Earlier this month, two events occurred which are likely to significantly boost Europe’s hopes for diversifying its gas supply and help realize Caspian gas exporting countries’ aspirations for reaching global gas markets. 

First, the discovery of a major new gas field in the Caspian was announced. A few days later, negotiations started between the European Union, Azerbaijan, and Turkmenistan regarding the legal framework of major new gas export infrastructure. In both instances, the United States should support the effort of the Caspian countries and the European Union to establish gas export routes and enter into the relevant intergovernmental and commercial agreements.

On September 9, Total, a French energy company, announced a major gas and condensate discovery in the Absheron block offshore Azerbaijan. The 270 sq km structure has the potential of several trillion cubic feet of gas and considerable quantities of condensate. The field is located about 25 km to the east of the producing Shah Deniz project in which Total holds a 10 percent share, and which could be onstream by 2021. The find boosts Azerbaijan’s proved gas reserves to more than 2.5 trillion cubic meters, along with the country’s prospects of becoming a major producer and exporter of gas from 2017 onwards when the second phase of Shah Deniz should become operational.

On September 12, the European Union authorized the European Commission to negotiate with Azerbaijan and Turkmenistan a treaty in support of the Trans Caspian Pipeline System, a major infrastructure project which could carry up to 40 billion cubic meters of gas from Central Asia to markets in Europe. The treaty will be the first of its kind in the relationship between the Union and its neighbors, and comes on the heels of a communication on security of energy supply and international cooperation adopted by the Commission on September 7. The communication stresses the opening of the Southern Corridor for supply of oil and gas to Europe as a matter of urgency, along with the need for a tri-partite cooperation at political and administrative level with Russia and Ukraine to ensure stable and uninterrupted gas supplies through the Eastern Corridor and cooperation on renewable energy projects with the Southern Mediterranean countries.

The discovery of more gas in Azerbaijan and the extension of a specific mandate to the European Commission to negotiate a framework agreement with a major external gas supplier significantly boost the prospects for bringing Caspian gas to European markets via alternative routes and for diversifying Europe’s gas supply. These recent developments are also a boon to Caspian energy producers and exporters, who now have a much better chance to gain direct access to the world’s largest export market for natural gas. 

However, shadows lurk in the background, and some of them could be bent on preventing or at least slowing down any progress of the South Corridor projects. One of the major risks is related to the divergent positions and policies which the Caspian littoral states have adopted regarding the development and exports of Caspian gas. The contradictory positioning is partially due to the different endowment of Caspian natural gas resources that these countries enjoy and its share in their overall gas resources, as well as to the availability of access to seaports and gas pipeline networks.

The United States Geological Survey estimates that most of the hydrocarbon resources around the Caspian are in five petroleum provinces – the North, Middle and South Caspian, the Amu Darya, and the North Ustyurt basins. A tiny sliver of a sixth one, the prolific Volga-Ural province located mostly in Russia, extends into Kazakhstan, but the volumes of oil and gas that could be found in this province in Kazakhstan are minute. 

The main feature of the Caspian petroleum provinces is that they are more gas-rich than oil-rich: about 60 percent of the Caspian petroleum endowment in terms of energy (barrels of oil equivalent) is natural gas, and the further south one heads, the greater the likelihood that the drill bit will hit gas pay rather than oil. The resources of the South Caspian are about 62 percent natural gas, and those of the Amu Darya province where Turkmenistan’s main fields are located – almost 90 percent. Even in the North Caspian basin, where about 60 percent of the hydrocarbons are liquids (oil and condensate), oil reservoirs are gassy and it is usually impossible to produce oil without taking care of the associated natural gas.

Finding ways to efficiently utilize and market natural gas is crucial for future of the Caspian petroleum industry. Keep in mind, however, that the role of Caspian itself is different in the petroleum industry of the various littoral countries. Iran’s prospects for hydrocarbon resources in the South Caspian and Amu Darya are significant and consist mostly of gas (up to 1.1 trillion cubic meters), but constitute only about 4 percent of the proved gas reserves of the country, most of which are in the Gulf area. Iran can therefore easily afford to create impediments for the development of the resources in the South Caspian, by preventing the delineation of the sea, sending the navy to shell exploratory vessels, and other means, and not take a penalty in terms of lost oil and gas production and exports. Russia’s parts of the North and Middle Caspian provinces contain large volumes of natural gas (about 2.7 trillion cubic meters), but this estimated resource composes just 6 percent of the country’s proved gas reserves, which are located mostly in West Siberia. Russia can therefore easily afford to deny to Caspian producers the use of its gas pipeline system for transit of gas to markets, and insist on buying all export volumes at the border instead, since the development of its hydrocarbons sector does not depend much on the Caspian. 

On September 12, Iranian oil minister Rostam Qasemi and his Russian counterpart Sergei Shmatko reportedly stated in Tehran following a meeting of the Russian-Iranian inter-governmental commission that Russia and Iran are against building any gas pipelines along the Caspian Sea bed for environmental reasons. All other countries in the Caspian region have all of their hydrocarbon eggs in the landlocked petroleum provinces around the sea – and in taking these resources to free global markets. For these nations, infrastructure that would provide access from the Caspian to free export markets is a matter of economic life or death.

The Absheron discovery in Azerbaijan and EU’s South Corridor treaty initiative are important milestones for both producers and consumers of natural gas in Eurasia. Total’s find underscores the fact that the petroleum provinces of the Caspian are young, with decades of development and growth of production ahead of them. Just Azerbaijan’s offshore contains more than 50 prospects that have been identified, but not yet drilled, and similar or greater numbers of good undrilled structures exist offshore Turkmenistan and Kazakhstan. In the past, these countries have failed to find a way to cooperate in the joint set-up and use of gas export infrastructure. The pace of resource development also hinges on granting reasonable, predictable terms of access for investors to resources and for exporters to markets. Equally important is having an equitable, transparent resource and revenue management policy in place. 

The United States should welcome and encourage the European Union’s effort to implement legally binding, transparent energy instruments as a part of the Union’s neighborhood policy. In the short run, the availability of such instruments will facilitate the implementation of the Southern Corridor initiative and the specific projects associated with it – Nabucco, the Trans-Adriatic Pipeline, the Italy-Turkey-Greece Interconnector, and others. A legally binding framework for the Trans Caspian Gas Pipeline will also promote development and stability in the gas producing countries (Turkmenistan, Azerbaijan) and the countries along the route to Europe (Georgia, Turkey). 

In the longer run, a treaty like the one negotiated between the EU, Azerbaijan, and Turkmenistan could also provide greater opportunities for regional cohesion, trade and development in Afghanistan and Uzbekistan. Parts of the most prolific Caspian petroleum province, the Amu Darya basin, are located in these two countries. In the past, Afghanistan produced and exported natural gas to Uzbekistan and other Central Asian republics, and used gas at power plants and industries. Gas resources in Afghanistan could be as much as 400 billion cubic meters, sufficient to support power generation, fertilizer and chemicals plants, and exports, providing a major source of employment and income. A gas pipeline to Pakistan could also become more realistic when stability and security improve along with economic growth and development.

A framework treaty between the EU and gas supplying countries will not provide all the answers needed to move forward specific projects. Gas sales and purchase agreements, contracts for the shipment and delivery of gas, its transportation via the pipelines, and other technical and commercial instruments will still be needed, and will most likely be negotiated separately by industry, not the governments. However, having a reference point and a clear legal basis is a sine qua non for industry’s participation.

The United States should explicitly support the particular infrastructure projects that link Caspian countries to free markets and to each other since, without such infrastructure, free trade and competitive markets will have a hard time emerging. Few Caspian countries boast competitive energy sectors. Their small size poses limitations in any case. Opening up hydrocarbon export routes, particularly for natural gas, from Central Eurasia via multiple, independently operated pipelines is an essential component of any strategy that aims to achieve energy security and to develop free, competitive oil and gas markets in the region.

Dr. Boyko Nitzov is a nonresident senior fellow with the Dinu Patriciu Eurasia Center at the Atlantic Council.