest foreign investor and operates several key
offshore fields, terminals, and pipelines from Baku. Most
importantly for the Southern Corridor under examination here,
BP operates the Shah Deniz\7\ offshore gas field and the South
Caucasus Pipeline (SCP), which has carried natural gas since
2006 from Baku, through Georgia, to the Erzurum terminal in
Turkish Anatolia. In addition to Shah Deniz' current 9 bcm gas
production capacity, the Shah Deniz Consortium is scheduled to
make a final investment decision of approximately $23 billion
(upstream) for the expansion of Shah Deniz field development
(known as Shah Deniz Phase II) by late 2013, although several
interlocutors foresaw likely delays until the end of 2013. That
investment is expected to produce an additional 16 bcm by 2017
that will be transported to Turkey (6 bcm) and onward to other
European nations (10 bcm). Although technically a decision for
the entire Shah Deniz consortium, Azerbaijan's State Oil
Company (SOCAR) and BP will play a central role in selecting
the pipeline routes that will take gas to Europe.
Azerbaijan is also expected to experience additional
natural gas production in new offshore fields, strengthening
its position as the Southern Corridor linchpin for perhaps
several decades. France's Total has announced discovery of 300
bcm of gas in the Absheron offshore field, which is expected to
begin producing in 2020. Azerbaijan may soon tender a new
production sharing agreement for deepwater segments of the
Azeri, Chirag, and Gunashli fields (``ACG Deep''). By 2030,
analysts estimate Azerbaijan alone could produce 30-50 billion
cubic meters annually.\8\
Some interlocutors noted that the presence of new
international oil company entrants into Azerbaijani production
may bring helpful competition and temper several increasingly
acrimonious disputes between the Azerbaijani Government and BP.
In October 2012, Azerbaijani President Ilham Aliyev took the
major step of publicly rebuking BP for its ``numerous
mistakes'' resulting in underperforming oil extraction, which
is essential to Azerbaijan's finances (as the Azerbaijani
saying goes, oil is about money and natural gas is about
politics).\9\ Although much of the rhetoric on both sides of
the argument is political positioning, the uncertainty may
ricochet to Shah Deniz II (if investors lose confidence) and to
trans-Caspian trade (if the Turkmenistan Government sees mostly
tumult in the Azerbaijani energy sector).
Indeed, this dispute is emblematic of the increasingly
tense relationship between the Government of Azerbaijan, SOCAR,
and BP. At the time of the Staffdel visit to Baku, a similarly
acrimonious dispute was underway between BP and SOCAR on the
engineering options available to upgrade the South Caucasus
Pipeline (SCP) that will be necessary to accomodate Shah Deniz
II gas supply.\10\ Although the SCP dispute has reportedly been
resolved, the fact that a technical dispute could so easily
flare into a crisis between BP and SOCAR is cause for concern
with the myriad investment decisions currently pending.
Recommendation: Encourage SOCAR to participate more
fully in technical and operational discussions in Shah
Deniz and other field development to minimize future
miscommunications.
Beyond Azerbaijani natural gas (1.3 trillion cubic meters,
or tcm, of reserves), other regional powers, beginning with
Turkmenistan (24.3 tcm) and possibly including Kazakhstan (1.9
tcm) and Uzbekistan (1.6 tcm), could transform Azerbaijan into
a key gas transit hub as well.\11\ However, Azerbaijan has yet
to fully embrace this prospect and has sent mixed signals on
its willingness to allow other nations' natural gas to compete
with its own in the Southern Corridor. Without guaranteed
transit access, a trans-Caspian pipeline (discussed further
below) is a non-starter.
In light of the key role for Azerbaijan in the Southern
Corridor over the coming decades, as well as regional security
concerns, the United States has dedicated substantial resources
to critical energy infrastructure protection and interdiction
of illicit materials. For example, the Nunn-Lugar Global and
other Defense and State Department programs have provided
radars to monitor offshore activities near Caspian energy
platforms, bolstered Azerbaijani Coast Guard assets, and
assisted in the construction of a maritime command-and-control
center and a naval port.\12\ Although no overtly hostile
activity has occurred in the Caspian in recent years, the
Caspian littoral nations have yet to delimit the Caspian's
waters, leading to several energy exploration-related disputes
and military exercises.\13\
Recommendation: The United States should ensure that
the Ambassadorial post in Baku does not remain absent
for extended periods of time. The U.S.-Azerbaijan
relationship benefits from a solid anchor based on
energy, non-proliferation, and counter-terrorism
cooperation, as well as skilled Ambassadors such as
Ambassador Richard Morningstar and his predecessor
Ambassador Matthew Bryza. However, the ambassadorial
post has previously been vacant for extended periods of
time, which has caused confidence in the relationship
to suffer and undermined U.S. interests in the region.
TANAP Overtakes Nabucco
The June 2012 signing of the Trans-Anatolian Pipeline
(TANAP) Intergovernmental Agreement by the Governments of
Azerbaijan and Turkey has been the most significant development
for the Southern Corridor since 2009.
Signing of the 2009 Nabucco Intergovernmental Agreement was
a tremendous step forward for the Southern Corridor concept
that transcended the benefits of any particularly transit
route, including the proposed Nabucco Pipeline itself.\14\
First, by agreeing to allow substantial amounts of natural gas
to simply transit its territory, Turkey set aside the policy
that required either the purchase of all of the gas for its own
onward resale or for Turkey's own domestic consumption. Second,
the Nabucco Agreement demonstrated that European nations were
finally willing to assert their common political interest in
natural gas supply diversification.
Despite the unprecedented political support enjoyed by the
Nabucco Consortium,\15\ culminating in the 2009
Intergovernmental Agreement, the project has proven vulnerable
to infighting among the consortium members (each previously
wielding veto authority); disputes with the BP-led Shah Deniz
consortium; and divide-and-rule tactics employed by the
Kremlin. As one interlocutor said, ``all they [Nabucco] do is
fight with each other.'' The situation was not helped by Turkey
and Azerbaijan going rounds on pricing terms. Some level of
uncertainty has been justified given that the Shah Deniz II
full field development is expected to produce only 16 bcm
during its initial stages beginning in 2017, while Nabucco
itself was originally envisioned to have a 31 bcm capacity.
While supplies of natural gas from Turkmenistan (whose
President had indicated willingness to participate) and Iraq
(whose Prime Minister pledged to deliver 15 bcm to the Southern
Corridor) could potentially fill the extra capacity,
insufficient tangible progress was made to secure those
additional sources.
As the Nabucco ``classic'' original proposal stalled, the
Governments of Turkey and Azerbaijan began negotiations
themselves on two alternatives to the Nabucco trunk line across
Turkey: an upgrade of existing infrastructure operated by the
Turkish Petroleum Pipeline Corporation (BOTAS) or a new
pipeline called TANAP. Given the limited capacity of the BOTAS
system, the two governments in June 2012 selected TANAP, which
will initially carry 16 bcm and will be scalable up to 60 bcm
over the coming decades as additional Azeri gas and other
sources become available. Of the 16 bcm available initially
from Shah Deniz II, Turkey will purchase 6 bcm for domestic
consumption, leaving 10 bcm for onward supply to Europe.
Compared to the Nabucco ``classic'' proposal, TANAP's
management structure is far simpler with only two governments
driving initial strategic decisions and Azerbaijan investing
the majority of capital required.
The next steps for TANAP will be the ratification of the
Intergovernmental Agreement by the Turkish parliament
(Azerbaijan ratified the agreement in November 2012) and
finalization of equity sales. Initially, TANAP's equity is
split between SOCAR (with an 80 percent share) and BOTAS and
Turkish Petroleum (TPAO) dividing a 20 percent share. It is
expected that Shah Deniz consortium members BP, Statoil, and
Total will purchase part of SOCAR's stake, leaving the
Azerbaijani state company a controlling 51 percent stake in
TANAP.
Shah Deniz consortium members have expressed several
concerns about TANAP. One member contended that it will not
make a final investment decision in Shah Deniz II unless it
will be guaranteed use of existing BOTAS pipelines in case
TANAP is not completed in time for Shah Deniz II gas to come
online in 2017.\16\ Given previous delays by Turkey and
Azerbaijan in finalizing natural gas agreements (combined with
the possibility of a reorganization of BOTAS), concerns about
delays are reasonable. However, absent substantial additional
capital, the BOTAS system itself is not a viable option, and it
is unlikely that Shah Deniz consortium members would be willing
to pay, even on a temporary basis, the exceptionally high
tariff rates required to finance those upgrades.
Recommendation: Turkey should plan, as a contingency,
to upgrade the existing BOTAS system to transport Shah
Deniz gas in 2017, in case TANAP is not completed on
time.
Some Shah Deniz members complain that they have been kept
in the dark about the likely tariffs and technical engineering
of TANAP, which should be disclosed and analyzed by the end of
2012 if a timely final investment decision in Shah Deniz II is
to occur. Indeed, the Shah Deniz consortium members, as
potential equity partners of TANAP, must also be able to agree
to all of TANAP's terms, and private entities will often
require more ambitious returns on investment than state-backed
companies. This could remain a critical point of contention, as
other officials involved in TANAP have insisted that tariff
negotiations will not occur until SOCAR sells its TANAP equity
shares to fellow Shah Deniz consortium members in early 2013.
TANAP's terms also have potentially worrying implications
for future gas supplies for the Southern Corridor. Given that
Azerbaijan's SOCAR will retain a controlling 51 percent stake
in TANAP, several interlocutors expressed concern that SOCAR
will exercise a right of first call on TANAP's capacity for
Azerbaijani gas. In other words, all Azerbaijani gas may
receive priority in TANAP, potentially precluding westward
throughput capacity for additional trans-Caspian gas from
Turkmenistan or from Iraq and raising concerns in Europe about
lack of supply price competition. Absent a guarantee from
Azerbaijan that Turkmen gas would have access, trans-Caspian
flows are a non-starter, which also will weaken Azerbaijan's
long-term economic and geopolitical position vis-a-vis energy
supplies. Securing such a guarantee from Azerbaijan should be a
top priority for U.S. diplomats.
Recommendation: Azerbaijan should guarantee that
Turkmen gas, as well as additional future trans-Caspian
and Iraqi sources, would have access to capacity in the
TANAP and SCP pipelines. Some portion of pipeline
capacity should be open to competitive bidding.
Turkish Domestic Energy Dynamics
Turkey's domestic energy situation remains a central
consideration in the development of the Southern Corridor and
warrants a higher priority in the bilateral relationship.
Turkey's willingness to allow transit of significant amounts of
natural gas to Europe, even as its own domestic market could
easily consume the gas, has been a key to progress in the
Southern Corridor. Turkey is expected to consume approximately
48 bcm of gas in 2012, but demand is expected to exceed 60 bcm
within ten years. With few known indigenous oil and natural gas
resources, Turkey relies on imports for 90 percent of its oil
and nearly 100 percent of its gas demand. Meanwhile, Turkey has
little natural gas storage capacity, which weakens its ability
to manage supply disruptions and suggests that it will continue
to need slack in its LNG import capacity to compensate for
unexpected disruptions.
Turkey is eager to secure additional sources of gas from
Turkmenistan, Iraq, and others and would have readily purchased
all 16 bcm of Shah Deniz II gas that will be available in 2017
instead of agreeing with SOCAR to send 10 bcm onward to Europe.
Currently, Turkey imports most of its gas from Russia, arriving
either via Bulgaria and Romania (16 bcm) or across the Black
Sea in the Blue Stream pipeline (10 bcm). In the past, Russia
has stepped in to assist Turkey with additional gas flows in
times of shortage. Turkey also takes 7 bcm of gas from
Azerbaijan via the South Caucasus Pipeline, and it imports
through a single LNG terminal connected to the Mediterranean
for Algerian and Nigerian gas. BOTAS has announced the
development of three additional LNG projects to increase its
import capacity in 3-4 years.
Turkey imports the remaining 20 percent of its gas from
Iran pursuant to a 1996 long-term contract that ends in 2026.
Due to the exorbitant rate, poor quality gas, and unreliability
of Iran (Iran has cut supplies in times of its own domestic
need during winter), Turkey has on several occasions sought to
re-negotiate the contract, which Iran has rejected. The parties
are currently in international dispute resolution over price
renegotiation.
As the international community seeks to put more pressure
on Iran's nuclear weapons ambitions, Turkish trade in Iranian
gas is a growing area of concern in Ankara--and should be in
Washington. The Council of the European Union took a decision
in October 2012 to apply further financial sanctions against
Iran and noted in its directive that ``the purchase, import or
transport of natural gas from Iran should be prohibited,''
which could potentially lead to sanctions against those who
``provide, directly or indirectly, financing or financial
assistance . . . related to the import, purchase or transport
of Iranian natural gas.'' \17\ Apart from complicating Turkey's
bid to join the EU, this provision could draw Turkey itself
directly into the EU's sanctions regime if Turkey cannot
certify that no Iranian gas is commingled with the Southern
Corridor supply.
The United States Congress is also likely to continue
pressing for strengthened sanctions against Iran. While the
amount paid by Turkey for Iranian gas is meager (compared to
Iran's oil revenues paid partly by several other U.S. allies),
natural gas sanctions will likely be part of future
Congressional debate. However, Turkey currently has no capacity
to fully replace Iranian natural gas, which would require both
new supplies and new domestic pipeline capacity to move gas
between regions. In any case, contract terms may require Turkey
to pay for the Iranian gas even if it does not accept delivery.
Unfortunately, efforts begun under the Bush Administration to
jumpstart alternative energy investments in Turkey have
atrophied.
Recommendation: Turkey should expand its LNG import
capacity, upgrade internal pipeline connections, import
gas from Turkmenistan (see below), and invest in
alternative energy supplies to alleviate its high
dependence on Iranian gas, which could soon be
subjected to international financial sanctions. The
United States should reinvigorate technical assistance
and commercial support for investment in these
projects, and facilitate financing through actions of
the U.S. Trade and Development Agency, Overseas Private
Investment Corporation, and international financial
institutions.
Security for European Allies: Nabucco West vs. Trans Adriatic Pipeline
At the western end of the Southern Corridor, a final
decision must still be made on the initial route of natural gas
(sourced in the Caspian, transiting the SCP, most likely
transiting TANAP) onward from the Turkish-EU border. By June
2013, the BP-led Shah Deniz consortium is scheduled to decide
between two alternative pipeline proposals that will determine
the ultimate destination of Caspian gas and, thus, the overall
strategic value of the Southern Corridor.
One option is the Trans-Adriatic Pipeline (TAP), stretching
from Turkey through Greece and Albania and under the Adriatic
Sea to Italy. A second option is the Nabucco West pipeline, a
scaled-back proposal following Nabucco's original route through
the EU, transiting Bulgaria, Romania, Hungary, and delivering
to the gas distribution hub in Austria. These two options
remain after the Shah Deniz consortium eliminated two pipeline
options, the Interconnector Turkey-Greece-Italy (ITGI) \18\ and
the Southeastern Europe Pipeline (SEEP) \19\ in February 2012
and June 2012, respectively.
Without doubt, TAP has advantages. With an initial capacity
of 10 bcm, it is likely to be less costly: it is shorter than
Nabucco West and most of its length will lie under the
Adriatic, requiring less complex engineering. Compared to
Nabucco West, TAP also benefits from a less unwieldy management
structure of only three energy companies, Swiss EGL, German
E.ON, and Norwegian Statoil (a Shah Deniz partner). TAP could
help diversify Albanian energy supplies, and further
connections to other Balkan nations in need of diversification
would be technically feasible;\20\ however, these additional
regional connections are not part of TAP's current proposal and
have no ready sources of financing. TAP could also encourage
competition in the Italian market, prodding sorely needed
regulatory reforms. Although TAP has suffered from a relative
lack of political clout, this was partly remedied by the
signing of a tripartite Ministerial Agreement on September 28,
2012 between Albania, Italy, and Greece. Due in large part to
these attributes, some Shah Deniz Consortium members assert,
without providing specific details, that TAP is commercially
preferable absent a cost revision in the Nabucco West proposal.
However, the strategic benefit that the EU and United
States would derive from facilitating a TAP pipeline would be
exceedingly narrow, resulting principally in a gas glut in
Italy. In fact, some supporters of TAP argue that the principal
benefit would be the promotion of price competition in Italy
and enabling more (likely Russian) gas supply to flow to
Western European markets. However, genuine price competition
depends on structural reforms in Italy's internal market, not
simply additional supply, and Western Europe (particularly
Italy) already benefits from supply diversification, as well as
the build-out of renewable energy. Albania, Greece, and Italy
all rely on Russia for less than 46 percent of their gas
(Albania does not purchase any Russian gas currently). By
virtue of geography, Western Europe will have ready access to
new supplies of North African gas following Arab Spring
reforms, as well as unconventional gas potential in Algeria.
With a change of political leadership in Italy, it is also
worth re-examining whether the Government will be more
independent from Russian energy policy, and whether any such
changes affect the cozy relationship between Italian and
Russian energy and finance companies.
Nabucco West would trace the same route of Nabucco
``classic'' from the Bulgarian-Turkish border and have a 10 bcm
capacity, scalable to 23 bcm pending further gas supplies. In
contrast to TAP, Nabucco West would offer direct and immediate
diversification to those countries in Central and Southeastern
Europe in need of diversification away from Russia,
particularly Bulgaria (89 percent dependent on Gazprom),
Hungary (57 percent), Romania (23 percent) and Austria (67
percent). Short- and medium-distance interconnectors could
reach NATO and EU Members and aspirants in Central Europe who
are in even more need of diversification, particularly Slovakia
and the Czech Republic (see energy diversification map on page
10). However, as with TAP, those potential interconnections are
still theoretical and lack developed financing proposals. Most
critically, Nabucco West would introduce international
competition in the region that would improve negotiating
posture with Russia, reduce the potency of supply disruption
threats, and bolster internal stability of NATO allies and
friends.
Due to those energy realities, Nabucco West still benefits
from the accumulation of political support in Washington and
Brussels, including the 2009 Intergovernmental Agreement that
remains in force. In order to address a debilitating management
structure requiring unanimity among consortium members, Nabucco
West shareholders met in late September and agreed to shift to
a majority voting rule and offered BP an equity stake in the
consortium.\21\
The United States should not be in the business of choosing
winners in what are ultimately commercial matters. For this
reason, the routing decision made by the Shah Deniz consortium
(which will no doubt be influenced by the Government of
Azerbaijan) must be commercially attractive to gain financing.
Despite claims of marginal economics from some Shah Deniz
Consortium members, both pipeline projects can certainly meet
that requirement. However, the U.S. Government frequently
intervenes in the market when national security interests are
at stake, as with anti-terrorism and counter-proliferation
sanctions and the vetting of foreign investment through the
Committee on Foreign Investment in the United States. Given
that no U.S. energy company has a direct stake in Southern
Corridor gas supply or pipelines, one of the underappreciated
realities is that the principal reason the United States has
even become involved in Southern Corridor negotiations is
because of U.S. foreign policy, not commercial, interests.
As the two pipelines are currently proposed, Nabucco West
is clearly superior to TAP for U.S. foreign policy interests in
the region. Although the U.S. interest does not lie with the
completion of the Nabucco West pipeline per se, Nabucco West
offers the most meaningful advance in two key objectives:
prompt delivery of gas to multiple allies in desperate need of
diversification and scalability to accommodate larger gas
supplies to the region in the future. Without doubt, other
allies would benefit from the TAP pipeline but the coercive
energy pressures brought by Russia against allies in Central
and Southeastern Europe are of an order of magnitude greater.
The United States owes it to these allies to speak clearly for
that shared interest.
Recommendation: The United States should advocate
that Nabucco West be selected as the downstream route
of the Southern Corridor, as opposed to wavering
between available options. Nabucco West is
strategically superior in that it will directly and
immediately transport gas to nations in East and
Southeast Europe who are most vulnerable to Russian
energy coercion and in need of diversification.
Although opportunities to use TAP to reach several
vulnerable Balkan states exist, those proposals are not
part of TAP's current planning or financing.
Supply decisions for the Southern Corridor will be of
continued interest to Congress. Thus far, Congress has exempted
the Shah Deniz Phase I project from financial sanctions, which
have been considered due to the 10 percent share in Shah Deniz
held by the National Iranian Oil Company as a ``passive
investor,'' under a narrow statutory exception.\22\ However,
continuing Congressional support for sanctions exemptions,
particularly for Shah Deniz Phase II and ancillary projects,
will be based on compelling benefits for U.S. national security
interests.
Congress has already indicated its preference that natural
gas projects must substantially contribute to Europe's energy
security (rather than producing a gas glut in Western Europe)
in order to receive an exemption. The 2012 Iran Threat
Reduction and Syria Human Rights Act explained that natural gas
development projects will be exempted only if they provide
Turkey and ``other countries in Europe energy security and
energy independence from the Government of the Russian
Federation.'' \23\ While Shah Deniz Phase II itself may fall
under the exemption created for Shah Deniz Phase I, it is
unclear whether other infrastructure projects ancillary to Shah
Deniz (including pipelines carrying that gas) would be exempt
under current law given the potential financial benefit to
Iran.
In any case, Congress will inevitably reconsider sanctions
in the future, and the standards for exemptions are likely to
become more stringent. Thus, although expansion of the Southern
Energy Corridor to Europe will advance U.S. interests
regardless of whether the Shah Deniz consortium selects TAP or
Nabucco West, that benefit will be weighed against the
detriment of allowing the project to benefit Iran's state
budget. In this respect, it is clear that of the two pipeline
proposals currently being discussed, Nabucco West offers the
most compelling case for continued exemptions from U.S.
financial sanctions because it would directly address the
energy insecurity of several NATO allies and provide much-
needed competition in Eastern European markets.
Recommendation: The United States should reconsider
sanctions against the National Iranian Oil Company's 10
percent share in the Shah Deniz Consortium. Although
Shah Deniz Phase I remains exempt, the merits of an
exemption for Shah Deniz II gas (and ancillary
projects) will, in part, depend on its ultimate
destination. In this respect, Nabucco West, or a
similarly conceived pipeline, would provide the most
compelling case for an exemption of Shah Deniz II gas
and related pipelines. By contrast, selection of TAP
would weaken the argument that Shah Deniz II and its
ancillary projects are of such immense benefit to U.S.
security interests that they should trump further
sanctions against Iran.
Recommendation: Shah Deniz Consortium members, with
the political backing of their home governments, should
seek ways to exclude the National Iranian Oil Company's
10 percent share of Shah Deniz. As financial sanctions
continue to tighten around Iran, the consortium will be
faced with increasing pressure for sanctions due to
this Iranian stake, however minor and ``passive''
Iran's role is in the consortium.
Future Gas Supplies
Turkmenistan, the Trans-Caspian Pipeline, and the ``Take our gas at the
border'' Policy
With the fourth largest conventional natural gas reserves
in the world, Turkmenistan could become a major supplier to the
Southern Corridor, but a combination of inscrutable leadership,
geopolitical pressures, an unattractive investment climate, and
distance from consumer markets has hampered progress.
Since taking power in 2006, President Gerbanguly
Berdymukha-medov has disappointed many observers who expected
him to open up Turkmen society and to more sharply dispense
with the eccentricities of his predecessor, Saparmurat Niyazov.
However, Turkmenistan has successfully pursued a foreign policy
of ``positive neutrality,'' leaving it with almost no political
disputes with neighbors in an otherwise tumultuous region, even
if this entails keeping foreign diplomats, visitors, and
businessmen at arm's length.
The United States has been able to cooperate on important
humanitarian and former security related issues with the
Turkmenistan Government, and Special Envoy for Eurasian Energy
Security Richard Morningstar made substantial headway in
building confidence on energy cooperation. However, the basics
of broad bilateral diplomatic interchange are still lacking,
and more high-level civilian official visits from the United
States will be needed to bolster efforts of our diplomats and
complement the substantial U.S. military engagement in the
region due to Afghanistan. Given Turkmenistan's economic
dependence on natural gas and its need for diversification of
export markets, energy remains the centerpiece of non-military
engagement.
The Turkmen Government operates in a reclusive manner on
oil and natural gas issues, which, as nearly every interlocutor
agreed, will have to be reformed if Turkmenistan is to achieve
its production goals and open new export markets, particularly
through the Southern Corridor. With current production capacity
of approximately 70 bcm of gas annually, Turkmenistan aims to
increase production to 120 bcm by 2015 and 250 bcm by 2030.
However, there is wide skepticism that the Government seriously
desires to significantly increase production. As one longtime
observer wryly noted, ``The Turkmen aren't in a hurry to do
anything.''
Onshore, Turkmenistan possesses vast conventional gas
reserves. The Dauletabad field in the southeast has long been
under production. Recently documented as the world's second
largest conventional gas field, the Galkynysh (formerly known
as South Yolatan) field is expected to be the focus of new
production. Galkynysh is a high-pressure, high-sulfur, and
high-temperature field, ranking among the most challenging in
the world.
For capital-intensive new production projects (as would be
the case in Turkmenistan), the international oil company (IOC)
majors are generally interested in negotiating production
sharing (PSA) or joint venture agreements that result in
ownership of a share of the gas. The energy majors generally
avoid basic service contracts except where they expect future
PSAs.\24\
However, Turkmenistan is deeply suspicious of the energy
majors and has been steadfast in refusing production sharing
agreements or other licensing arrangements that would allow
major IOCs to own onshore gas. Instead, the Turkmenistan
Government has informed the IOCs to ``take our gas at the
border,'' if they want to participate in gas exports. Thus far,
optimism for future gas ownership has been insufficient among
IOCs, and none operate in Turkmenistan under service
contracts.\25\ This investment climate will be particularly
problematic to the construction of future pipelines from
Turkmenistan (discussed further below).
Instead, natural gas production onshore is conducted by
nationally-owned Turkmengaz, which engages American and other
international companies for expertise and technology under
service contracts but retains ownership of all gas for the
Turkmenistan Government. The exception is the arrangement
offered to the China National Petroleum Company (CNPC) for
onshore gas development, reportedly under a 35-year turnkey
arrangement, whereby CNPC will build the facilities, commence
production, ship gas to China, and then turn operations over to
Turkmengaz. This deal is reportedly linked to China's agreement
to finance and construct the Central Asia-China gas pipeline to
carry gas to China.
Analysts diverge in their opinion as to whether CNPC and
Turkmengaz can develop Galkynysh by relying almost exclusively
on the assistance of service contractors and eschewing the
expertise, technology, and production scale offered by
IOCs.\26\ Some small- and medium-sized service companies
operating in Turkmenistan have indicated that operations in
Galkynysh are producing results, although detailed information,
particularly from CNPC operations, were confidential.
Whether Turkmenistan reforms its investment climate for
onshore natural gas production depends on its actual ambitions
for ramping up production. If reports are correct that progress
in Galkynysh is occurring (even at a slow pace), that may well
suit the modest ambitions of the Turkmenistan Government.\27\
Given a long enough time horizon, Turkmengaz will likely be
able to acquire the expertise necessary for ongoing yet modest
production increases. On the other hand, such a strategy would
take longer than the lifespan of the current leadership.
Reforms to the investment climate that would allow IOC
investment alongside Turkmengaz would not only boost production
but would also accelerate domestic expertise gains.
Offshore, Turkmenistan's terms have been closer to
international norms, but the reserves have not been
sufficiently lucrative to attract IOCs. Only a handful of
companies, including RWE (Germany), Dragon Oil (UAE), Petronas
(Malaysia), Buried Hill (Canada), Itera (Russia) and
Wintershall (Germany), have pursued these offshore
arrangements, in some cases to keep a toehold in the
Turkmenistan market should the investment climate change.\28\
Several other companies have departed due to disappointing
offshore discoveries, a frustrating regulatory environment, or
a lack of profitable export markets, which, by one account,
results in 8-9 bcm of offshore gas being flared annually.
Recommendation: The Government of Turkmenistan
should reform domestic energy laws to enable major
investments by energy majors in natural gas
exploration, production, and transport. The energy
majors not only have advanced technology and expertise
to more capably develop Turkmenistan's challenging gas
fields, but an energy major's ownership of part of the
gas through production sharing agreements will be
necessary to make advance sales to privately finance
the Trans-Caspian and Turkmenistan-Afghanistan-
Pakistan-India (TAPI) pipelines (discussed below).
Recommendation: The Government of Turkmenistan
should work with the State Department's Energy
Governance and Capacity Initiative, the World Bank, and
the Extractive Industries Transparency Initiative, to
promote good governance in management of energy
resources and revenues. Doing so will help build needed
domestic capacity, promote a positive investment
climate in Turkmenistan, and will help address
suspicion of IOCs.
Turkmenistan has also considered several new export
destinations. Historically, Turkmenistan has been highly
dependent on Russia as a purchaser of its natural gas through
the Central Asian Center pipeline system, giving Moscow potent
leverage over Ashgabat. Following a mysterious 2009 pipeline
explosion, as well as declining demand in Europe for Russian
gas, Russia substantially curtailed imports to 10-11 bcm.
Still, Russia reportedly makes payments of approximately $330
million per month to the Turkmenistan Government, a relatively
inflated price that Russia retains for political leverage with
Turkmenistan.
China has also undertaken concerted energy diplomacy in
Ashgabat and imports gas through three pipelines, with a fourth
under discussion via Afghanistan. By 2013, Turkmen gas exports
to China are expected to reach 30 bcm and 65 bcm in the
following years. Iran also imports 12-15 bcm via the Korpezhe-
Kurt Kui and Dauletabad-Khangiran pipelines but reportedly pays
mostly in goods, not hard currency, due to sanctions. In the
near term, trade with Russia is most vital for Ashgabat because
it provides hard currency. By contrast, gas sales to China are
used largely to pay off loans.
The United States and European allies are currently
advocating two major pipeline proposals in Turkmenistan: the
Turkmenistan-Afghanistan-Pakistan-India (TAPI) and the Trans-
Caspian Pipeline. Despite several substantial challenges, TAPI
has important merits and has been a key element of the U.S.
Government's ``New Silk Road'' strategy in South Asia, with the
hope that, with pipelines come peace and economic development.
Commercially, TAPI offers a link into the growing Indian gas
market. The Asian Development Bank (ADB) has been appointed as
financial advisor although it has little experience in projects
of this magnitude (estimated to exceed $7.6 billion).
Turkmenistan has offered 32 bcm for TAPI (5 bcm for
Afghanistan; the rest split equally between India and
Pakistan), and all TAPI countries except for India have agreed
to take equity in the TAPI pipeline. However, Turkmenistan's
tariff rates have apparently priced out Afghanistan as a
consumer via TAPI, and key players in the discussions seem to
lack awareness that employment along the pipeline route will be
limited after construction is complete.
Perhaps most critically, pipeline security will remain a
monumental challenge. Pakistan and Afghanistan have offered to
deploy thousands of security forces dedicated solely to
pipeline protection, which would leave forces exposed over
hundreds of miles.\29\ According to one somewhat fanciful
proposal, the Taliban would also be relied upon to contribute
its own forces. With strong backing from the U.S. Government,
the ADB and the TAPI nations have undertaken a series of
roadshows to drum up financing for the project. Several oil
majors have been involved in preliminary talks but interest has
been uneven following the recent road show. The next step for
TAPI will be a Steering Committee meeting to clarify India's
equity stake and to discuss tariffs.
Furthermore, Turkmenistan's ``take our gas at the border''
policy could further hinder progress on TAPI (and the Trans-
Caspian Pipeline, discussed below) because it is incongruous
with how pipeline projects are privately financed. Leaving
aside the question of whether Turkmenistan's modest production
can even fill massive new export routes, pipelines constructed
by the IOCs (who possess the expertise and capacity) are
financed by contracting for advance sales of gas that they are
given ownership of via PSAs or joint ventures. The Turkmenistan
Government has apparently failed to appreciate the fact that,
although its ``take our gas at the border'' policy may have
worked with China due to CNPC's willingness to simply fully
finance and construct a gas pipeline, private financing of the
TAPI or Trans-Caspian Pipeline will not occur according to this
model. State-backed financing or deep internal investment
climate reforms in Turkmenistan will be required.
A second, long-standing pipeline concept is the Trans-
Caspian Pipeline, which would traverse the Caspian Sea to
connect Turkmenistan and Azerbaijan, the key for transporting
Turkmen gas to the Southern Corridor. Construction of this
pipeline would be relatively simple from a technical point of
view, and it could be constructed in a matter of months once
initiated. Similar to the financing problems that hamper the
TAPI concept, the Trans-Caspian Pipeline would also likely
require private-financing by the IOCs. However, given that
costs would be dramatically lower than the TAPI pipeline due
the shorter trans-Caspian distance, the cost could also be well
within range of the Azerbaijani Government and its State Oil
Fund (SOFAZ), Turkish companies, project financing by the
European Bank for Reconstruction and Development (EBRD),
European Investment Bank (EIB), World Bank's International
Finance Corporation (IFC), or other international financial
institutions, or some combination.
Recommendation: The United States and EU should lead
diplomatic efforts to secure project financing for the
construction of the Trans-Caspian Pipeline with
international lenders, including the EBRD, EIB, IFC,
and others.
The principal impediment for the Trans-Caspian Pipeline
remains a failure of the Turkmenistan Government to exhibit the
necessary political will. Put bluntly, the President of
Turkmenistan must decide whether to assert Turkmenistan's
independence from Russia.
Several signs of diplomatic progress on the Trans-Caspian
Pipeline have been seen in recent years. The Turkmenistan
Government has spoken openly of non-Russian gas destinations,
and Turkmenistan has initiated construction of an East-West
pipeline to take gas from its major eastern gas fields to
infrastructure on the Caspian. As high-level U.S. engagement
has stalled, the European Union has also become a leading
advocate of the Trans-Caspian Pipeline.\30\ In September 2011,
the Council of the European Union encouraged the opening of
discussions with Azerbaijan and Turkmenistan on a trans-Caspian
pipeline, and both EU President Jose Manuel Barroso and EU
Energy Commissioner Gunther Oettinger have travelled to
Ashgabat for discussions.\31\ Nonetheless, several years of
talks have resulted in scant concrete progress to date, leading
to great frustration on both sides. In September 2012, for
example, President Berdymukhamedov refused to meet with
Commissioner Oettinger on his latest visit to Ashgabat.
The Government of Turkey, too, has begun to play an
increasingly pivotal role in talks with the Turkmenistan
Government, a welcome prospect given the two nations' warm
relations, common Turkic linguistic and cultural roots, and the
likelihood of Turkey becoming a major downstream purchaser of
Turkmen gas. For example, Turkish Energy Minister Taner Yildiz
has participated in discussions in Ashgabat with the European
Union and Turkmenistan Government, and the Turkish Government
has proposed a joint meeting with the Turkmenistan Government
and the European Union in Istanbul in late 2012.
Several specific obstacles will need to be addressed in
order to achieve further progress on the Trans-Caspian
Pipeline. First, Turkmenistan and negotiating partners will
have to adopt a more flexible approach to purchase guarantees.
To date, Turkmenistan has demanded that the EU guarantees a
purchase of 30 bcm of gas at Turkmenistan's Caspian border, an
amount too large for any single European company (or country).
Moreover, Turkmenistan itself has not provided confidence that
this amount of gas would even be available in the near-term,
given its own production uncertainties and lack of domestic
investment reform. Unlike visits by Russian or Chinese
officials, who do have authority to negotiate substantial gas
purchases and the construction of pipelines, EU officials
possess no such authority: the EU is neither a downstream
purchaser nor does it build pipelines. Although strong EU
engagement is welcome, it must be complemented by diplomacy
from individual EU Member States and downstream energy majors,
who together have authority to make purchase and pipeline
agreements. An earlier concept to create a Caspian Development
Corporation to guarantee aggregate long-term, high-volume
purchases of Turkmen gas is a promising initiative, deserving
of more attention.\32\
Recommendation: Turkmenistan and the European Union
should be more pragmatic in volume negotiations. The EU
should involve more downstream energy purchasers and
energy majors in talks with Turkmenistan given that the
EU itself does not have the authority to guarantee gas
purchases. The Government of Turkmenistan must take a
more flexible approach to gas purchases and step back
from its requirement of a 30 bcm purchase guarantee.
Turkmenistan's delays in finalizing agreement on a
trans-Caspian pipeline means that such large volumes
will not be accommodated in the next stage of the
Southern Corridor due to capacity constraints in TANAP
and SCP.
Recommendation: The European Union should involve
more national bilateral European delegations in talks
with Turkmenistan. A visit by a high-level delegation
from Germany would be particularly helpful because of
Germany's position as a large gas consumer and the
close affinity for Germany held by Turkmenistan's
leadership.
Turkey and Azerbaijan should also play a more constructive
and active role. Thus far, Azerbaijan has been lukewarm on
trans-Caspian gas trade, due in part to lingering historical
distrust between Azerbaijan and Turkmenistan and to lower-cost
Turkmen gas that could compete with Azeri offshore gas.
However, Azerbaijan could take advantage of Turkmenistan's
``take our gas at the border'' policy and directly purchase
Turkmen gas for resale, thereby enhancing its own position as a
regional energy hub (so long as EU competition regulations are
not implicated). Moreover, as noted above, Azerbaijan (and
Turkey) can provide additional confidence for trans-Caspian gas
transit by assuring that sufficient pipeline capacity exists
throughout the Southern Corridor for Turkmen supply, both in
SCP and TANAP.
Recommendation: Azerbaijan should use its
controlling stakes in TANAP and SCP to guarantee access
for Turkmenistan gas, as well as future gas from
Kazakhstan and other nations, and consider purchasing
large quantities of Turkmen gas for onward sales to
Turkey and Europe.
An even more appealing option would be for Turkey to
purchase Turkmenistan gas and finance trans-Caspian transit
infrastructure.\33\ Turkey could help meet its booming domestic
demand with relatively cheap Turkmen gas, thereby building on
the strong Turkish-Turkmen commercial relationship. This option
would also cause less aggravation with Moscow given that
Turkmen gas would not be in direct competition with Russian gas
in significant European markets. Azerbaijan, too, could benefit
by sending more of its own gas onward to European markets,
instead of to Turkey for its domestic consumption (possibly
including the initial 6 bcm of Shah Deniz II gas slated for
Turkey).
Recommendation: Turkey should secure contracts to
purchase natural gas from Turkmenistan and gain the
support of Azerbaijan and private energy companies to
allow this gas to transit Azerbaijani energy
infrastructure.
The EU and United States will also need to demonstrate
greater political backing for the trans-Caspian project. Russia
has demonstrated a willingness to exert pressure on Ashgabat by
cutting Turkmen gas imports, thus depriving the regime of
substantial finances, and at times, has partnered with Iran in
opposing further progress on trans-Caspian energy transport. As
one interlocutor said, ``Russians always have strings they can
pull.'' \34\ The Turkmenistan Government will need political
support from the West to contain any fallout in its
relationships with Russia and Iran resulting from trans-Caspian
gas sales. Unfortunately, Turkmenistan has little reason to
gain confidence in the West's support by the example of the
Nabucco Consortium, whose strong backing by the EU has yet to
translate into success. Perhaps the strongest way that the
United States and our allies can demonstrate the efficacy of
westward trade is to complete the Southern Corridor from
Azerbaijan onward to Europe and guarantee access for Turkmen
gas.
In particular, one canard often raised in opposition to a
trans-Caspian pipeline is Russian and Iranian objection to any
project until the Caspian Sea is demarcated by the five
littoral nations (Iran, Azerbaijan, Russia, Kazakhstan, and
Turkmenistan). Russia repeatedly refers to an October 2007
agreement saying decisions regarding Caspian energy development
would be taken by consensus by all Caspian nations, even though
Russia itself violated this provision through bilateral
agreements on sea use. Russia, with some irony, also cites
environmental implications of a new pipeline. In any case, a
trans-Caspian pipeline linking Turkmenistan and Azerbaijan
would only cross offshore terrain that would belong to either
Turkmenistan or Azerbaijan, and the United States rightly
supports the view that proceeding with trans-Caspian energy
transport should be these nations' own bilateral prerogative.
Recommendation: The United States, European Union, and
Turkey should advocate for a preliminary agreement
between Azerbaijan and Turkmenistan to connect
Turkmenistan's offshore gas production with Azerbaijan
infrastructure. This would allow up to 10 bcm of gas
production to find a market in Turkey or Europe in the
near-term, providing Turkmenistan with a flavor of
westward trade that will begin to build economic
relationships and confidence. That relatively small
amount of gas could be accommodated in plans for SCP
and TANAP and would not require the political fanfare
of a major new pipeline.
The need to embolden former Soviet states in making
strategic energy decisions is not unfamiliar. Similar problems
initially hindered the Baku-Tbilisi-Ceyhan (BTC) oil pipeline,
but a coalition of support built by the EU, the United States,
and a handful of energy majors helped push the project through.
A similar coalition will have to be built around trans-Caspian
gas transit. Russia should be invited to play a constructive
role in these talks, and its response will be indicative of
whether it is a good faith partner of Turkmenistan or has
ulterior motives in preventing Turkmeni-stan's energy
development according to its sovereign interests.
Recommendation: Over the long-term, the United
States, Turkey, and European Union should encourage
negotiation of an Intergovernmental Agreement for the
Trans-Caspian Pipeline. Russia, too, could be invited
to play a constructive role in these talks.
Recommendation: The United States should ensure that
senior U.S. civilian visits to Turkmenistan occur more
frequently to indicate high-level political support for
trans-Caspian shipments of Turkmen gas.
In light of the years of work that have gone into moving
forward on Nabucco, TANAP, and expansion of the South Caucasus
Pipeline, it is unlikely that political or financial capital
for any additional major new projects or expansions of either
SCP or TANAP will be forthcoming in the short-term. Moreover,
the European gas market could change significantly in the
coming decades, particularly if domestic shale reserves are
exploited. Therefore, the window for Turkmenistan to
participate in the next phase of the Southern Corridor is
quickly closing.
Iraq, Kazakhstan, and the Eastern Mediterranean: Future Supplies in
Need of Policy Attention
Although Turkmenistan possesses the most potential as a
future supplier to the Southern Corridor, the United States
should dedicate more attention to cultivating additional gas
sources for the next phase of development, including Iraq,
Kazakhstan, and in the Eastern Mediterranean.
In 2009, Iraqi Prime Minister Nouri al-Maliki attended the
signing of the Nabucco Pipeline Intergovernmental Agreement in
Ankara and stated that Iraq could contribute up to 15 bcm to
the Southern Corridor, raising hopes that Iraq, in possession
of the world's tenth largest conventional natural gas reserves,
was on its way to become a major supplier to Europe. Since
then, little progress has been made towards this goal due to
deep disagreements on energy revenue sharing between the
central government in Baghdad and the Kurdistan Regional
Government (KRG), as well as flagging progress on domestic
electrification and investment in domestic gas infrastructure.
Currently, energy revenues from the KRG are channeled to
the central budget in Baghdad, which then distributes proceeds
to the KRG and international energy companies operating in
Kurdistan. However, this arrangement has led to numerous
disputes involving delays by Baghdad in making the
distributions. Furthermore, several drafts of a comprehensive
national oil and gas law are under consideration in Baghdad,
and a September 2012 Baghdad-KRG agreement included a provision
to set up a six-member committee to review various drafts and
decide which version to send to the Council of Representatives
for consideration. The first meeting planned for mid-October
2012 failed to occur. Intransigence at the national level has
caused impatience in KRG and with international energy
companies, several of which (including ExxonMobil, Chevron,
Gazprom and Total) have negotiated independent exploration
deals with the KRG, only to become frozen out of negotiations
with the central government.\35\ In light of these disputes,
analysts do not expect Iraq to become a natural gas exporter
until at least 2017.
U.S. policy currently supports a national agreement on oil
and gas revenues prior to exports from Kurdish regions. Given
that higher value oil is concentrated in the south, this is
likely to be a net economic benefit to the KRG. However, U.S.
policy on this matter should be under constant review to ensure
that internal political disputes are not unduly hindering
projects beneficial for Iraq, regional stability, and U.S.
private investment. The Iraqi energy situation is yet another
reason why concerted U.S. energy diplomacy will be required in
the coming years.
By virtue of geography and geology, Turkmenistan would be
the anchor of trans-Caspian energy trade, but it is not the
only player. Kazakhstan is already a participant in the
Southern Corridor, shipping oil across the Caspian by barge to
Baku to connect to the BTC oil pipeline. Given that the BTC
pipeline is operating under capacity, Kazakhstan's
participation in the BTC pipeline could be increased in the
future. By contrast, Kazakhstan's 1.9 tcm of natural gas
reserves remain relatively underdeveloped as a commodity,
frequently being flared or re-injected for enhanced oil
recovery. To date, Kazakh officials have given mixed signals
about natural gas participation in the Southern Corridor, at
times citing the need for a Caspian demarcation agreement. The
United States should continue to bring the Kazakhstan
Government into discussions on the Southern Corridor given
future potential participation.
Finally, the United States should enhance engagement in
energy diplomacy on the development and interconnection of
energy resources off the Turkish coast and in the Eastern
Mediterranean.
In 2007, the Greek-Cypriot Government approved a license
for offshore exploration in waters that are disputed by
Turkish-Cypriot authorities. After exploration commenced in
September 2011, the Turkish Government sent military vessels to
the area as a warning and facilitated a separate offshore
exploration arrangement in what is claimed to be the Turkish-
Cypriot exclusive economic zone. In light of discussions
between Greek-Cypriot authorities and Israel on energy
transport and a future pipeline, tensions could eventually
flare again.
Israel itself has discovered large offshore natural gas
reserves, and the U.S. Geological Survey has estimated 3.5 bcm
of technically recoverable reserves in the Levant Basin. Owing
to abundant access to capital and strong rule-of-law
protections, Israel may be the most likely source of additional
gas flows from the Eastern Mediterranean. While current
conditions in the region are not conducive to quick progress,
increased natural gas trade within the region and in connection
with the Southern Corridor can promote long-term economic
development and stability. The United States should play an
active role in fostering regional dialogue on energy and
related demarcation issues, including track-two discussions
between Israel and Turkey on energy trade.
U.S. LNG: Putting Molecules Where Our Mouth Is
The United States, too, is in possession of resources that
could directly contribute to European energy security. In 2009,
the United States overtook Russia as the world's largest
natural gas producer due to vast unconventional reserves. At
current U.S. consumption rates, the United States possesses
perhaps a century of gas supply. This development has caused
U.S. natural gas prices to fall to nearly a half to a third of
gas prices in other key European and Asian markets\36\ and has
prompted numerous applications for export licenses of U.S.
liquefied natural gas (LNG) exports.
Pursuant to Section 3 of the Natural Gas Act,\39\ gas
exports are subject to approval by the Department of Energy's
Office of Fossil Energy and the Federal Energy Regulatory
Commission, which must certify that a particular export is in
the U.S. public interest. For destination countries with which
the United States has a free trade agreement, a presumption is
created that the export is in the public interest, and the
license is automatic. For non-free trade agreement nations, a
study must be conducted to determine the public interest,
entailing a notice and comment period.
Several companies have submitted applications to retrofit
U.S. LNG import terminals for regasification and export; to
construct new LNG export terminals; and to export cryogenic
natural gas to Latin America by rail and ship. After approving
one application, the Obama Administration deferred others until
at least 2013, pending further study completed in December
2012.
U.S. shale gas reserves are already transforming European
natural gas markets since LNG previously destined for the
United States has now been made available for Europe. The
United States can do much more to both use LNG exports to
benefit NATO allies facing energy insecurity in Europe and to
promote economic growth in the United States.
Turkey currently relies on Iran for 20 percent of its gas
imports, which could come under increased pressure when the
European Council's decision of October 15, 2012 to prohibit the
``purchase, import or transport of natural gas from Iran'' is
implemented. Moreover, several allies and partners in Central
and Southeastern Europe (Bulgaria, Croatia, Hungary, Greece,
the Czech Republic, and Moldova) will see their long-term
contracts with Gazprom expire before 2017, leaving a potential
gas import gap until Shah Deniz II gas comes online in that
year. For these countries, targeted U.S. LNG exports, along
with infrastructure investment and other policy responses,
could help alleviate energy insecurity. It is possible that
several other NATO allies and partners may opt for U.S. natural
gas imports (and even paying a reliability premium for them) if
the opportunity existed.
Meanwhile, European nations are ramping up capacity to
import LNG. At present, Europe imports LNG primarily from
Algeria, Egypt, Oman, and Qatar to meet about 26 percent of its
gas needs, due in large part to a lack of LNG import terminals,
which are mostly located in Western Europe,\38\ as well as
underdeveloped onward interconnectors and storage capacity in
Europe. However, numerous European countries, some with
financing from the European Bank for Reconstruction and
Development (EBRD), are considering construction of additional
LNG import terminals, including Bulgaria, Croatia, Estonia,
Lithuania, Latvia, Poland, Romania, Turkey, and Ukraine.
In light of these dynamics, the United States is well-
positioned to become a strategic energy supplier of LNG to NATO
allies in need of diversification. Senator Lugar has introduced
the LNG for NATO Act to achieve this objective (see Appendix IV
for the text of the legislation). This Act would not direct
supply, which should remain exclusively the function of private
industry. Instead, the Act would place NATO allies on equal
footing as other free trade partners with respect to access to
U.S. natural gas trade. Through market forces, NATO allies will
be more secure and the alliance will be stronger. While the
U.S. Congress will no doubt continue to debate full
liberalization of natural gas exports, the LNG for NATO Act
follows other precedents for narrowly tailored exceptions to
our export licensing regime.
Recommendation: The U.S. Congress should pass the
Liquefied Natural Gas for NATO Act, which would amend
Section 3 the Natural Gas Act to create a presumption
that licenses to export U.S. natural gas to NATO allies
is in the U.S. public interest, giving NATO allies the
same preferential treatment enjoyed by free trade
partners. Specifically, swift passage of this Act will
make gas export licenses automatic for Turkey, which
relies on Iran for 20 percent of its gas demand, and
those NATO countries, whose long-term gas contracts
with Gazprom expire in the next five years, in advance
of Shah Deniz II gas coming online through the Southern
Corridor.
Recommendation: The United States and European Union
should encourage the Overseas Private Investment
Corporation, U.S. Trade and Development Agency, the
European Bank for Reconstruction and Development, and
the European Investment Bank to facilitate financing
for the construction of LNG import terminals in Europe,
particularly on the territory of NATO allies in need of
diversification. U.S. assistance should also be
provided to plan alternative gas routes, storage
capacity, interconnectors, and power generation
options.
--------------
Notes:
\1\ The authors thank Michael Ratner of the Congressional Research
Service.
\2\ The authors recommend ``Europe's Energy Security: Options and
Challenges for Natural Gas Supply Diversification'' by Michael
Ratner, Paul Belkin, Jim Nichol, and Steven Woehrel of the
Congressional Research Service for further data and analysis.
\3\ The State Department Unconventional Gas Technical Engagement
Program plays an important role in providing information and
enabling policies for shale gas development.
\4\ Because South Stream would transit EU territory, it would have to
comply with several onerous EU regulations. First, South Stream
would be required to provide full access to third-party gas in
all distribution and transmission infrastructure in a
competitive manner, unless an exemption is granted. Exemptions
are granted only where the investment ``enhances competition in
gas supply'' and ``security of supply'' and ``is not
detrimental to competition or the effective functioning of the
internal gas market.'' See European Council Directive 2009/73/
EC. Given the EU's recent anti-competition investigations of
Gazprom, such exemptions may not be forthcoming. Second, Russia
would have to officially provide design, routing, and
construction information to the EU, none of which, according to
EU officials, has occurred. Finally, several energy analysts
note that Russia may not have sufficient gas to even supply
South Stream in an economical manner.
\5\ The U.S. Energy Information Administration estimates that Poland,
Ukraine, Lithuania, Romania, Bulgaria and Hungary possess over
252 trillion cubic feet of technically recoverable shale gas.
Poland has the most shale potential in Europe and is expected
to produce its first commercial shale gas in 2014 but would not
achieve energy independence until 2035. ExxonMobil and Talisman
Energy have both recently pulled out of Polish shale gas
exploration.
\6\ Also, Russia historically been willing to pay a significant
premium for gas produced by other Caspian nations in order to
maintain economic leverage and to thwart significant gas sales
to Europe via a new southern corridor. Since 2009, Russia has
purchased approximately 1 bcma of Azerbaijani gas through the
Gazi-Magomed-Mozdok pipeline. Azerbaijan also conducts gas
swaps with Iran to supply its exclave of Nakhchivan.
\7\ Shah Deniz consortium shareholders include Britain's BP (25.5
percent), Norway's Statoil (25.5 percent), Azerbaijan's SOCAR
(10 percent), France's Total S.A. (10 percent), Russia's Lukoil
in partnership with Italy's Eni (10 percent), Iran's NIOC (10
percent), and Turkey's TPAO (9 percent). The participation of
Iran's NIOC has threatened the consortium's political viability
in the midst of tightening U.S. and EU sanctions against
Iranian entities. The United States and European Union have
repeatedly exempted Shah Deniz from Iran-related sanctions
given NIOC's role as a ``passive'' investor.
\8\ The International Energy Agency's World Energy Outlook 2012, for
example, estimates 44 bcm in 2030.
\9\ BP currently operates oil extraction in the ACG field on behalf
of the Azerbaijan International Operating Company (AIOC), which
includes Chevron, Statoil, Turkey's TPAO, ExxonMobil, SOCAR,
Japan's INPEX and Itochu, and Hess. Significant capital
investments would be required to increase production under the
production sharing agreement that runs until 2024. This turmoil
could result in delays for the tender of an ACG Deep PSA for
gas development. To date, it is unclear even if current ACG
partners would operate ACG Deep.
\10\ Initially, the dispute centered on whether a new pipeline would
be built (favored by SOCAR) or whether the SCP would be
upgraded (favored by BP). Azerbaijani President Ilham Aliyev
intervened and chose the latter. Consequently, the dispute
centered on the size of the upgraded pipeline. SOCAR favored a
56-inch pipeline through the Caucasus mountains in Georgia
(requiring lower compression costs but raising construction
costs), whereas BP favored a smaller but scalable 42-inch
pipeline over the mountains (reportedly requiring as much as 1-
2 bcm to be consumed by additional compressors). Both sides
agreed, however, that the SCP upgrade must be scalable to
accommodate all future Caspian gas, including potential Turkmen
throughput, up to 63 bcm (25 bcm of which Shah Deniz I and II
provide).
\11\ BP Statistical Review of World Energy 2012.
\12\ The U.S. State Department's Export Control and Border Security
(EXBS) and U.S. Defense Department's Section 1206 train-and-
equip programs have also provided smaller boats and zodiacs,
respectively, to Azerbaijani coastal authorities.
\13\ For example, twice in 2008, Azerbaijan's coast guard intercepted
vessels, which were conducting seismic exploration in offshore
fields under contract from Turkmenistan. One involved a Russian
state vessel hired by Canada's Buried Hill and the other
involved a ship hired by Malaysia's Petronas. In 2011, the
Russian and Kazakh military conducted a naval exercise to
thwart aggression near Kazakhstan's offshore platforms; Iran
was allegedly the potential aggressor nation. In the past, Iran
has also moved its own drilling rigs into waters disputed by
Azerbaijan. More commonly, fishing vessels inadvertently float
into the two-mile exclusion zones around Azeri offshore
platforms, still requiring a response by coast guard
authorities.
\14\ Although not a signatory, the United States gave its full support
for the Nabucco treaty and was represented at the signing
ceremony in Ankara by Senator Richard Lugar and Special Envoy
Richard Morningstar, demonstrating bipartisan support from both
the Congressional and Executive branches.
\15\ The Nabucco consortium currently consists of six energy
companies: Germany's RWE, Austria's OMV, Hungary's OML,
Romania's Transgaz, Bulgaria's Bulgargaz, and Turkey's BOTAS.
\16\ While this concern is legitimate given that BOTAS currently has
no capacity for extra gas, Turkish officials assured that TANAP
would be completed on time; within Turkey, there is apparently
disagreement on whether an additional BOTAS upgrade will occur
in any case, which Turkey would have to fully finance absent a
new round of negotiations with other stakeholders.
\17\ European Union Council Decision 2012/635/CFSP, October 15, 2012.
To date, the EU and United States have pursued sanctions
against Iranian oil exports, which far surpass its minimal gas
exports.
\18\ The shareholders included Italy's Edison, Greece's DEPA, and
Turkey's BOTAS. Like TAP, it was to have a capacity of 10 bcm
and would stretch from Turkey through Greece to Italy.
\19\ SEEP was BP's own pipeline proposal that would have relied on
existing infrastructure from Azerbaijan through Turkey. SEEP
would have begun at the Bulgarian-Turkish border and stretched
to Hungary, consisting of both upgraded existing pipelines and
additional new segments. From Hungary, additional
interconnectors were envisioned to Austria and other parts of
Central Europe. SEEP would have had a capacity of 10 bcm.
\20\ One proposal (not part of the official TAP proposal) would be the
so-called Ionian-Adriatic Pipeline northward from Albania,
through Montenegro, Bosnia, and Croatia.
\21\ However, the scaled-back version of Nabucco West likely will
cause its lead partner, RWE, to sell its stake in the project
given RWE's requirement that 5 bcm arrives for delivery into
its own system. Reportedly, BP may acquire a stake in the
consortium.
\22\ See Section 201 of the Iran Threat Reduction and Syria Human
Rights Act of 2012, P.L. 111-158.
\23\ See Section 603 of the Iran Threat Reduction and Syria Human
Rights Act of 2012, P.L. 111-158. ``Nothing in this Act or the
amendments made by this Act shall apply to any activity
relating to a project: (1) for the development of natural gas
and the construction and operation of a pipeline to transport
natural gas from Azerbaijan to Turkey and Europe; (2) that
provides to Turkey and countries in Europe energy security and
energy independence from the Government of the Russian
Federation [emphasis added] and other governments with
jurisdiction over persons subject to sanctions imposed under
this Act or amendments made by this Act; and (3) that was
initiated before the date of the enactment of this Act pursuant
to a production-sharing agreement, or an ancillary agreement
necessary to further a production sharing agreement, entered
into with, or a license granted by, the government of a country
other than Iran before such date of enactment.''
\24\ This exception has been exercised by several energy majors in
Iraq given vast potential for future PSAs.
\25\ Several energy majors maintain offices in Turkmenistan. Chevron
also runs major development projects with USAID, providing 17
percent of USAID's budget in Turkmenistan, focusing on youth
centers and junior achievement projects.
\26\ For example, at the time of the SFRC visit, a row continued
between the Turkmenistan Government and one of its service
contractors due to drilling failures.
\27\ With only a population of 5 million, the Turkmenistan Government
appears to be satisfied with modestly rising energy revenues.
The Government only requires a reported $10 million to finance
its construction boom in Ashgabat. Moreover, as one
interlocutor noted, the concept of present value of money
(i.e., a dollar today is worth more than a dollar tomorrow)
does not exist in Turkmenistan.
\28\ Turkmen suspicion of even smaller companies was heightened after
Burren Energy, an offshore operator, sold its shares to Italy's
ENI without the Turkmenistan Government's consent.
\29\ That is, unless they are concentrated around compressor stations,
which would, however, not prevent disruptions to the pipeline
itself, as has been the case in pipeline attacks in Turkey and
elsewhere.
\30\ Commissioner Oettinger at the time of this decision noted that
``Europe is now speaking with one voice. The trans-Caspian
pipeline is a major project in the Southern Corridor to bring
new gas to Europe.''
\31\ The European Union reportedly will also soon open a mission in
Ashgabat.
\32\ The latest report of the Caspian Development Corporation can be
accessed at: http://ec.europa.eu/energy/infrastructure/studies/
doc/2010_12_report_cdc_final_implementation.pdf.
\33\ As long as the Government of Iran pursues a nuclear weapons
program, it would be unwise for Turkey to consider transiting
Turkmen gas via Iran.
\34\ For example, in response to intensified talks on trans-Caspian
gas shipments from Iran, Russian Duma Vice Speaker is reported
to have warned of an impending ``Arab Spring'' in Turkmenistan;
Russian non-governmental outfits have warned Turkmenistan that
it may suffer the same fate as Georgia in 2008 if talks with
the EU continue.
\35\ ExxonMobil is reportedly pulling out of its project in southern
Iraq, seeking to sell its 60 percent stake in a service
agreement to develop the massive West Qurna-1 oil field in
southern Iraq.
\36\ The average price in the United States is $3.18/MBtu; the price
in the United Kingdom is $10.35/Mbtu; the price in Germany is
$10.82/Mbtu; and the price in Japan is nearly $16.84/Mbtu, as
of December 8, 2012, Bloomberg New Energy Finance.
\37\ 15 U.S.C. 717b
\38\ As of May 2012, Europe possessed 22 LNG terminals (import and
export) with the following breakdown: Belgium (1); UK (4);
France (3); Italy (2); Greece (1), Turkey (2); Portugal (1);
Spain (6); Netherlands (1); Sweden (1); and Norway (1).
?
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A P P E N D I X E S
=======================================================================
Appendix I
The Lugar Energy Report, ``Lugar Travels Pipeline Route,'' August
2006
The Lugar Energy Report, ``Importance of the Nabucco Pipeline,'' July
2009
Appendix II
Transcript of Senator Lugar's keynote
address at the German Marshall Fund Conference,
delivered at the NATO Summit in Riga, Latvia
Congressional Record, Senate
Vol. 152, Pt. 18
Mr. President: I rise today to request that my remarks,
delivered in a keynote address at the German Marshall Fund
conference on Monday, November 27 in Riga, Latvia in advance of
the NATO Summit, be entered into the record.
Thank you Madam President [Dr. Vaira Vike-Freiberga,
President of the Republic of Latvia]. I appreciate your
thoughtful introduction and your generous hospitality. It is a
pleasure to be back in Riga and to deliver the keynote address
here at this important German Marshall Fund conference. This
conference and the participants it has drawn are evidence of
the deep respect the Fund merits throughout Europe and North
America.
In 1991 NATO stood at a crossroads. With the collapse of
the Soviet Union and the Warsaw Pact, the Alliance could have
declared victory and disbanded. Instead, NATO chose to adapt to
the new security environment and build on its legacy of being
the most successful security and defense organization in
history.
Since that time, we have welcomed ten new members into the
Alliance and have begun a dramatic transformation of our
military capabilities. We have also undertaken missions in the
Balkans and Afghanistan that have extended the purpose of the
Alliance beyond the territorial defense of its membership.
However, while NATO is busier than ever, these activities do
not guarantee that the Alliance will remain strong and
relevant.
For nearly half a century, NATO was oriented toward
defending against an attack from the East by Warsaw Pact
forces. Today, NATO's posture is influenced by emerging threats
such as the proliferation of weapons of mass destruction, rogue
states, terrorism, and genocide. The security threats of the
21st century require NATO members to deploy forces rapidly over
long distances, sustain operations for extended periods of
time, and operate jointly as trans-Atlantic partners with the
United States in high intensity conflicts. To be fully relevant
to the security and well being of the people of its member
nations, NATO must think and act globally.
The Test of Afghanistan
This is evident in the NATO mission in Afghanistan. That
country presents a difficult environment, but NATO must be
resourceful, resilient, and ultimately successful. The
September 11 attacks were planned in Afghanistan, al-Qaeda
still operates there, and the fate of the country remains
inexorably tied to the Alliance. NATO's International Security
and Assistance Force (ISAF) is responsible for security
operations throughout all of Afghanistan.
In recent months, Taliban attacks have occurred with
greater frequency, coordination, and ferocity. They have
extended well beyond the South and East, where most of the
fighting has been located. Although the hunt for al-Qaeda
terrorists continues, the primary threat to the stability of
Afghanistan is Taliban insurgents who are challenging ISAF in
greater numbers, sowing dissent among Afghanis, cooperating
with the bourgeoning narcotics trade, and complicating security
efforts in ways that inhibit the rule of law and
reconstruction.
If the most prominent alliance in modern history were to
fail in its first operation outside of Europe due to a lack of
will by its members, the efficacy of NATO and the ability to
take joint action against a terrorist threat would be called
into question. Moreover, Afghanistan has a legitimately elected
government and a long-suffering people, both of which deserve a
chance to succeed without the threat of violent upheaval.
It is imperative that NATO fulfills its commitments to
Afghanistan. The Alliance has found it difficult to generate
the political will to meet NATO objectives. The reluctance in
capitals to grant NATO requests for troops and resources have
complicated this process. Despite months of intensive
discussions, Supreme Allied Commander/Europe, General Jim
Jones, disclosed in September that NATO was 2,500 troops short
of the minimal commitment requested for ISAF. These troops did
not materialize until General Jones and other NATO leaders
publicly put Alliance nations on the spot for these shortfalls.
Afghanistan has become a test case for whether we can
overcome the growing discrepancy between NATO's expanding
missions and its lagging capabilities. NATO commanders must
have the resources to provide security, and they must have the
flexibility to use troops to meet Afghanistan's most critical
security needs. Unfortunately, NATO capitals are making the
military mission even more difficult by placing national
caveats on the use of their forces. These restrictions, coupled
with troop shortages, are making ISAF a less cohesive and
capable force.
Similar problems are plaguing the NATO Response Force
(NRF), which is slated to be NATO's expeditionary fighting
unit. As is often the case, the lack of transport capabilities
is a glaring deficiency. I am hopeful that the plan to
establish a fleet of C-17s under the command and control of
NATO succeeds. To overcome these challenges and similar ones,
we must reverse the downward spiral of defense budgets. Only a
handful of members spend more than 2 percent of their gross
domestic product on defense. Good intentions can only carry a
military force so far--the NRF and other NATO assets must have
the equipment, training, and resources to fulfill their
mission.
I believe strongly that NATO is capable of meeting the
challenge in Afghanistan. NATO commanders have demonstrated
that they understand the complexity of the mission. They know
that success in Afghanistan depends on the attitudes of the
people, the progress of reconstruction, the development of the
economy and the building of civil institutions that can deal
with the narcotics trade, as much as it depends on battlefield
victories.
Most Afghanis have welcomed the advances in personal
freedom, political participation, and educational opportunities
that have come during the last five years. The recent increase
in violence in Afghanistan clearly is not evidence of a popular
uprising. But to the degree that there is discontent,
disillusionment, or fear among the Afghan people due to their
security situation, trust in the Afghan Government and NATO
will dissipate. Insecurity stemming from insurgent activity by
Taliban forces has also caused Afghanis in some regions to seek
the protection of tribal leaders and warlords, which in turn
undercuts the authority of the Afghan Government and increases
the risk of civil conflict between tribal factions. Given these
dynamics, we must dispel any doubts about the commitment of
NATO and the West to Afghanistan's emergence as a stable and
free society.
The Centrality of Energy
NATO's challenges continue to come in new formations. We
have to understand not only the military configuration of
threats before us, but also the likely basis for future
conflict. The NATO alliance has been successful, not because it
fought wars, but because it prevented them. If the NATO
alliance is to be fully relevant to the security of its
members, it must expand beyond the mission of military defense
and begin to think about how to prevent the conditions that
will lead to war.
In the coming decades, the most likely source of armed
conflict in the European theater and the surrounding regions
will be energy scarcity and manipulation. It would be
irresponsible for NATO to decline involvement in energy
security, when it is abundantly apparent that the jobs, health,
and security of our modern economies and societies depend on
the sufficiency and timely availability of diverse energy
resources.
We all hope that the economics of supply and pricing
surrounding energy transactions will be rational and
transparent. We hope that nations with abundant oil and natural
gas will reliably supply these resources in normal market
transactions to those who need them. We hope that pipelines,
sea lanes, and other means of transmission will be safe. We
hope that energy cartels will not be formed to limit available
supplies and manipulate markets. We hope that energy rich
nations will not exclude or confiscate productive foreign
energy investments in the name of nationalism. And we hope that
vast energy wealth will not be a source of corruption within
nations that desperately ask their governments to develop and
deliver the benefits of this wealth broadly to society.
Unfortunately, our experiences provide little reason to be
confident that market rationality will be the governing force
behind energy policy and transactions. The majority of oil and
natural gas supplies and reserves in the world are not
controlled by efficient, privately owned companies. Geology and
politics have created oil and natural gas superpowers that
nearly monopolize the world's oil supply. According to PFC
Energy, foreign governments control up to 79 percent of the
world's oil reserves through their national oil companies.
These governments set prices through their investment and
production decisions, and they have wide latitude to shut off
the taps for political reasons.
The vast majority of these oil assets are afflicted by at
least one of three problems: lack of investment, political
manipulation, or the threat of instability and terrorism. As
recently as four years ago, spare production capacity exceeded
world oil consumption by about ten percent. As world demand for
oil has rapidly increased in the last few years, spare capacity
has declined to two percent or less. Thus, even minor
disruptions of oil supply can drive up prices. Earlier this
year, a routine inspection found corrosion in a section of BP's
Prudhoe Bay oil pipeline that shut down 8 percent of U.S. oil
output, causing a $2 spike in oil prices. That the oil market
is this vulnerable to something as mundane as corrosion in a
pipeline is evidence of the precarious conditions in which we
live.
Within the last year and a half, the international flow of
oil has been disrupted by hurricanes, unrest in Nigeria, and
continued sabotage in Iraq. Al-Qaeda and other terrorist
organizations have openly declared their intent to attack oil
facilities to inflict pain on Western economies. We should also
recognize that NATO members are transferring hundreds of
billions of dollars each year to some of the least accountable,
autocratic regimes in the world. The revenues flowing to
authoritarian regimes often increase corruption in those
countries and allow them to insulate themselves from
international pressure and the democratic aspirations of their
own peoples. As large industrializing nations such as China and
India seek new energy supplies, oil and natural gas may not be
abundant and accessible enough to support continued economic
growth in both the industrialized West and in large rapidly
growing economies. In these conditions, energy supplies will
become an even stronger magnet for conflict.
Under the worst case scenarios, oil and natural gas will be
the currency through which energy-rich countries leverage their
interests against import dependent nations. The use of energy
as an overt weapon is not a theoretical threat of the future;
it is happening now. Iran has repeatedly threatened to cut off
oil exports to selected nations if economic sanctions are
imposed against it for its nuclear enrichment program. Russia's
shut off of energy deliveries to Ukraine demonstrated how
tempting it is to use energy to achieve political aims and
underscored the vulnerability of consumer nations to their
energy suppliers. Russia retreated from the standoff after a
strong Western reaction, but how would NATO have responded if
Russia had maintained the embargo? The Ukrainian economy and
military could have been crippled without a shot being fired,
and the dangers and losses to several NATO member nations would
have mounted significantly.
We are used to thinking in terms of conventional warfare
between nations, but energy could become the weapon of choice
for those who possess it. It may seem to be a less lethal
weapon than military force, but a natural gas shutdown to a
European country in the middle of winter could cause death and
economic loss on the scale of a military attack. Moreover, in
such circumstances, nations would become desperate, increasing
the chances of armed conflict and terrorism. The potential use
of energy as a weapon requires NATO to review what Alliance
obligations would be in such cases.
Energy as an Article Five Commitment
We must move now to address our energy vulnerability.
Sufficient investment and planning cannot happen overnight, and
it will take years to change behavior, construct successful
strategies, and build supporting infrastructure.NATO must
determine what steps it is willing to take if Poland, Germany,
Hungary, Latvia or another member state is threatened as
Ukraine was. Because an attack using energy as a weapon can
devastate a nation's economy and yield hundreds or even
thousands of casualties, the Alliance must avow that defending
against such attacks is an Article Five commitment. This does
not mean that attempts to manipulate energy for international
political gain would require a NATO military response. Rather,
it means that the Alliance must commit itself to preparing for
and responding to attempts to use the energy weapon against its
fellow members. NATO must become a reliable refuge for members
against threats stemming from their energy insecurity. If this
does not happen, the Alliance is likely to become badly divided
as vulnerable members seek to placate their energy suppliers.
In fact, no issue in the history of NATO is so likely to divide
the alliance in the absence of concerted action.
Article Five of the NATO Charter identifies an attack on
one member as an attack on all. Originally envisioned to
respond to an armed invasion, this commitment was the bedrock
of our Cold War alliance and a powerful symbol of unity that
deterred Warsaw Pact aggression for nearly fifty years. It was
also designed to prevent coercion of a NATO member by a non-
member state. We should recognize that there is little ultimate
difference between a member being forced to submit to foreign
coercion because of an energy cutoff and a member facing a
military blockade or other military demonstration on its
borders.
In preparing for such a commitment, NATO leaders should
develop a strategy that includes the re-supply of a victim of
an aggressive energy suspension. How would the Alliance shift
energy supplies and services to a member under such an attack?
What steps can NATO take now to ensure that we have the
infrastructure in place to respond to such an attack? What
steps are needed to diversify our energy sources and supply
routes to deter the use of energy as a weapon? Alternatives to
existing pipeline routes must be identified and financial and
political support for the development of alternative energy
sources is crucial. A coordinated and well-publicized Alliance
response would be a deterrent that would reduce the chances of
miscalculation or military conflict. It would also provide a
powerful incentive for Member states to remain in the Alliance
and for prospective members to accelerate reforms necessary to
qualify for membership.
The energy threat is more difficult to prepare for than a
ground war in Central Europe. Troops, equipment, and supplies
can move along highways and over difficult terrain. Energy
supplies do not enjoy the same freedom of movement. Developing
a logistical response to an energy cutoff will prove a complex
challenge.
My friend, Mark Grossman, the former U.S. Under Secretary
of State for Policy, has proposed reviving the REFORGER
exercises of the Cold War. These exercises were carried out to
prepare for the massive troop and equipment re-supply mission
that would be required to thwart a Soviet attack. A new
REFORGER should focus on how the Alliance would supply a
beleaguered member with the energy resources needed to
withstand geo-strategic blackmail. This will not be easy or
comfortable for the Alliance. Members will be required to
tighten their belts and make hard choices. But, if we fail to
prepare, we will intensify our predicament.
Beyond constructing strong alliance commitments related to
energy, NATO must engage Russia and other energy rich nations.
I advocate establishing regular high-level consultations
between Russia and NATO on energy security. The economic and
political situation in Russia is intensely influenced by the
price of energy. Moscow is banking on big returns from its
energy sector indefinitely into the future. But the fickleness
of energy markets affects not only consumers, but producers.
I believe that Russia has a long-term interest in achieving
a more prosperous stability that comes with greater investment
in its energy sector and the development of a reputation as a
trusted supplier. But its recent actions to temporarily reduce
gas supplies to the West, confiscate some foreign energy
investments, and create further barriers to new investment are
undermining confidence in Moscow's reliability. This trend is
likely to have unintended repercussions for Russia. Even now,
Russians are feeling the effects of inadequate investment in
their energy sector. Russia boasts the world's largest reserves
of natural gas, but this winter it could face gas shortages of
its own. Russia has not contended with investment problems in
its natural gas industry, and its artificially low domestic gas
prices have undermined the development of efficiency measures
that are commonplace in the West. Russia now requires gas
imports from Central Asia, which it sells at a premium to
Europe. Yet if growing domestic demand in Russia outstrips
stagnating production and Central Asian imports, as some
commentators predict, the Kremlin will face the difficult
choice between letting some of its people go cold or not
meeting its commitments to Europe.
We do not wish these difficulties on anyone. But we should
speak clearly with Russia about our concerns and our
determination to protect our economies and our peoples. We
should outline the differences between a future in which Russia
tries to leverage for political advantage the energy
vulnerabilities of its neighbors and a future in which Russia
solidifies consumer-producer trust with the West and respects
energy investments that help expand and maintain Russia's
production capacity. Energy is a two-way relationship and will
remain so even as Europe and the United States diversify their
energy resource base. Both NATO and Russia need a sustained
discussion on the rule of law, the status of foreign
investment, bi-national and multinational agreements, and steps
to implement the principles agreed to at the G-8 Summit in
July.
Expanding NATO's Partners
One critical element in strengthening the alliance's energy
security is developing new relationships and admitting new
members who will contribute to NATO's efforts in this area. I
applaud Alliance efforts to develop special relationships with
states around the world. At the Riga Summit, NATO should
authorize the creation of partnerships with like-minded
countries such as Japan, Australia, South Korea, Finland, and
Sweden.
An effective energy strategy should also include new
strategic relationships with energy exporters. I urge Alliance
leaders to look to the Caucasus and Central Asia for new
partnerships. These states are critically located and important
sources of oil and natural gas. Substantial improvement is
needed in the region in areas such as democracy, the rule of
law, and civil society. A closer relationship with NATO will
promote these values and contribute to our mutual security. I
recommend that NATO focus especially on its relationships with
Azerbajian and Kazakhstan. While both countries have
considerable work to do, eventual NATO membership must be on
the table.
I believe that some aspirant states are prepared to assume
membership responsibilities. Croatia, Albania, and Macedonia
should be invited to join NATO as soon as they meet Alliance
requirements. Each has expressed a strong desire to join the
Alliance, and each is capable of making important
contributions. While I am disappointed that invitations will
not be extended here at Riga, we must increase the tempo of
cooperation between the Alliance and those states.
NATO should also invite Georgia to join the Alliance.
Tbilisi is a young democratic government, resisting pressure
from breakaway republics backed by Moscow and Russian troops on
Georgian soil. Georgia has been a superb role model for the
region, and it is host to critical segments of the Baku-
Tbilisi-Ceyhan oil pipeline and the Southern Caucuses natural
gas pipeline. Two months ago, the NATO Secretary General
announced that the Alliance had launched an Intensified
Dialogue with Georgia. While this is an important step, NATO
must grant a Membership Action Plan as soon as possible.
After recovering from recent political instability, Ukraine
has indicated that it wants to move more slowly toward NATO
membership. I am pleased that Kiev has acknowledged the
important work needed to accurately convey to its population
what NATO membership would mean. While I hope this process
might move more quickly, I urge the Alliance, when all
applicable criteria are satisfied, to support efforts for
Ukraine to join NATO.
The Alliance must also continue to encourage Belgrade to
meet its international obligations, which include full
cooperation with the International Criminal Tribunal for the
former Yugoslavia. With additional progress on war criminals
and other important reforms, Serbia would be a valuable member
of the Alliance.
Conclusion
By their nature, alliances require constant study and
revision if they are to be resilient and relevant. They must
examine the needs of their members and determine how the
alliance can safeguard the freedom, prosperity, and security of
each member. NATO has survived and prospered because it has
been able to do this repeatedly. We have met the threat of
Soviet aggression, expanded the zone of peace and security
across Europe, guarded against the risks posed by terrorism and
weapons of mass destruction, and improved our ability to
project power over long distances. We are meeting threats in
Afghanistan, the African continent, and other locations outside
Europe. But if we fail to reorient the Alliance to address
energy security, we will be ignoring the dynamic that is most
likely to spur conflict and threaten the well-being of alliance
members.
I understand that adopting energy security as a mission is
a major advancement from NATO's origins. But it represents an
historic opportunity to change the circumstances of geopolitics
to the benefit of all members. At this summit, we should engage
in a broad, strategic debate on how we can ensure progress in
Afghanistan, strengthen NATO through new members, and face the
energy security threats of the 21st century together. Although
Riga may not produce definitive answers to these questions, it
must be the summit that starts the crucial discussion that will
lead to consensus.
The stakes are such that if we wait even a few years, we
are likely to find that our alliance is in jeopardy. We will
look back at this point in time and see it as a critical
juncture that required bold vision and leadership. I look
forward to working together with each of you to provide this
leadership.
Thank you.
Appendix III
Letter to Secretary of State Condoleezza Rice from
Senator Lugar and then-Senator Biden regarding the
appointment of a U.S. Special Envoy for Eurasian Energy Security
Appendix IV
Liquefied Natural Gas (LNG) for NATO Act