Gould: “Southern Corridor Needs To Be Perceived as Open for Business”
Jana Kovačovská - 22. Duben 2010, rubrika Rozhovory
Témata: energetická bezpečnost, Nabucco
Tim Gould is Manager for the Caspian, Caucasus and Southeast Europe in the Directorate of Global Energy Dialogue of the International Energy Agency in Paris. Prior to taking up this position in 2008, he dealt with a wide range of Eurasian energy issues as Senior Advisor to the Secretary General of the Energy Charter Secretariat (from 2004). The interview took place in the IEA headquarters in Paris. Part of this interview has also been published in the Bulletin of Azerbaijan and Caspian Studies Center, which operates under the International Institute of Political Science of the Masaryk University.
Mr. Gould graduated in 1992 from Oxford University with a degree in History and Russian, and has a post-graduate diploma in international relations from the School of Advanced International Studies of Johns Hopkins University. He speaks Russian and Ukrainian. Along with work in Brussels on the European internal energy market he has ten years of experience in Eastern Europe, primarily in Russia and in Ukraine, where he worked on EU-Ukraine economic and political relations in the Delegation of the European Commission, and also served as the founding Executive Director of the European Business Association in Kyiv.
Rozhovor proběhl v ředitelství Mezinárodní enregetické agentury v Paříži v prosinci 2009 (s úpravami v únoru 2010).
In terms of energy security, how important is Caspian region for the European energy security? Some argue that the percentage of gas it can bring to European markets through, for example, Nabucco pipeline, is so low, that it is quite overestimated when it comes to its contribution to the European energy security.
It would also be a mistake to underestimate the Caspian as a potential supply source. The resources in the region are considerable and the security benefits of diversification of sources of supply cannot be captured just by talking about the percentage contribution to European gas demand. At the margin these imports would introduce some flexibility and also a more competitive structure to the European gas market. Also, when you talk about possibilities for Caspian supply to Europe, you shouldn’t only link this to the Nabucco pipeline. There is number of other infrastructure projects that could bring gas to Europe, through Turkey, through Southeastern Europe, across the Black Sea and Europe might be looking over time at the possibility to open up an energy corridor that could be bigger than any individual project.
Do you see Russia as a competitor to Caspian countries in terms that they are all gas and oil producers?
Russia is the main export route for these countries and it’s clear that Gazprom prefers to buy the gas at the border and then incorporate this gas into the Russian gas balance, whether for domestic consumption or for export. Russia doesn’t want to see Central Asian producers marketing their gas directly on its traditional export markets in Europe.
However, the conditions under which the gas is purchased have changed dramatically over the last few years. Previously there was a significant discount compared with the price that was available on the international market. But this narrowed after 2005 and in March 2008 there was a decision taken between Russia and the gas producers in Central Asia saying that they would bring prices up to a European netback level, so that East Caspian producers would get the price available on the European market, normally the German border price, minus the cost for transportation and storage back to the relevant delivery point in Central Asia. As a result you have seen the gas export prices for these countries rose quite significantly at the beginning of 2009. This was particularly significant for Turkmenistan.
So the conditions for Russia’s gas relationships with these countries have changed quite dramatically. They’ve become more commercial. But this year the dynamic has changed again since these relationships have had to cope not only with rising prices and rising demand for gas, but now with declining European demand and declining prices. And this has proved to be a very difficult point in the discussions between Moscow and Ashgabat.
You see some of the same issues in the oil sector, although the task of finding new routes to market for landlocked Caspian producers is somewhat easier. You already see much more variety in oil export from the region and less opportunity for Russia or any other country to exert monopoly control. This is not to say that all problems are solved. Far from it, there are still big dilemmas ahead, in particular in Kazakhstan to increase export capacity to accommodate a large increase in oil production foreseen over the next 10–15 years. But gas is still more complicated, transport is relatively expensive and there are fewer options technically to bring it to markets.
What about the potential of other countries to sell their gas to Russia?
You see that Russia has made the same offer of a ‘European’ gas price for export from Azerbaijan. It is interesting for Azerbaijan that this offer is on the table since it provides Azerbaijan with additional leverage in negotiations with European transit countries and purchasers. Azerbaijan has in fact agreed to sell gas to Russia, although current volumes are relatively small. But if and when a reliable ‘European’ price is also on offer from Europe itself, with an open corridor directly to European markets, then the advantage of the Russian offer is not so clear.
More generally, what current energy trends do you consider most important in the Caspian region nowadays?
From a global perspective, a main trend is the growing contribution from the Caspian countries, by which I mean Azerbaijan, Kazakhstan, Uzbekistan, Turkmenistan, to the energy balance. This is well known: you’ve seen fast growth in oil production in Kazakhstan and Azerbaijan; Turkmenistan has enormous potential on the gas side and both Azerbaijan and Kazakhstan have gone from being net importers to net exporters of gas in the last few years. Kazakhstan is a major producer of both coal and of uranium. Uzbekistan is also a significant producer of gas in particular, but it’s not a big player on the international markets because of the large domestic market.
Are these countries also hit by the economic crisis?
Yes, a lot of their revenues, their GDP is linked to the export of minerals, natural resources, so they are vulnerable to changes in commodity prices. Of the energy producers, the country that has been most affected is probably Kazakhstan. It was the country that had opened up its financial sector the most, and it was the most vulnerable to tightening international credit markets.
But even in a country like Turkmenistan which has not opened up in anything like the same way you can still see the effects of the international recession. The fall in European gas demand has been felt in Ashgabat because for the moment Russia just doesn’t need Turkmenistan gas in the way that it did before.
The medium-term challenge for these countries is to have more balanced, diversified economies beyond the resources sector, and to ensure that resources can be used to support more sustainable economic development for the country as a whole. But this is quite difficult to implement in practice.
Which economic and energy characteristics Caspian countries share and in which do they differ?
In terms of energy resources, their endowments are different. These are not just hydrocarbons either. In Central Asia you have Tajikistan and the Kyrgyz Republic that have huge potential for hydropower, and in general the potential for renewables is greatly underused.
In terms of hydrocarbons you also have a varied landscape. Turkmenistan is overwhelmingly a producer of gas and has confirmed some exceptionally large reserves over the last year. The question for Turkmenistan is not how much gas is available to be produced, but how much gas does Turkmenistan want to produce. What incentives do they have to do it, at what prices available? And what markets are accessible? These are now the main issues for Turkmenistan.
By contrast, Azerbaijan and Kazakhstan are primarily oil producers with gas potential; Kazakhstan also has some of the world’s largest coal reserves. In some cases there are choices to be made as to what gets produced first. For example, most gas in Kazakhstan is associated with oil production, but companies in Kazakhstan have prioritized oil over gas and a large share gas output is immediately re-injected to maintain reservoir pressure. What this means though is that at the certain point in time, say towards the end of the 2020s it will become commercially feasible to produce this gas and so Kazakhstan will be looking at increased amounts of marketable gas in 15 years’ time.
How much accurate are the calculations of Turkmenistan gas reserves? And how do they influence the perspectives for upcoming years?
This is an area where there’s more certainty today than there was a few years ago. Some of the biggest potential fields in Turkmenistan have now been appraised by international experts, and one of them in south east Turkmenistan could be in the top 5 of the largest gas fields ever discovered. The best estimate of gas initially in place at the South Yolotan – Osman field is 6 trillion cubic meters. To put this in perspective, this is more than total proven reserves for the whole of Europe.
How does this influence the perspectives for the upcoming years? Well, the main thing is that it increases the chances of a cooperative solution to Caspian gas issues. If the reserves are larger, there is more room for multiple purchasers. And this is also very sought after in Turkmenistan, the diversity of customers. But it will require huge investment to get this gas to market.
As they differ in some terms, how does this shape their regional cooperation?
You’d expect that countries with different resources would have a good reason to trade and cooperate. This is true to an extent but regional cooperation is not as strong as it might be.
To take an example, Tajikistan and the Kyrgyz Republic have relatively limited hydrocarbon resources but they do have significant hydropower potential and the two main rivers that irrigate Central Asia, the Amu Darya, and the Syr Darya, rise in the mountains of Tajikistan and Kyrgyzstan. There are links between energy use and water use because these countries release water for electricity generation in the winter to meet higher seasonal electricity demand, whereas the downstream countries need water for irrigation in the spring and summer. So an issue for the region as a whole is how to manage these links between electricity production and water management. There is a trade-off between these countries, each of them needs something from the other in order to optimize their energy sector and there is strong rationale for regional cooperation.
There are some multilateral arrangements but the challenge is to implement them and to make them sustainable.
At the same time, even though you have quite different energy profiles for each country, they also have things in common. One thing they share is the way the energy is used – overall it’s used extremely inefficiently. The energy intensity of GDP is extremely high even in comparison to other countries from the former Soviet Union.
And so it’s a big challenge for the countries to try to save more of the energy than they do today.
Is this inefficiency linked to producing process, or does it lie in final use?
In terms of technology, you still have a lot of industrial infrastructure that is inherited from Soviet times; also in terms of the market structure in many cases you have pricing that doesn’t encourage energy savings and doesn’t encourage energy efficiency. But these are issues that countries are starting to focus on more because even the major exporters are realizing that they have incentives to use energy more efficiently; any energy they don’t use on the domestic market is energy available for export and for generating revenues.
Is this the same problem as in Ukraine, which is said to be using old and quite opaque energy distribution system?
Ukraine is also an example of the country that uses far more energy that it needs. And some of the structural issues are the same as in Central Asia. But the situation in Ukraine is more serious in that it imports such a lot of energy. And so the inefficiency doesn’t just have an economic cost or environmental cost, but it also has a big impact on energy security and political relationships.
From more political point of view, what do you think on how these countries are trying to decide whether they will orientate their exports rather towards European market or Russia or other major actors?
In a way the gas that is exported to Russia at the moment is already gas provided to Europe, either because there is a contractual link to European country as was the case for Ukraine, or because of the contribution to the Russian gas balance which allows Russia to export more to Europe. So these are already European supplies. The question is about routes and diversity.
What about China as a market for Caspian energy supplies?
Yes, these countries also have the possibility to sell to the East, to China, and you see in both the case of gas and of oil that China has been quick in putting new export infrastructure in place. The final section of a new oil pipeline from the north Caspian in Kazakhstan to western China was finished and a new gas pipeline is also being completed from eastern Turkmenistan across Uzbekistan and Kazakhstan to China.
So this eastern option for the countries of the east Caspian is becoming increasingly visible and for the moment in the gas sector it will offer the main large-scale alternative to the traditional export routes through Russia.
As you mentioned that the transport is the important challenge in gas market, do you consider LNG as a good way how to overcome these difficulties?
The economics of LNG transportation are such that for short distances across a closed sea like the Caspian it’s unlikely to be viable. For LNG projects you will normally be looking for direct access to international waters and that’s always been a problem for Caspian countries. They still rely on transit, on fixed infrastructure across land to get their resources to international markets.
Do you think that conflicts such as Russia-Georgia War have some significant impact on energy business?
The conflict itself did not lead to any lasting disruption to energy transportation through the South Caucasus. In the case of the gas pipeline from Azerbaijan there was a two-day disruption. You can argue that the Baku-Supsa oil pipeline was interrupted for longer, but it was just coming back into service after some repairs so it is not self-evident that these delays were directly attributable to the conflict. Of course flows along the Baku-Tbilisi-Ceyhan pipeline were disrupted but this also had to do with a separate explosion in eastern Turkey a few days before the conflict began.
Georgia is still an important transit country and the main export routes for Azerbaijan oil and gas all run through Georgia. I don’t see any under-utilization of these capacities through Georgia as the result of the conflict.
But still, the stability of the region has been shaken by this conflict, aren’t there any impact on future developments?
Yes, the conflict could influence strategic calculations among Caspian countries about the direction of export routes for their oil and gas, because of the perception of increased risk in the South Caucasus. So there is a potential impact. I think though that the situation is slightly different for oil and gas. In the case of oil, export routes in the South Caucasus are already well established and so there are strong incentives to continue to use these as much as possible. You can also see that plans are on track to increase oil transit through the region, in particular the oil export from Kazakhstan. However, the situation with gas is more complex because the conflict came at a relatively early stage in regional gas pipeline development. But the challenges for future Caspian gas export are not only about politics and security; there are other issues that need to be looked at too.
Such as?
One of the main ones is to ensure that the commercial conditions for trade along the Southern Corridor are transparent and that this corridor is really seen as open for business. Producers need a clear perspective on the benefits of the deep and lucrative European gas market, but a difficulty with these routes to Europe has always been the fact that they cross so many national borders, you have lots of different jurisdictions, lots of different transit players. This has the cumulative effect of making the benefits of that route less visible to the gas reserve holders and producers further upstream. On the plus side, some of the elements are in place and the intergovernmental agreement on Nabucco earlier this year was an important step forward, but I think there is still some work to be done to convince Azerbaijanis in the first instance and then the Turkmen that this is a viable commercial corridor that they can use, and to convince potential consumers that it will be reliable.
What about other frozen conflicts? Is there any correlation between their presence and energy projects advancement?
People look at the political risks. But the Georgia-Russia conflict also made clear to everyone the risks of having such disputes within the region. You can see some signs of positive movement on other regional disputes that have taken place in the period since August 2008.
We haven’t mentioned Iran yet. What are its perspectives to become more important energy player in the Caspian?
Even if you put all of the political and international aspects to one side, you still see some structural reasons why it’s going to be difficult for Iran to increase its exports of gas very substantially in the upcoming years. If you look at the volumes of gas that are required for re-injection in oil fields to maintain oil output, if you look at the trajectory of domestic gas demand, then you see that the volumes that are potentially left for export are quite limited.
Which energy security threats can you identify within Caspian countries themselves?
They have some serious challenges in terms of reliability of their domestic energy supply, in terms of upgrading their domestic energy infrastructure; they have significant environmental challenges associated with energy use. In many cases, you have electricity generating infrastructure and transmission infrastructure that is in strong need of investments. Reliable domestic energy supply will be essential for these countries’ social and economic development. But attracting investments to these sorts of projects is not easy, certainly not as easy as in the oil and gas sectors. It requires more attention to domestic market structure, the business climate, pricing and tarification. All of these sorts of things cannot be achieved overnight. And one thing they have in common is that no country is very well equipped to manage all these things on its own.
So to achieve ‘higher stage’ of energy security is the regional cooperation also important?
Yes, in many cases the infrastructure and electricity grids are shared and of course they all require cooperation with neighbors to get their products to market. That is the nature of the region, these are landlocked countries. That doesn’t mean that the regional cooperation is as good as it could be, but there are some strong driving forces towards finding regional approaches to common problems.
Which IEA projects are targeted towards these countries?
There are different activities, but a recent example was a joint workshop with Turkmenistan to share views and analyses of the way international markets operate and what are the likely developments in the main Eurasian gas markets over the next 10–15 years, that is, Europe, China, Russia, southern Asia. But at the same time, we’re now working hard to broaden the approach and to involve countries from the region more in a discussion of energy efficiency, renewable energy and technology. Among the projects that we’re working on now is one to encourage the collection of more reliable energy data and statistics, and to develop energy efficiency indicators that can be used to design policies on energy savings. We’re also trying to bring these countries to energy technology networks that the IEA has set up.
Renewables? Are they seriously becoming a ‘hot topic’ in the region that largely builds it GDP on hydrocarbons?
Renewables are a lot warmer topic than they were a few years ago. There is potential in these countries for solar, hydro in some countries, there is also wind and other resources. There are countries that already rely heavily on hydropower – Tajikistan, Kyrgyz Republic, Georgia, and Armenia. But overall, non-hydro renewables could be developed much more, and there is a lot of potential also for small-scale hydro as well as the big projects that policymakers tend to focus on.
It’s difficult to generalize, but my impression is that countries are more
receptive today to a discussion concerning these issues. Kazakhstan for example
has recently adopted legislation on renewable energy for the first time. You
need to be realistic about the likely penetration of renewables in a country
with Kazakhstan’s reserves of oil, gas and coal, but it’s important and
encouraging that this debate has begun and that countries like Kazakhstan are
ready to participate.
Thank you.
Autorka studuje mezinárodní vztahy na Masarykově univerzitě. Absolvovala také studijní pobyt na Institut d’Etudes Politiques de Paris – Sciences Po, a letní školy London School of Economics and Political Science a Evropského konsorcia pro politologický výzkum zaměřené na analýzu zahraniční politiky a na metodologii sociálně-vědního výzkumu. Je výzkumnou pracovnicí Mezinárodního politologického ústavu Masarykovy univerzity. Věnuje se problematice energetické bezpečnosti a zahraniční politice s regionálním důrazem na střední a východní Evropu a post-sovětský prostor.
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