Session 1: Realizing Shah Deniz and the Southern Gas Corridor
The Honorable Ross Wilson,
Director, Dinu Patricia Eurasia Center,
Acting General Manager,
Vice President, Shah Deniz Development,
Nabucco Gas Pipeline International
The Honorable Richard Morningstar,
U.S. Ambassador to Republic of Azerbaijan
Trans Adriatic Pipeline (TAP)
Fuji Ballroom 1
Swissôtel, The Bosphorus
4:00 p.m. – 5:20 p.m.
Thursday, November 15, 2012
Federal News Service
ROSS WILSON: Good afternoon. Probably everybody knows I’m Ross Wilson. I’m the director of the Dinu Patriciu Eurasia Center at the Atlantic Council. I’m pleased to welcome all of you to this session entitled “Realizing Shah Deniz in the Southern Gas Corridor.”
A number of us in this room have worked on issues of Caspian oil and gas development over many, many years. I see Dick Morningstar down the way. I think Matt Bryza is here somewhere. I see many colleagues from SOCAR, from the Turkish government, from elsewhere.
And looking back on this, I think for many years it seemed like gas was going to be the next thing. It was going to be the next thing after Zarishra Gneshli (ph) got sort of done. It was going to be the next thing after the sanctioning of BTC. It was going to be the next thing after BTC was opened in 2006.
And it’s continued to be the next thing for, really, I think, quite a while. Over the course of the last six, nine, maybe 12 months, it stopped being the next thing and it started being “the” thing, “the” thing that is happening. The issue has transformed itself after a lot of back and forth among the parties, a lot of back and forth among the companies, extraordinarily complicated conversations between a number of countries, including in particular Azerbaijan and Turkey.
Finally it looks now, in November 2012, like this extraordinarily complicated project that involves massive – that involves massive financial requirements to develop large – very large-scale gas resources, new onshore facilities, thousands of miles of pipeline to connect markets in many, many different countries, that this is finally nearing lift-off.
And as I look back over the events that we, the Atlantic Council, have hosted here, clearly a very important milestone were the remarks that SOCAR president Rovnag Abdullahyev made at this event last year here in Istanbul where he announced the Trans-Anatolian Pipeline, which I think has been one of the keys, if not the key to open up real progress toward the realization of the Southern Gas Corridor, and therefore of Shah Deniz.
I’ll say one other piece of context: I have long thought that the development of Shah Deniz and the development of this new gas pipeline infrastructure would be important not just for Azerbaijan and for Turkey and for other European customers further downstream, but would also be exceptionally important for galvanizing the development and the transit of other gas, other Azerbaijani gas, potentially gas that lies further to the east in Turkmenistan, to some extent possibly other Central Asian countries, gas that might come from Iraq or certainly from the northern part of Iraq, the Kurdistan region, many in a different political environment from Iran.
So this can be an important political and practical catalyst that has immense ramifications economically for this region of the world, obviously for the countries around the Caspian, certainly for Turkey, and I think also for Europe as it looks further to diversify its sources of energy.
To discuss this today we have a number of distinguished participants who each have been involved in the Southern Gas Corridor for many different years. We do not, I should say, have with us Rovnag Abdullayev, who spoke at the first session this morning in place of Azeri Energy Minister Natig Aliyev, who at the last minute could not be with us. But I think this will make for somewhat more efficient conversation with one fewer person.
And I guess to start from my extreme left, we’re pleased to have Reinhard Mitschek, longtime managing director of the Nabucco Gas Pipeline International Consortium, or group. Very pleased to welcome you here.
Al Cook is the vice president for Shah Deniz development at BP, the guy for BP I think who is charged with pulling together this massive and extremely complicated project.
Richard Morningstar, now America’s ambassador to the European Union, but for a number of years the U.S. government’s point person on Caspian energy development and Eurasian energy development, both in the first Obama administration and going back in the Clinton administration as well, and in the interim served as America’s ambassador to the European Union.
We’re pleased to welcome the acting chairman and general manager of BOTAŞ Mehmet Konuk, here to talk a little bit about the Turkish piece.
And finally, Kjetil Tungland, managing director of the Trans-Adriatic Pipeline, originally from Statoil but very much involved in one of the two projects that are proposed to move beyond Turkey further into European markets: Trans-Adriatic Pipeline and the Nabucco project.
What I thought we would do is start in the East, work our way to the West, and then go back to Ambassador Morningstar to fill out the picture based on his experiences both in general on Caspian Energy and also his experience now in Azerbaijan.
So with that I think I’ll turn the floor to Al Cook to describe for us the current state of play on Shah Deniz, if you would please – Shah Deniz and the Southern Gas Corridor. What are the next key couple of milestones? And I hope if not in your conclusion now then perhaps a little bit later get to the point, where will we be when we gather here in 12 months at the next Atlantic Council Energy & Economic Summit? Where will this project be, and what then will be the next milestone?
AL COOK: Thank you very much. And as you say, it’s a terrific panel to be part of in terms of the whole scope of the Southern Corridor. And between Reinhard, Kjetil, Mehmet, we’ve all been part of the journey over the last 12 months that you’ve talked about. And Ambassador Morningstar, if you like, has been the guardian angel of the Southern Corridor for longer than most of us can remember, and continues to be.
So what I’ll do is I’ll just, over the next five, 10 minutes, is just give you a sense from our perspective of what’s happened over the last 12 months, touch briefly on what we’ve learned and the philosophy of the Southern Corridor going forward and then perhaps pick up finally on your question around where we need to be over the next 12 months.
So what has happened since we sat in the Atlantic Council this time last year? I think the progress actually has been quite good, as good as any of us dared hope for. And you began by talking about the project of the future, and I think we can genuinely say that over the last 12 months we’ve begun to move from sheets of paper to sheets of steel as we take on what is a $40 billion project stretching 4,000 kilometers from Azerbaijan to Europe.
And if you want evidence of that, perhaps you need look no further than the Caspian Sea, where for the first time we now have two mobile drilling rigs on the Shah Deniz field, the Istigal rig and the Maersk Heydar Aliyev rig, which are now going to be drilling in parallel on the Shah Deniz field alongside the existing rig we have on the first-phase development.
That in itself is evidence of the seriousness and the intent of the participants in Shah Deniz. Those rigs alone cost around about $1 million a day in terms of expenditure. And we wouldn’t be putting that amount of capital into Shah Deniz if we weren’t immensely serious about doing the project and confident that we can take it from being the project of the future to the project of the present.
If you start with the Caspian, you’ll see the drilling rigs. If you then move to Seng Dishau (ph) you’ll see the work we’re doing there on the expansion of the Seng Dishau terminal. Seng Dishau terminal is already the biggest oil and gas terminal outside of the Middle East, and we’re undertaking a substantial expansion of that.
On the South Caucasus Pipeline we’ve now agreed with SOCAR and the Azerbaijan government the exact scope for that pipeline expansion, and that will be done with 56-inch diameter pipeline. And the reason for that is because we want to put in place not just the right facilities for Shah Deniz Stage 2, but also an investment in the future demonstrating our confidence that Shah Deniz 2 will be followed by further sources of Azerbaijani gas.
And then further, into Turkey, where, as you mentioned this time last year there was the announcement by SOCAR on the creation of the Trans-Anatolia Pipeline, and the Turkish government and the Azerbaijan government have worked immensely constructively together to put in place the intergovernmental agreements, the host government agreements for the Trans-Anatolia Pipeline that, in parallel with companies like BP, have stated their intention to join TANAP.
And in BP we will be taking a 12-percent stake in the Trans-Anatolia Pipeline and seeking to bring the experience we have from BTC, the resources we have, and the project coordination abilities we have to support SOCAR and to support the Turkish government in making TANAP a success.
And then we come on to the European pipelines, where we’ve cooperated immensely closely with both the Trans-Adriatic Pipeline and the Nabucco pipelines. And of course we’re here today with just two options whereas a year ago we had four options for the pipelines. And that demonstrates our increasing confidence in what will make up the pieces of the jigsaw of the Southern Corridor.
And even this week we are working very closely with both the pipelines to understand how we can best ensure we meet the needs of the pipelines, the gas consumers in Europe, but also the needs of the Shah Deniz participants in the upstream.
So that’s where we are today. And I think it’s been a very successful year, but as we’ll come onto, there are still, as always, plenty of challenges ahead.
I secondly wanted to talk a little bit about the philosophy and what we’ve learned over the last year. And I think it’s worth pausing for a moment to reflect on the fact that we are embarking upon a $40 billion project at a time when most companies around the world are cutting back on their capital expenditure, and at a time when in Europe what we’re actually seeing is reduced gas demand in the short term and reducing potential gas prices in the longer term.
So it’s worth pausing for reflection to think about what that means for the Southern Corridor. Above all I think it means two things. Firstly, we have to deliver a Southern Corridor project which is both cost-efficient and scalable for the future, and that is a fine balance. If we put too much cost into the project, if we put too much capacity in the pipelines, if we’re too ambitious, we won’t get the project off the ground. We won’t be able to make Shah Deniz 2 economic.
However, if we’re not ambitious enough, we won’t be able to scale up the infrastructure so that when future gas comes, whether it’s from Azerbaijan or from other countries, we need to be able to bring that into the infrastructure and develop that through the same Southern Corridor. So it’s that balance of cost and efficiency – cost efficiency on the one hand and scalability on the other hand – that we really need to seek to get right. And that’s particularly important at a time when we have a massively expensive set of capital undertakings at the same time as the European gas market, which is deeply competitive.
Now, I think the second point is we recognize we need to be competitive. We recognize we need to come into Europe with a source of gas that addresses European needs. And the announcement recently on South Stream simply underline the fact that it’s deeply important that as Shah Deniz gas, as Azerbaijan gas, comes into Europe, it meets the needs of the consumers. They have a choice, and we intend their choice to be the Azerbaijani gas fulfills their needs best of all.
So then if you look forward to the third point, to your question on what needs to happen over the next 12 months, well, I think 2013 is a huge year for us. It’s the year in which we’ll take a final investment decision on Shah Deniz Stage 2.
In the short term, what we need to do is we need to put in place the commercial decisions which build upon the political infrastructure, the political framework that’s been put in place by the intergovernmental agreements, the host government agreements in Turkey and in Europe. We need to put in place the agreements for TANAP and we need to put in place the agreements for the other pipelines.
Secondly, we need to move forward with European pipeline selection. And it’s become clear that in the first phase of the Southern Corridor, certainly for the purpose of Shah Deniz 2, we can only support a single pipeline into Europe, and we need to work very closely with Reinhard’s Nabucco project and Kjetil’s TAP project to make sure that by June next year we have the two best pipeline projects possible and we can work with them to decide what the right combination is going forward.
And we understand that that decision needs to be a balance of commercial imperatives. The decision needs to be an economic decision, but we also need to make sure that we have the strong support of all the countries involved for the long term because we will certainly need, over a period of 30 years, a project development to make sure we’re addressing the concerns not just of the commercial participants involved but also the governments, the companies, the European Commission, the United States government, that are key stakeholders in the Southern Corridor project.
And all of that will come into place at time when we need to bring really four different projects now – Shah Deniz 2 in the upstream, the expansion of the South Caucasus Pipeline, TANAP and the European pipeline.
We need to bring all those four pipelines into a synchronized move forward so that we can be confident not only can we make a final investment decision together, but on a day in 2018 when we bring gas from the first Shah Deniz 2 well under the water in the Caspian Sea, we have the Seng Dishau terminal ready, we have the South Caucasus Pipeline ready, we have TANAP ready, we have the European pipeline ready, and we have gas consumers in Europe who want to buy, who want to burn gas from Azerbaijan and start the Southern Corridor really flowing. Thank you. (Applause.)
MR. WILSON: Thank you. That’s an excellent way to start us. Thank you very much, Al.
We move a couple of countries over to the West. Turkey obviously plays an extremely important role as a transit country for this gas. It is also an important consumer country. That’s not necessarily the work of BOTAŞ. But I would like to turn the floor over to Mehmet Konuk. Please give us where these projects stand, in your calculations; where you see significant issues that arise out of the presentation that Al Cook gave; and where, from your point of view, this project should be in November 2013.
MEHMET KONUK: (Mr. Konuk’s remarks are provided through an interpreter.) Thank you. Thank you. Chair, distinguished guests, distinguished participants, I would like to first of all greet you all on the occasion of this Atlantic Council meeting. On behalf of myself and on behalf of BOTAŞ, I greet you all.
In the morning session, the ministers and other distinguished speakers, participants talked about the strategic, economic and security supply aspect of transit projects, and they gave you some numbers, they made some assessments, evaluations of these projects, referring to their importance.
Turkey, where is Turkey in this picture of transit projects and why does Turkey place importance on these projects? First of all, if we look at the geography that Turkey is placed in, then we see that Turkey sits in a geography which has a significant portion of the world’s oil and gas reserves; that is, the Middle East, Central Asia and the Caucasus.
Turkey also is very important as a liberal economy, also has a competitive private sector. And we see that this market in Turkey will continue to develop. And Turkey continues to develop a vision in order to be globally competitive. So Turkey is an emerging country, and energy and the increase in energy demand is one of the most important elements in an emerging country.
In terms of electricity demand, in terms of the need for other fossil fuels, we see that since 2001 we have seen a rise, an increase in demand despite some of the crises which, from time to time, have had an impact on Turkey.
So within this framework we need to, as Turkey, meet our rising demand, and we also need to diversify our sources of energy, our sources of supply. And we can also be instrumental in meeting the demand in the West. And Turkey is working to portray itself as a reliable transit country, a stable transit country which can serve this purpose.
If we look at natural gas consumption in Turkey, we see that there has been about a 20 (percent) to 25 percent increase in natural gas consumption in Turkey in the last few years. It was 43 BCM last year. This year it’s more than 48 BCM. Where do we get our supply? We get our supply from five different countries: Iran, Azerbaijan, the Russian Federation. The natural gas comes though pipelines from these countries. And from Algeria and Nigeria we have long-term agreements and we get liquefied natural gas from those countries. And the total volume for these imports is 51 BCM.
So this year we have 48 BCM and next year it will probably be – our consumption will probably be around 50 BCM. And this will continue to increase. And according to estimates, in 2020 Turkey will need 70 BCM natural gas annually.
What does it mean? What does this mean? It means that we need additional resources. And at the same time, we need to supply – or get the supply of natural gas from different sources, from different routes. And as an additional source, the phase 2 project – the Azeri phase 2 project is important to us. And our government and BOTAŞ, we have been talking to our counterparts, SOCAR and the consortium, and as a result of our discussions, a portion of Turkey’s rising natural gas needs will be met by Azerbaijan.
And on the other hand, phase 2 – the initial production foreseen in phase 2 is 16 BCM, and the remaining 10 BCM will be carried through Turkey, transiting through Turkey to Europe. So this has been the goal, and as a result of the work we have done, on the 25th of October 2011, the host country agreement and the intergovernmental agreements were signed.
And within the framework of these agreements, BOTAŞ and SOCAR have reached an agreement for the sale of 6 BCM between BOTAŞ and SOCAR. And 10 BCM Shah Deniz gas will be transiting through Turkey to Europe. And an agreement has been signed to that effect as well.
And there will be some additional investments in the BOTAŞ system. That was what was foreseen in the agreement in order to transport this gas. But further studies showed that building a separate pipeline and having a transit system through this pipeline would be more advantageous. This pipeline would meet the additional needs of Turkey for natural gas, and it would also transport 10 billion cubic meters of natural gas to Europe.
And so there was a memorandum of understanding which was signed between governments, and a result of the work carried out between the two parties, on the 26th of June, 2012, the host country agreement for building of a separate pipeline and an intergovernmental agreement with regard to this new pipeline were signed. So with respect to the Turkish leg of this project, the agreements are concluded.
With respect to the building of the pipeline, Turkey has a 20 percent partnership. BOTAŞ, as a public entity, is part of that partnership. And SOCAR will be project leader. And as Mr. Al Cook said, the remaining part will be shared by the partners within a certain predetermined distribution. And I’m very happy that there is progress made in that respect.
Now, what about looking into the future now? There is the financing side here, and it is projected that the project will be completed by 2018, and there needs to be – all the alternatives have to be looked at. There were four alternatives in the past. Now there are two, Nabucco West and the top project, and work is ongoing. And Shah Deniz consortium is talking to the Nabucco companies, and we hope that in 2013 – by mid-2013 there will be a decision on the selection of the route and construction would then begin.
As I said before, Turkey is part of this project because Turkey wants to meet its additional needs and wants to diversity its sources, and also be a reliable and stable transit country. And Turkey wants to become a hub to such projects, and that’s why Turkey supports these projects, and we will continue to support projects in the future.
If we go back a little bit in time, the transit projects in the international arena did not start with TANAP. In the past there was Baku-Tbilisi-Ceyhan oil pipeline. This is an important initial effort. Such projects have to be strategically and economically evaluated, and they have to be supported.
The oil pipeline, as you know, became operational in 2006, and it runs smoothly and efficiently. In the same way, there was another agreement we had signed in 2001. This was an agreement we signed with Azerbaijan. Well, after that agreement with Azerbaijan, we also signed an interconnection agreement between Turkey and Greece. This was our first attempt at opening towards Europe. And although it was not very large, it was an important start for Turkey. And then we also took part in the – initiated in the Nabucco project.
And TANAP is at the moment – or has priority, but of course Nabucco, TAP, IGTI – all these projects are important. And whenever the right circumstances prevail between the buyer and seller, these projects could be projects which can become very feasible and very applicable. That’s why some projects will have, of course, priority in terms of timing and scale. But other activities, other previous efforts, are also important, and future possibilities exist. And as our minister said this morning, in 2030, 2035, it is expected that Europe’s consumption of natural gas will exceed 700 bcm. And that means an additional 200 bcm of natural gas. So from a production point of view, and also from the point of view of the agreements to be signed between consumers and producers, options which are stable and economic have to be considered. And if such circumstances exist, many projects could become instrumental.
So let me stop here in the first phase. And perhaps later on in other rounds, in Q-and-A, I can take the floor once again. Thanks very much. (Applause.)
MR. WILSON: Thank you very much, Mr. Konuk.
So we’ve had laid out very ambitious plans that BP has: $40 billion project to ship, to begin with, 10 bcm of gas all the way across Turkey and into European markets; discussion about a project that is both cost-efficient but also scalable, that presumably allows some opportunity – provides for some opportunities for growth.
Two competitive projects, at this point – as Al indicated – Nabucco and TAP. I hope – I’d ask you not so much to give us your sales pitch as talk through with us the comparative – the comparative advantages or the comparative differences, what distinguishes your project, and also a little bit about what you see as kind of the steps forward for you, how you look back at the kind of timeline that Al Cook has laid out.
To be somewhat arbitrary in the – in the order, why don’t I start with TAP – with Kjetil Tungland – and then we’ll turn to – turn to Nabucco.
KJETIL TUNGLAND: OK. Thank you very much, Ross. I think I will try and do this short and sweet, since I represent such a short and sweet pipeline project.
TAP is a project supported by the German company E.ON; the Norwegian company Statoil, who is also a member of the Shah Deniz consortium; and the Swiss energy giant, Axpo.
What the project is essentially about is an 800 – round about 800-kilometer-long pipeline from the western border of Turkey between Turkey and Greece, crossing Greece, crossing Albania, crossing the Adriatic Sea and ending up in Italy. The main design is to transport the 10 billion cubic meters annually that Shah Deniz is offering, but we’re designing the pipeline such that the capacity can be doubled, up to 20, by simply adding compression.
So that’s essentially what we are offering: the shortest way to the – a sizeable, well-paying market in Italy for people who have gas that they have been able to transport to the western borders of Turkey, supported by technically competent and financially strong owners.
But as Al was illustrating, this is just one piece of a really big puzzle. All in all, the value chain from Baku to market consists of six or seven projects, investment in the order of 40 (billion dollars) to 45 billion U.S. dollars. There are more than 10 companies – 10, at least, companies and six nation states. So this is really an international, intercompany project that needs to be coordinated very, very well.
And so then looking back at this session last year, what has happened – I congratulate Al and BP and the Shah Deniz consortium for the progress that they have made. But I’m afraid I have to say that not enough has happened. By November last year, there were four projects who had made their proposal to the Shah Deniz consortium. Of those proposals, made 1st of October last year, TAP is the only project still standing. And the promise was that they would make a final selection before Christmas that year. Now it looks as if that selection will not happen until maybe mid-next year. That means that this coordination of this giant project along the entire value chain is being delayed and postponed.
All the better, then, that TAP was chosen in February for the southern leg, in the event that Shah Deniz wants to go to Italy with its gas. Following from that decision, we have made agreements with Shah Deniz to closer coordinate our cooperation. We signed a cooperation agreement between TAP and Shah Deniz in June, following from which more members of the Shah Deniz consortium – BP, SOCAR and Total – made a(n) arrangement with the existing owners of TAP to fund the costs of TAP. And this was then also coupled with an option on their part to join the shareholding of TAP, which means that TAP now has three more funding partners and three more companies to report to. So for all practical purposes, I have three more shareholders. And that sort of ties this value chain tighter together, and that is a good thing in itself.
I would also like to underline that with the three existing shareholders and three new ones coming in, they have all six of them agreed that they are open and welcoming new partners to the project – whether they be from Italy, Greece or Turkey. And discussions to this effect are ongoing, and I look forward to having more partners in the project.
So what is going to happen until next Atlantic Council meeting in November? Well, the first thing is – that is going to happen is that TAP will complete all its technical studies and coordination with Shah Deniz. We will complete the intergovernmental agreement between Italy, Albania and Greece. You will have noted that these three countries signed a memorandum in New York on 26th of September, which kick started the negotiations over this intergovernmental agreement.
Next thing that happens is that TAP will be chosen as the final leg of Shah Deniz’s value chain. (Laughter). Following from that, we will then make what we call a resolution to construct, which means that the shareholders of TAP will commit themselves to start construction. And then Shah Deniz will make its parallel final investment decision. And that will then conclude the value chain, I think. The TAP consortium will consist of a new shareholder group with the three existing one and three new ones from Shah Deniz, but maybe also more companies from the countries that we’re passing through.
Thank you very much.
MR. WILSON: Thank you. Thank you. (Applause.)
And let’s hear from the competition – Reinhard.
REINHARD MITSCHEK: Thank you. Thank you, Ross.
I would like to thank the Atlantic Council for the invitation to give a report on the Nabucco project as it stands today, and I’m very happy to do that.
Well, Nabucco saw two important decisions this year influencing the scope and the overall framework of the project. One was that Turkey and Azerbaijan decided to develop the Trans-Anatolian pipeline across Turkey. And the second was in June 2012, Shah Deniz decided in favor of Nabucco West versus SEEP. And from that time on, we started to have very concrete, deep and fruitful negotiations between the Shah Deniz group, shelter group and the Nabucco West group.
We’ve heard today that there is a tendency that upstream costs could increase and market prices go down. And that’s a challenging situation for mid-streamers. The mid-streamer has to meet requirements from both sides and has to optimize the services and the costs. Optimization means that we have to attract the maximum of business opportunities; that creates a maximum of gas flow. And the result of that is a minimum in cost per unit for the transport.
Nabucco is not a – simply a pipeline bring gas from A to B. Nabucco West is a 1,300 kilometers marketplace. We will construct this pipeline in a 48-inch diameter, starting to offer 10 bcm, and stepwise increase the capacity up to 23 bcm. There are several intake and off-take points along the route. Nabucco will combine the national grates in Bulgaria, in Romania, in Hungary and Austria. We’ll interconnect to TANAP and to the downstream system in Baumgarten.
Nabucco also offers gas not only to the Nabucco countries itself, but to all the countries in the western Balkan. We have to consider that there is an interconnection from Bulgaria to Macedonia. There are interconnections from Hungary to Croatia to Serbia, from Croatia to Slovenia. There is a plan interconnect from Hungary to Slovakia, from Austria, downstream capacity increases. So that means that Nabucco as a marketplace offers gas for 500 million European customers.
One hundred forty market participants are registered clients at the Central European gas hub in Baumgarten. Billions of cubic meter of gas storage capacity is available in Bulgaria, in Romania, in Hungary, in Austria to create flexibility for the gas transports. It’s not simply a flat gas stream coming from Turkey across the countries of taking some gas and then ending up in Baumgarten. We’ll combine physically transporting Nabucco and top transactions from the Central European gas hub to other hubs in Europe – in the northwest of Europe, in the south of Europe, et cetera. And this combination creates attractive business opportunities.
In addition to that, I expect that Nabucco will work in the bidirectional way. That means that also capacity bookings in the reverse flow may be expected. Due to different scenarios of storage flexibility in the various countries, the storage cover ratio in Austria – that is a ratio of gas storage volume to yearly consumption in a country – is about 50 percent in Austria. It’s approximately 30 percent of the yearly consumption is in gas storage – is in Southeast Europe and at 3 percent in Turkey.
That means that there could be a need for flexibility to be delivered and offered to Turkey, to Bulgaria and to other countries. We have perfectly the framework in place: an intergovernmental agreement, which is ratified by all involved governments and parliaments; project-support agreements between Nabucco International and the host countries; exemptions from national regulatory authorities and the commission. This legal framework reduces the risk of the project. And that means, again, cost minimization, because the price for money for the financing of the project is lower. So all that are benefits Nabucco West can deliver.
When we had the positive decision pro-Nabucco West in June, as I said, we started negotiations with Shah Deniz. In the meantime, we are far advanced in these negotiations. In September, Nabucco offered a data room, and Shah Deniz experts started a due diligence process. In – also in September, we entered a deep exchange and interaction with TANAP. Also there we offered a data room, and we offered the engineering results we have made in Turkey to TANAP, because it is very important to synchronize the timelines – Shah Deniz, South Caucasus pipeline expansion, TANAP and Nabucco West. That is a very important step, and that increases the credibility and the importance of that project.
So all in all, Nabucco is on schedule. I expect that Shah Deniz will successfully negotiate with gas buyers in the first half of next year. We will further develop our project, project management, the technical solutions, environmental impact assessments and all the other elements which are needed to take off. And Nabucco will be ready to take off whenever the gas sales and purchase agreements are in place. We’re starting open season. We’ll conclude transportation agreements, and then we are ready for a final investment decision.
And Nabucco West was the winner of the semifinal in June 2012 between Nabucco West and SEEP, and I’m very confident that Nabucco will be the winner of the final in June 2013. Thank you. (Applause.)
MR. WILSON: I didn’t know it was an elimination contest quite in that way, but thank you very much, Reinhard.
Ambassador Morningstar, you are one of the people in this room who, I think, goes really all the way back to the beginning of America’s work on Caspian energy development and – starting in 1998, I think. You have – bring extraordinary perspective. I wonder if you could sort of fill in some of the pieces, how this relates to some of the work that you’ve been involved in. And of course, there’s an Azerbaijan-specific piece you may wish to add to as well. Please.
RICHARD MORNINGSTAR: Thanks, Ross.
First of all, let me thank you for referring me – referring to me as the guardian angel of the southern corridor. My wife, Faith, is in the audience. I don’t think she ever thought she would hear me described as an angel of – as an angel of any kind. (Laughter.) So I want to – I want to thank you for that.
And I have to say also, with respect to the southern corridor, I never expected to be even closer to it than I have been. But now I feel like I’m in its womb in Baku.
Having said that, I’ll start off just by making two very boring statements. One, I feel as strongly as ever that there will be a southern corridor. I have no doubt in my mind, anyway, of that. The second – after listening to the descriptions – the very good cases being made both by Kjetil and Reinhard Mitschek – I’ll say what I’ve said and others in our government have said many times: We’re neutral as between TAP and Nabucco West. There are only two things we’re concerned about: one, that if TAP is chosen, that there be a connection into Southeast Europe, and there appear to be commitments as to that – I see Al shaking – nodding his head; and also that any pipeline be expandable, as Al described and some of the others have described earlier.
Let me just briefly talk about a couple of macro issues, which may add a little more context. This relates a little bit to what Al was saying at the beginning. I think, by the very nature of the issue, there’s a difference in approach between countries, like Azerbaijan and Turkey, and companies – for example, the Shah Deniz partners. Countries are going to – particularly Azerbaijan but also Turkey – are going to emphasize the strategic aspect of things, as they should. Azerbaijan, for example, is concerned what’s going to happen with respect to future gas. There’s the Shah Deniz project, but there are also other projects that will hopefully be up and going by the early to mid-2020s. And how is that gas going to be taken care of, which is the reason why expandability is absolutely critical. The companies are obviously, and ought to be, emphasizing the commercial aspects.
And I think this has created some issues, but I’m heartened by the fact that I think that both the countries, SOCAR and the Shah Deniz partners are understanding where they’re coming from maybe more than they have before. And I think that the companies understand the absolute need for expandability. In fact, many of the Shah Deniz partners are involved in other projects in Azerbaijan. And I think Azerbaijan and Turkey certainly understand that there needs to be – that the projects need to be commercially viable.
I think where that issue that I’ve just raised has surfaced – it appears to have been resolved – is, without getting into the weeds, a recent dispute as to what the engineering design ought to be on the South – on the South Caucasus pipeline. But after some pretty testy going back and forth, the parties sat down and resolved that issue – and I think to the satisfaction of both – and have come to a very rational solution.
But this issue will continue under the surface or at the surface, because of questions of market demand, pricing, that will be, I think, an issue over the coming years. We’ll see. That – for the project, which – whether it’s Nabucco West or TAP – for it to be a successful project, it has to – it has to obviously provide a sufficient return. So the question is what’s the pricing going to be down the road? What’s the pricing? Yeah, Italy’s had good prices in the past, but given their sources of supply, given the present situation, is that pricing going to hold up? What’s the pricing going to be like in Baumgarten and on into Europe over the coming years?
I think these issues do have to be addressed. And the parties do need to work together to make sure that – as Kjetil mentioned, that all elements of the value chain are constructed in a way that everybody can end up – end up making a profit. I think that can be done, whichever project is chosen. But it’s going to take all of the parties – the Shah Deniz consortium, the countries involved, the project – the pipeline project sponsors – all to work together to make sure – to make sure that that happens. And I think it will – I think it will happen.
That brings me – and I think it relates – since I think you mentioned it, Al, in your – at the – in your statement – your initial statement – and it’s certainly in the news today because of what’s happened in Bulgaria, where Bulgaria has signed an agreement with South Stream. And the question, what effect is – what effect is South Stream going to have?
I’ll tell you very frankly what I think, anyway, about it. I’d say, first of all, countries have a right to do whatever they want to do as far as making decisions on projects. And if countries want to participate in the – in the South Stream project, so be it.
Having said that, there’s still a long way from here to there with respect to the South Stream project. And there are any number of regulatory issues that need to be worked through with the European Union. I mean, I could get into that in detail, but we don’t have time to do that now. But there are – there are certainly issues there, certainly financing issues and the like.
Having said that, I’m not sure that South Stream really will have much of an effect at all on the southern corridor. Where it’s going to have the most effect, perhaps, would be in the Balkans. But you know, Russia’s not going to roll over. I mean, they’re going to compete in the Balkans whether there’s South Stream or not, and that’s going to be an issue that’s going to have to be dealt with.
And so I don’t see the issue so much as being the Balkans, but it comes back to what’s the pricing going to be in the case of Nabucco West beyond the Balkans, in Baumgarten and beyond? And also, for that matter, with respect to TAP, what’s the pricing ultimately going to be in Italy and potentially north of Italy as, you know, different actions, you know, take place with respect to – with respect to gas being delivered there? That’s what the issue’s going to be. I don’t think it’s going to be South Stream.
And it comes back to the point that the parties have to work together in a situation where pricing may be uncertain over the next five to 10 years – whatever – to, again, work together to make sure that all elements of the value chain work. And I think that’s the challenge; I think it’ll happen. I think everybody’s committed to it happening. I think the southern corridor is critical, not just from a commercial standpoint; also from a strategic standpoint. Even with South Stream and the Balkans, it’s necessary to have competing – you know, competition in that part of Europe.
And at the end of the day, that – what’s the most important is that Europe develop a competitive market, as I think it’s trying to do with the third energy package, with respect to actions taken by the EU in the competition area – and to have as many diverse sources of supply as possible. That includes new pipelines; it includes LNG; it may include shale; it includes interconnections between countries and other things, which I think are the most important things as far as Europe is concerned.
MR. WILSON: Great. Thank you. Thank you very much, Dick. (Applause.)
Very wide-ranging observations that I think justified our placing confidence in you here to add, at the – at the tail end of the beginning of this session, the fullest possible picture of the issues.
I want to open the discussion up to questions. We’ll have a couple over here. Let me – let me take the moderator’s prerogative, though, and ask the first.
And that, I think, mostly is a question for Al. There are some important decisions that the consortium is going to make – relates to these two competing projects. Obviously you don’t want to talk too much about some of the specifics there, but if you could talk a little bit about what are the key factors that are at play here? Dick has referred to issues of price. Prices will vary in different parts of Europe. There clearly are issues of financing and the capitalization of these respective projects. There may be political issues – certainly for the government of Azerbaijan there are.
Can you talk a little bit about what are the – what are the key factors that BP and the – and the consortium would be look at as it makes this momentous choice? And then – and then I’ll turn it to the audience.
MR. COOK: Certainly, certainly. I think for two years now we’ve had a consistent framework within which we look at pipeline options into Europe. And that framework balances commercial drivers but also strategic drivers and also engineering drivers and elements like the reliability of exports as well. We use that framework for the selection that led to TAP being selected over ITGI and Nabucco being selected over SEEP, and we will consistently use that framework going forward.
But more specifically to your question, I think it’s the work we need to do as now prospective partners within Nabucco and TAP to make sure that between now and the middle of next year we can de-risk the projects and increase the value of the projects to a sufficient degree that the value of the whole 4,000-kilometer chain of platforms and pipelines and pump stations actually make sense as a commercial proposal.
So what do I mean by that? I think for both projects we’ve got to make sure that on the commercial side, two basic factors are in place: the right gas prices and the right transportation tariff to get the gas to the key markets. In terms of the right gas prices, we’ve been in a good situation, with an over-demand for Azerbaijani gas, and we need to work with our customers to make sure that that desire to import Azerbaijani gas continues through until we sign gas sales contracts in the middle of next year.
On the transportation tariff, I think we need to work very closely with TAP and Nabucco to create that right balance of cost and expandability. And what we can’t afford at this stage is excess capacity which might or might not be used in the future. From a Shah Deniz perspective, we’ve got to make sure that they’re economic upfront whilst all the time preserving the ability to have expandability beyond that. So I think that’s key on the commercial side.
On the political side, it’s about demonstrating strong and stable government support. I think Nabucco has always enjoyed a huge degree of support from the European Commission and from the governments that signed up for the original intergovernmental agreement and met recently to confirm that the IGA supports Nabucco West.
TAP has had a shorter history on that front than Nabucco but has moved extremely fast. And certainly the MOU signed by the Albanian, Greek and Italian governments in New York a couple of months ago was an absolutely fundamental step towards cementing that political support. I do, however, think it’s – a second fundamental step needs to be taken for TAP, and that would be the signing of an intergovernmental agreement between those three countries over the upcoming months. And we’ll be working very closely with TAP to ensure that the Italian, Greek and Albanian government can put in place that level of certainty which is fundamental to a successful project going forward.
So the criteria will be as we’ve set out, and I think the difference will be this time around us working very closely with Reinhard’s team and the partners of Nabucco – us working very closely with TAP and E.ON Statoil and EGL there to really develop as best as possible two pipeline options that are both commercially viable and politically supported.
MR. WILSON: Great. Thank you very much.
Let me open it up to questions. If I could ask each of you to identify yourself and please confine yourself to a question, and then we will go forward. And I have two over here, in the third row back and then – and then the one in front. Nassim (ph) – or either; it doesn’t matter. Please.
Q: I’m Olga Ukmush (ph) from Sciences-Po, Paris, Sciences-Po Institute in Paris. So I have two questions, one for Mr. Konuk and the second for Mr. Mitschek.
(Through interpreter.) Mr. Konuk, BOTAŞ not a partner in TANAP or in TAP and has a partnership of 16.5 (percent) in Nabucco but it’s got – it’s shrunk. Who owns the 20 percent that belongs to Turkey? If it’s not BOTAŞ, where does BOTAŞ stand in the south energy corridor?
(In English.) My question concerned the future of Nabucco and Nabucco West. So the reluctance of shareholders of Nabucco pipeline, does it in effect – I mean, negative or positive effect on the future of Nabucco – if shareholders – if some shareholders of Nabucco moves out, it will affect Nabucco pipeline company. Thank you.
MR. WILSON: Let’s take the next question right behind. Nassim Molazeleh (ph).
Q: Thank you, Mr. Ambassador. I’m Nassim Molazeleh (ph), member of Azerbaijani parliament. Early ’90s, there were great skepticism about any possible transport corridor, but as a result of efforts of U.S. government, now we have an existing system.
My question links to perspective of trans-Caspian system because now we feel there is a lack of American efforts on this issue. Is it because of some problem on trans-Atlantic cooperation or reset button push between the U.S. and Russia? But without U.S. efforts, it never will happen. And my question, is U.S. government supporting Trans-Caspian? Because it will give an additional gas, and we can share it between two competing projects. Thank you.
MR. WILSON: Three – so we have three questions. One, a very specific question with respect to the 20 percent share of TANAP that belongs to Turkey; more general question, I think, to Reinhard about Nabucco; and then a third question about Trans-Caspian Gas and maybe turn that to Dick Morningstar. Mr. Konuk?
MR. KONUK: (Through interpreter.) In the intergovernmental agreement, BOTAŞ and TPAO as public entities have 20 percent of the share. This is already in the agreement. If BOTAŞ hadn’t been part of the TANAP project, I would not have been sitting here in this panel, or I shouldn’t have been.
Second, our share in Nabucco West is still there. We continue to have it.
And TAP – with respect to TAP and IGTI, in previous terms there were discussions and project evaluations and memoranda. But concretely speaking, BOTAŞ is within the TANAP project and has the 16.7 percent in Nabucco West. Thank you.
MR. MITSCHEK: The question for the Nabucco shareholders: Nabucco has a very robust group of shareholders that are the national champions in every country we cross. And if we successfully conclude our negotiations with Shah Deniz, then some of us – some of the shareholders, strong shareholders – will come into this group. So I absolutely feel comfortable with this group of shareholders, and I’m fully confident that we can deliver the project in time, in budget and with respective care needed to be – to be the strongest link in this chain, because one topic is clear: It’s a very complex issue to realize this gas chain from the wellhead to the burner tip, and the whole gas chain is as strong as the weakest part. So therefore, we all have to take care that we perform well in order to prove that trust and the necessary care is – will be satisfied and market requirements will be satisfied and customers will receive the services they expect.
MR. WILSON: Thank you very much. Dick, on Trans-Caspian.
MR. MORNINGSTAR: First of all, let me say that our position on the Trans-Caspian Gas Pipeline has nothing whatsoever to do with any reset question with Russia or the trans-Atlantic relationship.
I’ve been working on a trans-Caspian pipeline for – as Matt Bryza knows, my predecessor in Azerbaijan over there, since we were working on it together – for 15 years – and Steve Mann as well who’s there, and I’m sure that I could point to several other people in the audience who have been working on a trans-Caspian pipeline, and nothing has happened.
We fully support a trans-Caspian pipeline. When the EU began its negotiations with Azerbaijan and Turkmenistan, I said that that’s great, that we fully support it, and if they are successful in concluding negotiations, I’ll be the first person out there dancing on the streets – in the streets. It’s something we’ve thought about for – obviously for a very long time.
But I have to fully honest with you, frank with you, as I always am, that there are problems. First problem is that Turkmenistan is still unwilling to allow international companies on the ground in Turkmenistan. I don’t know how you finance a trans-Caspian gas pipeline without some kind of international cooperation with Turkmen Gas. And until there’s an international company on the ground, my own view – this is my personal view – I don’t think it’s going to happen.
Second, there are still issues – obviously, there’s opposition by Russia and Iran to a trans-Caspian pipeline. We’ve always been of the view, as long as the pipeline crosses waters that are either Turkmen or Azeri, that should be enough to allow the pipeline to go forward.
But the question I think that is still out there: Is Turkmenistan really willing – apart from the question of international companies, is Turkmenistan really willing to go forward at this point with such a pipeline? Or is it leverage with the Russians? Or is it something else? I don’t know. I think Turkmenistan, for it to go forward, has to show, one, that it’s willing to work with international companies; and two, make very clear that it will – is willing to make an agreement that’s reasonable in nature as far as crossing the Caspian and not asking for too much from either Azerbaijan or the European Union.
MR. WILSON: Dick, all of us look forward to seeing you dance in the streets.
A question here in the front. If we can bring a microphone up here in the front row, please?
Q: Thank you. (Inaudible) – King’s College, London. I have a question to basically Al Cook.
We heard from Reinhard Mitschek and from Kjetil Tungland about – well, both believe they will win the contest. And you talked about the final that you want to win. But given the enormous amount of money, resources and skills both of you have put into your projects – discussing with governments, host government agreements, all the planning you have done – is it not a waste of resources if the contest has only one winner? Given the huge amount of gas the Russians ship with Nord Stream, which they want to double right now, with South Stream, which is a huge project compared to both of yours, is it not a possible idea to – may have two winners at the – at the very end? How big are the chances for this from your point of view?
MR. COOK: I think that’s a – that’s a good question.
First of all, we recognize the vast amount of investment, both political and commercial investment, that’s gone into both TAP and Nabucco. And as we look to make a decision in June 2013, we recognize that in order for the pipelines to continue to invest between now and then, we need to invest alongside them. And that is why a number of the Shah Deniz consortium members – Statoil, SOCAR, Total, BP – will be investing in both TAP and Nabucco and funding those pipelines from now until a selection is made.
I think to the other part of your question, is it – is it possible to take two? In the long term, absolutely. If the volumes of gas that we’re talking about between Azerbaijan, Turkmenistan, northern Iraq are developed, there is easily enough demand for two pipelines into Europe.
But I think this comes back down again to this balance between cost efficiency and scalability. Transporting gas 4,000 kilometers from the Caspian Sea to burn it in Europe is something that is always going to be tough economically. It’s always going to be an economic challenge to make enough money out of that to pay for and make an economic return on $40 billion of capital investment. So just as we can’t afford large amounts of overcapacity, in the first instance for Shah Deniz, we could not afford to pay the costs of two large pipelines into Europe. Longer term I think you could see two being developed.
I think there’s one other important principle as well, which Ambassador Morningstar referred to, and that is that even if we choose Nabucco, we would expect to be having some gas along the TAP route through a smaller pipeline into Greece. And even if we chose TAP, we would expect to have some gas along a smaller pipeline into southeast Europe. And part of the intent of that is to set in place the precedent for two export routes from Turkey that over time could mean two fully-fledged pipelines out of Turkey.
MR. WILSON: Good. Thank you very much. I can see that there is – there are a number of hands waving, and I’m afraid I’m going to have to ask you to try to accost our participants privately after this session is over and bring this – bring this to a close.
Let me say in terms of housekeeping, our next – the next piece is a reception and dinner. We are very honored to have with us this evening as our principal dinner speaker U.S. Deputy Secretary of Energy Daniel Poneman, who will talk about some of the issues we’ve discussed here but I think in particular in a global context and in particular in light of some exciting and important energy developments in the United States.
I’m very grateful to all of our panelists for very illuminating comments. Please join me in thanking our group today. (Applause.)