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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


                          UNITED STATES SENATE

                      One Hundred Twelfth Congress

                             Second Session

                           December 12, 2012

    Printed for the use of the Committee on Foreign Relations

                        Available via World Wide Web:



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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
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          


                            C O N T E N T S

  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


                         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 
    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.


    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.
                                          Richard G. Lugar,
                                                    Ranking Member.





                          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 
    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 
    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 
    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 
    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 
    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 

                  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).


    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 

    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 
    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 

    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 
    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 

          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 
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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 

    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 

          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 

          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 

    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 
    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 
    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 
    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 
          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 

  \1\ The authors thank Michael Ratner of the Congressional Research 

  \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 

  \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 

 \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 

 \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 

 \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 

 \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 

 \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 

 \32\ The latest report of the Caspian Development Corporation can be 
        accessed at: http://ec.europa.eu/energy/infrastructure/studies/

 \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).



                          A P P E N D I X E S


                               Appendix I

    The Lugar Energy Report, ``Lugar Travels Pipeline Route,'' August 

 The Lugar Energy Report, ``Importance of the Nabucco Pipeline,'' July 

                              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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
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 
    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.
    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 
    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 
    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