[NGW Magazine] EU Needs Azeri Gas

This article is featured in NGW Magazine Volume 2, Issue 18

By David O'Byrne

Allegations that Baku has engaged in dodgy practices to secure support for its major infrastructure projects have been upstaged by the extension of the 'deal of the last century' but will nevertheless face official scrutiny.

Azerbaijan may be facing allegations that it laundered money through front companies, made payments to lobbyists and even a formal investigation instigated by the European parliament.

But less than a week after the allegations surfaced, Baku was the venue for the signing of an amended production-sharing agreement with the BP-led international consortium operating Azerbaijan's huge ACG oil and gas field.

This signal of "business as usual" coupled with the continuing ongoing development of the TransAnatolian and TransAdriatic pipelines (Tanap and TAP) to carry Azeri gas to European markets strongly suggests that any measures the EU may take in response are unlikely to have any significant effect on future investment in the Azeri oil and gas sectors, or indeed Baku's involvement in transit projects beyond its borders.

In its dealings with the European Union at least, Baku has a trump card: it is not Russia, and the importance of its gas exports in that respect is disproportionately large.

Laundromat allegations

The reports published initially in Danish media and subsequently in the UK's Guardian (September 5), alleged that Baku had channelled payments of as much as $2.9n through the Estonian branch of Danish bank Danske and a number of UK-based front companies.

What exactly all the money was used for remains unclear. However it appears that a substantial portion at least was paid to lobbying companies and influential individuals in an effort to improve Azerbaijan's image in the face of criticisms of its human rights record and its broader commitment to democracy and to ensure continued EU commitment to the Southern Gas Corridor (SGC), through which Azerbaijan plans to export its sizeable gas reserves to European markets. This major midstream investment requires loans and other forms of finance.

Just how much of what went on was illegal is equally unclear. Lots of countries employ public relations professionals, companies and consultants to lobby for specific issues or for general image management.

Calls by the European parliament for a formal investigation into just what was paid to whom and why, appear certain to be met with any wrongdoing subject to some form of censure and tightening of procedures.

Danske has already admitted that it may have been at fault for not questioning the money transfers, while the alleged use of Scottish Limited Partnerships could lead the UK to tighten up its corporate monitoring and to prevent the incorporation of entities that do not reveal final beneficial ownership.

Caspian gas exports

While any wrongdoing within EU borders is likely to be dealt with, the question remains as to what steps the EU can take, or would want to take, against Azerbaijan.

Thanks to its sizeable oil and gas reserves the former Soviet state has enjoyed rapid development and has long enjoyed strong support from the EU to further develop its gas sector and for the export of gas to Europe.

Around the year 2000 Brussels identified the looming problems of dwindling European gas reserves and potential over dependency on Russia for imports, developing plans for the SGC to bring gas from the newly independent gas rich states of the Caspian region.

For over a decade that took the form of the Austrian-backed Nabucco pipeline project to carry 31bn m³/yr of gas from potential suppliers in the Caspian and northern Middle east through Turkey and the Balkans for trading at Baumgarten.

However, Nabucco was conceived back to front: it began as an EU-compliant third-party pipeline project that sought to line up unspecified gas reserves and numerous buyers, rather than as a means to monetise a giant discovery. It never succeeded in persuading regional gas producers to commit their reserves to a project in which they might have had no stake, and failed to convince buyers that it could actually deliver the gas it was promising to transit. Sanctions on Iran killed off hopes for the cheapest source of gas.

The decision by Azerbaijan and Turkey to launch their own pipeline project, Tanap, to carry Azeri gas as far as the Turkey -Greece border saved Brussels no little embarrassment but also changed the dynamic of the SGC very much in Baku's favour.

Tanap is very much Baku's own project, while it also has a 20% stake in the TAP pipeline which will carry Azeri gas from the Turkey-Greece border to Italy. Certainly Socar's international partners seem little concerned by the recent allegations.

In mid-September, Baku was the venue for the signing of a new agreement with the eight international partners which make up the consortium developing the Azeri Chirag Guneshli (ACG) oil and gas field which will see the consortium continue to operate the field until 2050. (See separate feature.)

With BP the operator and main shareholder in ACG, the new deal was welcomed by a personal letter from UK prime minister Theresa May to Azerbaijan’s president Ilham Aliev, suggesting that business is continuing as normal.

Future investment 

May's letter was a significant gesture given that there are more talks scheduled for ACG, first over the possible transit of gas from the field to Europe in Tanap and then later over a new production-sharing agreement for a deeper gas field below the existing ACG field in which BP at least is sure to want to be involved.

That gas too would certainly be targeted at European markets and would help solve the one issue that continues plague both the 31bn m³/yr Tanap and the 20bn m³/yr TAP.

Although both are under construction and scheduled to be completed on time, Tanap has commitments of only 16bn m³/yr of which 10bn m³/yr will go to TAP.

The remaining 15bn m³/yr in Tanap and 10bn m³/yr in TAP leaves a hole both in the financial model of the line owners and more importantly in the EU plans for the SGC.

Other options for filling the empty capacity exist. But with Turkey at loggerheads with Iraqi Kurdistan over its planned referendum on independence from Iraq and continuing signals from the Trump administration in the US that it may re-impose sanctions on Iran, the two cheapest options to deliver already appear to be ruled out.

The more costly options of gas from the east Mediterranean fields of Israel and Cyprus or from Turkmenistan, appear far more distant prospects with nothing from the eastern Med likely before an agreement to reunify Cyprus – even assuming it has the gas to export – while gas from Turkmenistan could only transit to Europe with Azeri permission.

Which leaves Azerbaijan itself as the sole likely supplier, with gas from a number of possible sources including ACG, deep ACG and the Total operated Absheron field scheduled to be developed to supply gas for the Azeri domestic market.

The question is whether, the result of any EU investigation into the laundromat allegations would seek to put barriers to the huge investment needed for these fields to be developed and the gas brought to European markets via Tanap and TAP.

The simple answer though has to be no. Tanap and TAP have already attracted close to $1bn in funding from the World Bank together with smaller amounts from the Asian Development Bank, the EBRD and the International Bank of Reconstruction and Development. Tanap was also scheduled to receive funding from the EU-controlled European Investment Bank.

That funding has been delayed due to Baku's decision earlier this year to pull out the Extractive Industries Transparency Monitor (EITI), the body that aims to promotes open, responsible management of countries’ oil, gas and mining resources.

It's unclear the extent to which this funding is actually necessary or to what extent similar funding might be necessary for future upstream investments or the addition of compressor stations to expand Tanap and TAP to full capacity.

In theory the EU could put blocks on potential sources of funding or even on potential buyers for the gas but this would be disingenuous on both practical and political levels.

The scheduled expansions of both Tanap and TAP already face a major obstacle in the form of Russia's TurkStream pipeline through which Russia plans to deliver 15.75bn m³/yr of gas to the Balkans and Italy in direct competition. 

Any EU imposed sanctions against Azerbaijan would simply give Moscow an advantage against an Azeri competitor the EU has been backing specifically for it to compete with Moscow. And this backing is much older than Moscow's aggression against Ukraine, which led the EU to join the US in imposing sanctions against Russia.

Azerbaijan may have used its hydrocarbon revenues to fund whitewashing of its own poor record of human rights and democratic accountability, but as yet at least it hasn't annexed part of any of its Caucasus neighbours nor provoked a civil war, as Russia has in Ukraine.

Not being Russia should be sufficient to ensure any sanctions imposed on Baku have little effect on its gas business.

David O'Byrne