Caspian Report - Issue: 07 - Spring 2014
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caspian<br />
published by caspıan strategy ınstıtute | SPRING <strong>2014</strong> ıssue: <strong>07</strong><br />
Southern Gas<br />
Corridor and the<br />
Potential for Genuine<br />
Diversification<br />
Aura Sabadus<br />
Afghanistan’s Uncertain<br />
Future Threatens Global<br />
Peace<br />
Ahmet Yukleyen<br />
Contribution of Trans<br />
Adriatic Pipeline to the<br />
Italian Economy<br />
Matteo Verda<br />
Discussions about<br />
Violation of the Montreux<br />
Convention and the<br />
Future of Turkish-Russian<br />
Relations<br />
Fatih Ozbay
caspian<br />
Publisher<br />
<strong>Caspian</strong> Strategy Institute<br />
Owner on Behalf of Publisher<br />
Haldun Yavaş<br />
Editor-in-Chief<br />
Efgan Nifti<br />
Managing Editor<br />
Hande Yaşar Ünsal<br />
Editorial Board<br />
Siddharth Saxena, Gönül Tol, Bekir Günay, Efgan Nifti, Şaban Kardaş, Svante E. Cornell, Taleh Ziyadov, Amanda<br />
Paul, Mitat Çelikpala, Ayça Ergun, John Roberts, Fatih Macit, Şener Aktürk, Kornely Kakachia, Ercüment Tezcan,<br />
Vladimir Kvint, Joshua Walker, Sham L. Bathija, Emin Akhundzada, Hayreddin Aydınbaş, Ahmet Yükleyen, Mübariz<br />
Hasanov, Fatih Özbay, İbrahim Palaz, Friedbert Pflüger<br />
Researcher<br />
Seda Birol<br />
Research Assistants<br />
Ayhan Gücüyener<br />
Emin Emrah Danış<br />
Translator<br />
Cansu Ertosun<br />
Mailing Address<br />
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The opinions expressed within are those of the authors<br />
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without written permission of the publisher and the author.
CASPIAN <strong>Report</strong><br />
2<br />
The urgent need to diversify energy supply sources hit<br />
the European policy agenda as geopolitical complications<br />
in and among the region’s supply and transit countries.<br />
As a consequence, Europe has increasingly been<br />
feeling the strain of high import dependence. Projects<br />
of common interest announced by the EU, of which one<br />
is the Southern Gas Corridor, are aimed at bringing alternative<br />
energy sources through diversified routes to<br />
ensure European energy security.<br />
Notwithstanding key developments that have eased immediate<br />
concerns over energy supply - including the<br />
shale gas revolution in the US i , increased efficiency<br />
measures for energy use, growth in the production of<br />
renewable energy, and the stagnant trend in natural gas<br />
demand - the need for diversification and energy security<br />
has by no means disappeared. In this regard, the<br />
Southern Gas Corridor remains one of the most feasible<br />
and reliable projects on the ground in terms of providing<br />
a secure energy supply from the <strong>Caspian</strong> to Europe.<br />
Efgan Niftiyev<br />
Editor-in-Chief<br />
Twitter: @enifti<br />
efgan.niḟtiẏev@hazar.org<br />
The <strong>Caspian</strong> <strong>Report</strong> continues to monitor and evaluate<br />
the European energy outlook, providing incisive policy<br />
analysis on key developments. In the cover story of <strong>Caspian</strong><br />
<strong>Report</strong>, Aura Sabadus of King’s College discusses<br />
the Southern Gas Corridor and its potential to provide<br />
genuine diversification for Europe. Another key component<br />
of the Southern Corridor, the Trans Adriatic<br />
Pipeline (TAP) project, is explored in detail by Davide<br />
Tabarelli, Antonio Sileo and Matteo Verda. A prominent<br />
voice in energy studies, Frank Umbach, assesses the<br />
strategic perspectives for unconventional gas in the EU<br />
in the context of resistance to fracking for shale gas from<br />
European publics and policy makers alike.
EDITORIAL<br />
As in the previous issues of the <strong>Caspian</strong> <strong>Report</strong>, our<br />
<strong>Spring</strong> issue focuses on the evolving energy agenda. To<br />
this end, Mubariz Hasanov, Radu Dudau and Emin Akhundzada<br />
highlight current trends in the Turkish and<br />
Romanian energy markets as Turkey pursues its energy<br />
hub aspirations, and Romania seeks to develop its energy<br />
sources.<br />
The ongoing crisis in Ukraine, the instability in Iraq,<br />
Iranian nuclear negotiations and the recent presidential<br />
elections in Afghanistan will shape the security climate<br />
in Europe and the Middle East in the months and<br />
years to come. The potential deterioration of the security<br />
situation in Afghanistan in the aftermath of the US<br />
withdrawal and the country’s uncertain future threaten<br />
Afghanistan and its neighbors. Fatih Ozbay, Ahmet Yukleyen<br />
and Luay Al-Khatteeb provide unique perspectives<br />
on the volatile politics of the region.<br />
So without further ado, get your coffee mug and prepare<br />
for a good read!<br />
Southern Gas<br />
Corridor remains<br />
one of the most<br />
feasible and reliable<br />
projects on the<br />
ground in terms of<br />
providing a secure<br />
energy supply from<br />
the <strong>Caspian</strong> to<br />
Europe.<br />
i.<br />
According to BP statistics the United States has now become the<br />
largest natural gas producer in the globe due to shale gas production.
caspian<br />
CASPIAN <strong>Report</strong><br />
4<br />
06<br />
AHMET YUKLEYEN<br />
Afghanistan’s Uncertain<br />
Future Threatens Global<br />
Peace<br />
22<br />
MATTEO VERDA<br />
Contribution of Trans<br />
Adriatic Pipeline to the<br />
Italian Economy<br />
32<br />
AURA SABADUS<br />
Southern Gas Corridor and<br />
the Potential for Genuine<br />
Diversification<br />
46<br />
DAVIDE TABARELLI<br />
Environmental Effects of<br />
the Trans Adriatic Pipeline<br />
54<br />
MEHMET AKIF OKUR<br />
Iran Nuclear Negotiations<br />
and Turkey<br />
64<br />
FRANK UMBACH<br />
Strategic Perspectives for<br />
Unconventional Gas in the<br />
EU
TABLE OF CONTENS<br />
80<br />
ANTONIO SILEO<br />
The Importance of TAP for<br />
Italy Some Scenarios<br />
106<br />
LUAY AL-KHATTEEB<br />
Why World Oil Prices Should Be High and<br />
Stable<br />
110 EMIN AKHUNDZADA<br />
Turkey as an Energy Hub: Opportunities<br />
and Challenges<br />
92<br />
RADU DUDAU<br />
Romania’s Energy Strategy<br />
Options: Current Trends in<br />
Eastern Europe’s Natural<br />
Gas Markets<br />
116<br />
124<br />
FATIH OZBAY<br />
Discussions about Violation of the<br />
Montreux Convention and the Future of<br />
Turkish-Russian Relations<br />
MUBARIZ HASANOV<br />
Some Remarks on Economic Benefits of<br />
TANAP for Turkey
AHMET YUKLEYEN<br />
6<br />
Afghanistan’s<br />
Uncertain Future<br />
Threatens Global<br />
Peace<br />
Ahmet Yukleyen<br />
EXPERT, CENTER ON POLITICS AND SOCIAL STUDIES, HASEN
Osama bin Laden, the leader of Al-Qaeda,<br />
was killed by US Navy Seals on May 2,<br />
2011. It looked like the “War on Terror”<br />
had been won.<br />
IntroductIon<br />
Al-Qaeda’s September 11, 2001 attacks<br />
challenged America’s post-<br />
Cold War era global hegemony. In<br />
response, President George W. Bush<br />
launched the “War on Terror”, and<br />
within a month, American and British<br />
troops had entered Afghanistan.<br />
They were later joined by NATO, the<br />
Northern Alliance, and the United<br />
Nations in their mission to destroy<br />
al-Qaeda and eliminate its safe haven<br />
by removing the Taliban from power.<br />
Hamid Karzai became the twelfth<br />
president of Afghanistan following<br />
the removal of the Taliban regime in<br />
late 2001, and Osama bin Laden, the<br />
leader of Al-Qaeda, was killed by US<br />
Navy Seals on May 2, 2011. It looked<br />
like the “War on Terror” had been<br />
won. However, two Chechen brothers<br />
– though found to be self-radicalized<br />
and unconnected to any outside terrorist<br />
groups – were nonetheless motivated<br />
by Jihadism and the wars in<br />
Iraq and Afghanistan. They learned<br />
how to build explosive devices from<br />
an online magazine produced by<br />
the al-Qaeda affiliate in Yemen, and<br />
planted bombs at the finish line of<br />
the Boston Marathon on April 15,<br />
2013 killing three and wounding<br />
264. 1<br />
The Obama administration has not<br />
officially used the term “War on Terror”<br />
since 2009. It has become clear<br />
that preventing terrorist attacks<br />
requires more than dismantling Al-<br />
Qaeda or removing the Taliban or<br />
Saddam from power. Moreover, the<br />
US has begun peace talks and negotiations<br />
with the Taliban in Afghanistan,<br />
as the country is undergoing a<br />
major political transition and faces<br />
significant challenges in <strong>2014</strong>. In his<br />
state of the union speech on January<br />
28 th , <strong>2014</strong>, President Obama said<br />
that, with the so-called Bilateral Se-<br />
7<br />
CASPIAN REPORT, sprIng <strong>2014</strong><br />
1.<br />
Michael Cooper, Michael S. Schmidt, and Eric Schmitt (2013) “Boston Suspects Are Seen as Self-Taught and<br />
Fueled by Web” April, 23. http://www.nytimes.com/2013/04/24/us/boston-marathon-bombing-developments.<br />
htmlhp&pagewanted=all&_r=0. Retrieved on February 25, <strong>2014</strong>.
AHMET YUKLEYEN<br />
8<br />
In Afghanistan’s presidential elections this<br />
year, Karzai was barred by the constitution from<br />
running again as a candidate.<br />
curity Agreement (BSA) 2 , America<br />
would keep on a “small force” of<br />
Americans to train Afghan forces and<br />
pursue what remains of al-Qaeda. 3<br />
In Afghanistan’s presidential elections<br />
this year, Karzai was barred by<br />
the constitution from running again<br />
as a candidate. Tough bargaining between<br />
the Afghan government and<br />
the United States over BSA continues.<br />
What will this mean for the future of<br />
Afghanistan<br />
Justifying starting a war is easier than<br />
making the case for ending one. The<br />
uncertainties around the US withdrawal<br />
from Afghanistan have global<br />
as well as national implications. If<br />
Taliban gets back in power and terrorist<br />
networks return to their safe<br />
haven, Jihadist networks could pose<br />
an increased threat to global peace.<br />
These networks gain strongholds in<br />
countries with “failed states” such as<br />
Iraq, Syria, and possibly Afghanistan<br />
again.<br />
This article examines the current<br />
political negotiations between President<br />
Obama and Karzai (and his<br />
successor as President) over the US<br />
withdrawal, and what this means<br />
for the future of Afghanistan and beyond.<br />
It lays out the challenges for<br />
the country, and also the world. It argues<br />
that the biggest challenge is the<br />
potential reemergence of the Taliban,<br />
and through it, an increased threat of<br />
global Jihad. The persistence of Al-<br />
Qaeda affiliated terror networks despite<br />
the killing of Bin Laden and destruction<br />
of Al-Qaeda’s infrastructure<br />
has demonstrated that Al-Qaeda is a<br />
not a top down organization of Jihadists<br />
as some US intelligence experts<br />
had mistakenly assumed. 4 The Jihadist<br />
movement is global and cannot be<br />
limited to a single organization. This<br />
alternative approach argues that Jihadists<br />
are self-recruits, educated,<br />
and well-off. 5 According to The National<br />
Intelligence Estimate, which<br />
includes input from the US’s sixteen<br />
intelligence agencies, predicts that<br />
the Taliban and other power brokers<br />
will become increasingly influential<br />
as the US troops leave Afghanistan. 6<br />
2.<br />
Council on Foreign Relations (2013) “United States and Afghanistan’s Security and Defense<br />
Cooperation Agreement” Published on November 21. http://www.cfr.org/afghanistan/unitedstates-afghanistans-security-defense-cooperation-agreement-november-2013/p31921.<br />
Retrieved on February 23, <strong>2014</strong>.<br />
3.<br />
The Economist (<strong>2014</strong>) “Afghanistan’s uncertain future. Playing with fire: Hamid Karzai’s<br />
vilification of America is risking his country’s security” January 30. http://www.economist.com/<br />
news/asia/21595472-hamid-karzais-vilification-america-risking-his-countrys-securityplaying-fire.<br />
Retrieved on February 22, <strong>2014</strong>.<br />
4.<br />
Elaine Sciolino and Eric Schmitt (2008) “A Not Very Private Feud Over Terrorism” June 8.<br />
http://www.nytimes.com/2008/06/08/weekinreview/08sciolino.htmlpagewanted=all&_r=0.<br />
Retrieved on Jan. 19, <strong>2014</strong>.<br />
5.<br />
Marc Sageman (2008) Leaderless Jihad: Terror Networks in the Twenty-First Century<br />
(Philadelphia: University of Pennsylvania Press).<br />
6.<br />
Ernesto Londoño, Karen DeYoung and Greg Miller (2013) “Afghanistan gains will be lost quickly<br />
after drawdown, U.S. intelligence estimate warns” Washington Post. December 28<br />
http://www.washingtonpost.com/world/national-security/afghanistan-gains-will-be-lost-<br />
quickly-after-drawdown-us-intelligence-estimate-warns/2013/12/28/ac609f90-6f32-11e3-<br />
aecc-85cb037b7236_story.html. Retrieved on February 20, <strong>2014</strong>.
A stable future for Afghanistan looks<br />
bleak, which means that any country<br />
concerned with global Jihad terrorism<br />
needs to understand this movement<br />
and the details of its operations:<br />
specifically, how they recruit,<br />
grow, and operate in the context of<br />
Afghanistan’s uncertain future.<br />
to negotiate. The Loya Jirga, which<br />
was composed of tribal leaders and<br />
The Bilateral Security Agreement (BSA) will<br />
allow about ten thousand foreign troops - 8000<br />
American and 2000 NATO - to continue training<br />
and assisting Afghan security forces.<br />
US-Afghan Relations<br />
The Bilateral Security Agreement<br />
(BSA) will allow about ten thousand<br />
foreign troops - 8000 American and<br />
2000 NATO - to continue training<br />
and assisting Afghan security forces.<br />
Without the presence of these foreign<br />
troops, many Afghans fear that<br />
the influx of foreign aid will cease,<br />
and that, unable to resist the Taliban,<br />
the state could collapse. The first<br />
sign of trouble came in last November,<br />
on the occasion of a Loya Jirga, a<br />
grand assembly of 2,500 community<br />
leaders and tribal elders. The meeting<br />
was convened to approve the<br />
BSA, which had taken nearly a year<br />
elders close to Karzai had overwhelmingly<br />
endorsed it. However,<br />
President Karzai criticized American<br />
allies for a number of failures, including<br />
civilian deaths from a NATO<br />
bombing strike on January 15 th , 2013,<br />
and making big prisons on several<br />
occasions including a recent interview<br />
with the Sunday Times. 7<br />
Karzai’s other condition for the BSA<br />
was for the US to open serious peace<br />
talks with the Taliban. It transpired<br />
that in early February, Karzai had<br />
been holding secret peace talks with<br />
the Taliban, without telling his Western<br />
allies, though ultimately with<br />
limited success. 8 Karzai does not<br />
9<br />
CASPIAN REPORT, sprIng <strong>2014</strong><br />
7.<br />
Christina Lamb (<strong>2014</strong>) “Hamid Karzai: America has left me with a mess. I can’t wait to go”<br />
February 2, The Sunday Times. http://president.gov.af/en/news/full-transcript-of-presidentkarzais-interview-with-british-newspaper-the-sunday-times.<br />
Retrieved on February 21, <strong>2014</strong>.<br />
8.<br />
Azam Ahmed and Matthew Rosenberg (<strong>2014</strong>) Karzai Arranged Secret Contacts With the<br />
Taliban” February 3. http://www.nytimes.com/<strong>2014</strong>/02/04/world/asia/karzai-has-held-secretcontacts-with-the-taliban.html.<br />
Retrieved on February 22, <strong>2014</strong>.<br />
Afghan<br />
delegates<br />
discuss the<br />
Bilateral Security<br />
Agreement<br />
during a fourday<br />
Loya Jirga.
AHMET YUKLEYEN<br />
10<br />
want to face the same fate as Najibullah,<br />
the last Soviet-backed president,<br />
who was hanged when the<br />
Taliban first came to power. 9 If the<br />
Americans do not accept his conditions,<br />
he added, “they can leave<br />
anytime and we will continue our<br />
lives”. 10 This was despite the agreement<br />
reached between NATO and<br />
Karzai at the Lisbon summit in 2010,<br />
that NATO would pull its troops out<br />
of Afghanistan at the end of <strong>2014</strong>. If<br />
BSA is not signed, all NATO troops<br />
will leave at the end of this year and<br />
all military aid will be cut off, which<br />
would likely bankrupt the Afghan<br />
army and the government. This is<br />
easier said than done. Karzai has<br />
even looked to Afghanistan’s neighbours<br />
– India and Iran – for defense<br />
assistance and support. Just a week<br />
after he expressed his reluctance to<br />
sign the BSA, Karzai signed a security<br />
pact with Iran and soon thereafter<br />
went to New Delhi. However,<br />
the BSA has broad regional support<br />
from friends and rivals alike – China,<br />
India, Pakistan, and Russia. 11 Thus<br />
President Karzai may be over-playing<br />
his hand under these circumstances.<br />
Nevertheless, President<br />
Obama reaffirmed that America<br />
would stand by Afghanistan and<br />
keep on a “small force” of Americans<br />
that would train Afghan forces and<br />
go after “what remains of al-Qaeda”<br />
in his state of the union speech on<br />
January 28, <strong>2014</strong>. 12<br />
Even if Karzai does not sign the BSA,<br />
his successor will, after the elections<br />
scheduled for April of this year.<br />
An October poll by the Moby Group<br />
in Kabul, Afghanistan’s largest private<br />
media organization, suggests<br />
the two leading contenders are<br />
former Foreign Minister Abdullah<br />
Abdullah and former Finance Minister<br />
Ashraf Ghani. 13 Some say Karzai’s<br />
preferred candidate is Foreign<br />
Minister Zalmay Rassoul. 14 They<br />
are all pro-Western and continue to<br />
support American and international<br />
presence. In a way, Karzai knows<br />
that the agreement will be signed<br />
anyway, so his country is not going<br />
to lose anything. By not signing it,<br />
he is preserving his own reputation,<br />
and indeed gaining credibility by<br />
standing up for the Afghan people<br />
and avoiding accusations of being a<br />
“puppet” for the Americans.<br />
9.<br />
Fred Kaplan (<strong>2014</strong>) “Hamid Karzai Isn’t Crazy. He’s a wily survivor whose main concern is<br />
watching his own back” Feb. 13. http://www.slate.com/articles/news_and_politics/war_<br />
stories/<strong>2014</strong>/02/hamid_karzai_isn_t_crazy_the_afghan_president_is_trying_to_survive_a_<br />
post.htmlwpisrc=burger_bar. Retrieved on Feb. 23, <strong>2014</strong>.<br />
10.<br />
BBC (<strong>2014</strong>) “Afghanistan-US deal ‘hinges on Taliban peace talks’” Jan. 25. http://www.bbc.co.uk/<br />
news/world-asia-25893296. Retrieved on Feb. 22, <strong>2014</strong>.<br />
11.<br />
Ankit Panda (2013) “U.S. Intelligence Community Pessimistic About the Future of Afghanistan”<br />
Dec. 31. http://thediplomat.com/2013/12/u-s-intelligence-community-pessimistic-aboutthe-future-of-afghanistan/.<br />
Retrieved on Feb. 20, <strong>2014</strong>. 5. Marc Sageman (2008) Leaderless<br />
Jihad: Terror Networks in the Twenty-First Century (Philadelphia: University of Pennsylvania<br />
Press).<br />
12.<br />
The Economist (<strong>2014</strong>) “Afghanistan’s uncertain future. Playing with fire: Hamid Karzai’s<br />
vilification of America is risking his country’s security” Jan. 30. http://www.economist.com/<br />
news/asia/21595472-hamid-karzais-vilification-america-risking-his-countrys-securityplaying-fire.<br />
Retrieved on Feb. 22, <strong>2014</strong>.<br />
13.<br />
John R. Allen and Michael E. O’hanlon (2013) Ignore Karzai’s Arrogant Insults” Nov. 28. http://<br />
www.nytimes.com/2013/11/29/opinion/ignore-karzais-arrogance.html. Retrieved on Feb. 20,<br />
<strong>2014</strong>.<br />
14.<br />
John R. Allen and Michael E. O’Hanlon (<strong>2014</strong>) “Solidify the U.S.-Afghanistan<br />
Alliance” Jan. 23. http://www.brookings.edu/research/papers/<strong>2014</strong>/01/<br />
solidify-us-afghanistan-alliance-ohanlon-allen
Afghanistan’s National<br />
Challenges<br />
The stalemate over the signing of<br />
BSA only exacerbates the existing national<br />
and global challenges. It introduces<br />
more uncertainty to an already<br />
fragile situation. As they say, Americans<br />
have the watch but Afghans<br />
have the time, especially the Taliban.<br />
Afghan politics is based on betting<br />
on who will win, and siding with that<br />
party. If people calculate that power<br />
will be redistributed, they make new<br />
alliances based on those predictions.<br />
All of the actors - ethnic groups, tribal<br />
leaders, warlords, local police, and<br />
power brokers - are interested in<br />
maximizing their gains and can (re)<br />
make any alliance. In this complex<br />
power matrix, there are three interrelated<br />
questions: security, politics,<br />
and the economy. The security question<br />
requires an evaluation of the<br />
ability of the Afghan Security Forces’<br />
(ASF) to counter the Taliban insurgents.<br />
Even if the ASF is stronger,<br />
the legitimacy of a new government<br />
in Kabul depends on the success of<br />
the presidential elections this year<br />
for which people should feel secure<br />
enough to go to polls. Moreover, if the<br />
US troops leave and foreign aid weakens<br />
the economy to support ASF or<br />
state services fail. If Afghanistan falls<br />
into a civil conflict, the war economy<br />
will take hold of peoples’ lives. In this<br />
economic structure, war means employment,<br />
and peace means unemployment.<br />
Thus, evaluating the security,<br />
politics, and economy prospects<br />
for Afghanistan is a matter of life and<br />
death for the betters.<br />
Security<br />
Afghan politics is based on betting<br />
on who will win, and siding<br />
with that party.<br />
Over the last twelve years, the war in<br />
Afghanistan has cost 2,310 American<br />
lives 15 and $700 billion. 16 In his memoir,<br />
former US Defense Secretary<br />
Robert Gates described how the US’s<br />
Afghanistan policy changed from<br />
perceiving a fight that had to be won,<br />
to a situation that America just had<br />
to exit. The exit strategy has been to<br />
build the capacity of the ANF and to<br />
train them to defend their own country<br />
- but is ANF ready to take over<br />
There are some very optimistic views<br />
on the capacity of the ANF and on the<br />
country’s stability, but also deep pessimism,<br />
that once the US leaves, everything<br />
will fall apart. 17 According<br />
to the unclassified assessment by the<br />
US military, violence in Afghanistan<br />
has diminished, and “Afghan security<br />
forces are now successfully providing<br />
security for their own people.” 18<br />
11<br />
CASPIAN REPORT, sprIng <strong>2014</strong><br />
15.<br />
Iraq Coalition Casualty Count. http://icasualties.org/oef/. Retrieved on Feb. 23, <strong>2014</strong>.<br />
16.<br />
National Priorities Project. http://nationalpriorities.org/cost-of/. Retrieved on Feb. 22, <strong>2014</strong>.<br />
17.<br />
Ernesto Londoño, Karen DeYoung and Greg Miller (2013) Afghanistan gains will be lost quickly<br />
after drawdown, U.S. intelligence estimate warns” Dec. 28. http://www.washingtonpost.<br />
com/world/national-security/afghanistan-gains-will-be-lost-quickly-after-drawdown-usintelligence-estimate-warns/2013/12/28/ac609f90-6f32-11e3-aecc-85cb037b7236_story.<br />
html. Retrived on Feb. 20, <strong>2014</strong>.<br />
18.<br />
US Department of Defense (2013) <strong>Report</strong> on Progress Toward Security and Stability in<br />
Afghanistan. http://www.defense.gov/pubs/October_1230_<strong>Report</strong>_Master_Nov7.pdf. P. 1.<br />
Retrieved on Feb. 19, <strong>2014</strong>.
AHMET YUKLEYEN<br />
12<br />
In short, ANF has made progress but<br />
is not ready to control the country.<br />
According to Stephen Biddle, a defence<br />
policy expert at the Council<br />
on Foreign Relations, Afghanistan<br />
experts in and out of government<br />
have varying opinions. The optithe<br />
classified US National intelligence Estimate<br />
predicts that the Taliban and other power<br />
brokers will become increasingly influential as<br />
US troops withdraw.<br />
However, the classified US National<br />
Intelligence Estimate predicts that<br />
the Taliban and other power brokers<br />
will become increasingly influential<br />
as US troops withdraw.<br />
Despite the progress ANF has made,<br />
they are not yet ready to provide security<br />
for the country on their own.<br />
The United Nations reported that civilian<br />
casualties rose 16 percent in<br />
the first eight months of 2013. 19 The<br />
ANF needs more time to operate on<br />
their own. Today, there are 38,000<br />
US and 19,000 NATO troops serving<br />
in Afghanistan, training, advising,<br />
and assisting Afghan forces, both<br />
military and police. 20 Since 2009, the<br />
number of Afghan security forces<br />
has grown from 100,000 poorly<br />
equipped and minimally trained<br />
troops to a force of nearly 350,000,<br />
which is now planning and executing<br />
95 percent of daily patrols. Despite<br />
this impressive growth, these<br />
troops are still mostly illiterate, and<br />
they lack supporting airpower, intelligence,<br />
and medical capabilities.<br />
Moreover, institutional ability to<br />
train and pay personnel or resupply<br />
units is weak. 21<br />
According to the UNAMA Mid-Year<br />
<strong>Report</strong> 2013 on Protection of Civilians<br />
in Armed Conflict, as Afghan security<br />
forces have begun to conduct<br />
the majority of operations, the number<br />
of casualties has risen considerably.<br />
22 During the second quarter of<br />
2013, over 3,500 Afghan service personnel<br />
were reportedly wounded or<br />
killed in action. On 1 July, the Ministry<br />
of the Interior reported that<br />
299 police officers were killed in<br />
June, a 22 per cent increase over the<br />
same period in 2012. Large-scale<br />
unauthorized absences, in the army<br />
in particular, remain an issue. The<br />
same report documented 3,852 civilian<br />
casualties (1,319 deaths and<br />
2,533 injuries). “That marked a 14<br />
per cent rise in civilian deaths and<br />
a 28 per cent increase in civilian<br />
injuries compared to the first six<br />
months of 2012, with civilian casualties<br />
up 23 per cent overall.”<br />
19.<br />
United Nations Assistance Mission in Afghanistan (2013) “UNAMA registers 16 per cent<br />
rise in civilian casualties in Afghanistan” Oct. 2. http://unama.unmissions.org/Default.<br />
aspxtabid=12254&ctl=Details&mid=15756&ItemID=37327&language=en-US. Retrieved on<br />
Feb. 19, <strong>2014</strong>.<br />
20.<br />
NATO (<strong>2014</strong>) “International Security Assistance Force: Key Facts and Figures” Jan. 15. http://<br />
www.isaf.nato.int/images/stories/File/<strong>2014</strong>-01-15%20isaf%20placemat-final.pdf. Retrieved<br />
on Feb. 15, <strong>2014</strong>.<br />
21.<br />
Janine Davidson (<strong>2014</strong>) “If there are no U.S. or NATO troops in Afghanistan after <strong>2014</strong>, what<br />
happens” Feb. 3.http://www.cfr.org/afghanistan/if-there-no-us-nato-troops-afghanistanafter-<strong>2014</strong>-happens/p32320.<br />
Retrieved on Feb. 15, <strong>2014</strong>.<br />
22.<br />
United Nations Assistance Mission in Afghanistan (2013) Afghanistan: Mid-Year <strong>Report</strong> 2013.<br />
Protection of Civilians in Armed Conflict. P. 1. http://unama.unmissions.org. Retrieved on Feb<br />
10, <strong>2014</strong>.
An Afghan<br />
protester holds<br />
up a banner<br />
reading “Signing<br />
Bilateral Security<br />
Agreement with<br />
the USA is a<br />
Treason”.<br />
13<br />
mists see Afghan security forces<br />
expanding their territorial control<br />
until the Taliban is forced into a<br />
peace deal. Pessimists fear that the<br />
government could eventually lose<br />
control of the capital and other big<br />
cities because ANF is too weak. Biddle<br />
himself predicts “a stalemate for<br />
years to come.” 23<br />
The future of Afghanistan lies in rebuilding the<br />
legitimacy of the national political system<br />
through fair and free elections; creating<br />
functional state institutions that build trust<br />
in the national government rather than local<br />
power brokers; and fighting corruption.<br />
rather than local power brokers; and<br />
fighting corruption.<br />
CASPIAN REPORT, sprIng <strong>2014</strong><br />
PolItIcs<br />
The future of Afghanistan lies in<br />
rebuilding the legitimacy of the national<br />
political system through fair<br />
and free elections; creating functional<br />
state institutions that build<br />
trust in the national government<br />
The upcoming presidential elections<br />
are an opportunity and challenge for<br />
politics. The acceptance of the final<br />
election outcome by Afghanistan’s<br />
main constituencies would represent<br />
a great step toward political legitimacy.<br />
If Afghan people can reach<br />
political consensus on a candidate,<br />
23.<br />
Ernesto Londoño, Karen DeYoung and Greg Miller (2013) Afghanistan gains will be lost quickly<br />
after drawdown, U.S. intelligence estimate warns” Dec. 28.http://www.washingtonpost.<br />
com/world/national-security/afghanistan-gains-will-be-lost-quickly-after-drawdown-usintelligence-estimate-warns/2013/12/28/ac609f90-6f32-11e3-aecc-85cb037b7236_story.<br />
html. Retrived on Feb. 20, <strong>2014</strong>.
US President<br />
Barack Obama<br />
holds a bilateral<br />
meeting with<br />
Afghanistan<br />
President Hamid<br />
Karzai.<br />
AHMET YUKLEYEN<br />
14<br />
they can move forward - but that has<br />
not yet happened. Although many<br />
policymakers and analysts focus on<br />
who will be the next president, the<br />
more important question in relation<br />
to sustainable peace and political<br />
consensus is whether Afghanistan’s<br />
Pashtun, Uzbek, Tajik, Hazara, and<br />
other major constituencies will support<br />
the election’s outcome. The biggest<br />
opposition to any political consensus<br />
is the Taliban, who are mostly<br />
Pashtuns. The Taliban leader Mullah<br />
Omar disparaged the upcoming elections<br />
as a “waste of time”, highlighting<br />
allegations of fraud and corruption<br />
in previous elections as part of<br />
a campaign to discourage election<br />
participation. 24<br />
State institutions beyond the security<br />
sector must be viable. These<br />
include the public-finance system;<br />
health services and education; infrastructure<br />
for transportation, communications,<br />
irrigation, and energy.<br />
State institutions should be able to<br />
manage sources of revenue, including<br />
municipalities. A reform agenda<br />
needs to address corruption and<br />
ensure services work not only in the<br />
major cities but also in the towns and<br />
villages. The rural areas are most<br />
open to corruption and risk falling<br />
into the hands of local power brokers.<br />
If sub-state actors (especially power<br />
brokers from northern and western<br />
Afghanistan) lose faith in the central<br />
government, they are likely to accelerate<br />
their efforts to rearm. These fissures<br />
will undermine the cohesiveness<br />
of the ANF and other security<br />
agencies. If the central government<br />
cannot control the distant regions<br />
of Afghanistan, then India, Russia,<br />
and Iran will likely increase support<br />
for anti-Taliban forces in the north<br />
and west, while Pakistan would support<br />
the Taliban and other Pashtun<br />
groups in the south and east. 25<br />
24.<br />
United Nations Assistance Mission in Afghanistan (2013) Afghanistan: Mid-Year <strong>Report</strong> 2013.<br />
Protection of Civilians in Armed Conflict. P. 1. http://unama.unmissions.org. Retrieved on Feb<br />
10, <strong>2014</strong>.<br />
25.<br />
Graeme Smith, Seth G. Jones, Nader Nadery, Clare Lockhart, Director, and Daniel S. Markey<br />
(2013) “Prospects for Afghanistan in <strong>2014</strong>” Dec. 18. http://www.cfr.org/afghanistan/prospectsafghanistan-<strong>2014</strong>/p32094.<br />
Retrieved on Feb. 18, <strong>2014</strong>.
The reliance of the US forces on manipulative<br />
powerbrokers and controversial<br />
paramilitary forces, such as the Afghan<br />
Local Police, has been extremely<br />
problematic for stability and counterterrorism<br />
objectives in the long term. It<br />
was often the powerbrokers’ politicaltribal-criminal<br />
patronage networks<br />
that shaped the stabilization and statebuilding<br />
effort in Afghanistan. “Many<br />
Afghan people themselves refer to the<br />
post-2002 political dispensation and<br />
the rise of non-Taliban protagonists as<br />
mafia rule.” 26<br />
Mafia rule can gain a great deal of legitimacy<br />
and political capital among the<br />
population, especially if it outperforms<br />
the state in providing security, services,<br />
and socio-economic benefits. But mafias<br />
can be highly abusive, capricious,<br />
and ultimately deficient in providing<br />
security or economic benefits to the<br />
population, which is the situation that<br />
emerged in post-Taliban Afghanistan.<br />
“Since many of the mafia-like powerbrokers<br />
have been linked to the Afghan<br />
government and even frequently held<br />
positions in the government, many Afghans<br />
have come to see the state itself<br />
as a mafia-like structure.” 27<br />
Karzai’s presidency has largely lost legitimacy<br />
due to corruption. If the political<br />
actors of Afghanistan fail to use the<br />
elections this year as an opportunity<br />
to build political consensus and legitimacy<br />
through trustworthy state institutions,<br />
no military power can stabilize<br />
the country. This could lead all players<br />
to default to a civil war in which they<br />
all lose out.<br />
Economy<br />
A stable economy is a vital in providing<br />
security and dependable political<br />
institutions. If soldiers in ANF are not<br />
paid, they will seek out other options.<br />
If state officials are not paid well, they<br />
begin to engage in corruption and<br />
bribery. Moreover, without stability<br />
and well-functioning bureaucracy, investments<br />
cannot grow. The Afghan<br />
economy has been trapped in this<br />
vicious circle for decades, and consequently<br />
is reliant on two main sources<br />
of income: foreign aid and opium.<br />
If security is not provided once US<br />
troops leave, aid workers and investment<br />
dollars will leave as well. The<br />
hard-won gains from twelve years of<br />
fighting and $17 billion in economic<br />
assistance 28 could be lost if the country<br />
slides into another violent civil war,<br />
reverts to Taliban rule, and if al-Qaeda<br />
reclaims its former safe haven. The<br />
sooner Afghanistan moves toward<br />
revenue self-sufficiency, the sooner<br />
it can act to prevent international aid<br />
dependency. This requires focusing<br />
on certain sectors for growth such as<br />
agriculture, extractives, and light industry<br />
and linking them to markets<br />
inside and outside the country. It also<br />
requires fighting corruption and reducing<br />
revenue losses to middlemen. 29<br />
15<br />
CASPIAN REPORT, sprIng <strong>2014</strong><br />
26.<br />
Vanda Felbab-Brown (2013) “Afghanistan After ISAF” Harvard International Review Vol. 35, No.<br />
2.http://hir.harvard.edu/not-a-drop-to-spare/afghanistan-after-isafpage=0,2. Retrieved on<br />
Feb. 2, <strong>2014</strong>.<br />
27.<br />
Ibid. p. 3.<br />
28.<br />
U.S. Agency for International Development http://www.usaid.gov/afghanistan/about-us.<br />
Retrieved on Feb. 12, <strong>2014</strong>.<br />
29.<br />
Graeme Smith, Seth G. Jones, Nader Nadery, Clare Lockhart, Director, and Daniel S. Markey<br />
(2013) “Prospects for Afghanistan in <strong>2014</strong>” Dec. 18. http://www.cfr.org/afghanistan/prospectsafghanistan-<strong>2014</strong>/p32094.<br />
Retrieved on Feb. 18, <strong>2014</strong>.
AHMET YUKLEYEN<br />
16<br />
The second big challenge in stabilising<br />
the Afghan economy is the<br />
opium trade. The 2013 World Drug<br />
<strong>Report</strong> highlighted that Afghanistan<br />
accounted for 74 per cent of the<br />
world’s illicit opium production in<br />
2012. 30 The global area under poppy<br />
cultivation rose by 15 per cent in<br />
2012, driven largely by increases<br />
in Afghanistan. Global production,<br />
however, fell by almost 30 per cent,<br />
mainly as a result of poor yields<br />
in Afghanistan owing to adverse<br />
weather conditions. Moreover, there<br />
are nearly 1 million Afghans affected<br />
by drug use — one of the world’s<br />
highest levels of addiction — and<br />
only 10 per cent receiving any form<br />
of treatment.<br />
In the midst of this gloomy picture,<br />
there are two glimpses of hope for<br />
the Afghan economy: energy and<br />
youth. On July 7 th , Afghanistan became<br />
the fifty-fourth member of the<br />
Energy Charter Treaty. On July 9 th ,<br />
progress was made on the Turkmenistan-Afghanistan-Pakistan-India<br />
(TAPI) gas pipeline project with a<br />
contract signed in Ashgabat between<br />
Afghanistan and Turkmenistan on<br />
the sale and purchase of gas. On July<br />
13 th in Kyrgyzstan, a meeting of the<br />
Foreign Ministers’ Council of the<br />
Shanghai Cooperation Organization<br />
reaffirmed support to Afghanistan<br />
as an “independent, peaceful, neutral<br />
and prosperous state, free from<br />
terrorism and drug-related crime.” 31<br />
The central role of the United Nations<br />
in international efforts to improve<br />
the situation in Afghanistan was also<br />
underlined. Under the Istanbul Process,<br />
regional technical groups on all<br />
six of the agreed confidence-building<br />
measures held meetings.<br />
Human capital is the most valued<br />
type of capital in today’s high-tech<br />
global economy. Afghanistan’s new<br />
generation—tolerant and talented—<br />
is the future of this country. This new<br />
generation is full of the energy and<br />
resources required to tackle its country’s<br />
challenges. 32 As Afghanistan<br />
navigates the complex road ahead,<br />
these aspirations and voices must be<br />
addressed.<br />
Global Challenges: Jihadi<br />
Salafism, Al-Qaeda, and the<br />
Taliban<br />
The uncertainty in Afghanistan’s future<br />
brings global as well as national<br />
challenges because of the affinity<br />
among Jihadi Salafism, Al-Qaeda,<br />
and the Taliban. With a degree of<br />
simplification, it can be claimed that<br />
Jihadi Salafism is the bonding ideology<br />
between Al-Qaeda and the Taliban.<br />
This means that if the Taliban<br />
gains ground in Afghanistan, Al-Qaeda<br />
can regain footing in this part of<br />
the world. Jihadi Salafis are already<br />
a global movement, but they gain<br />
30.<br />
United Nations Assistance Mission in Afghanistan (2013) Afghanistan: Mid-Year <strong>Report</strong> 2013.<br />
Protection of Civilians in Armed Conflict. P. 1. http://unama.unmissions.org. Retrieved on Feb<br />
10, <strong>2014</strong>.<br />
31.<br />
United Nations Assistance Mission in Afghanistan (2013) Afghanistan: Mid-Year <strong>Report</strong> 2013.<br />
Protection of Civilians in Armed Conflict. P. 1. http://unama.unmissions.org. Retrieved on Feb<br />
10, <strong>2014</strong>.<br />
32.<br />
Graeme Smith, Seth G. Jones, Nader Nadery, Clare Lockhart, Director, and Daniel S. Markey<br />
(2013) “Prospects for Afghanistan in <strong>2014</strong>” Dec. 18. http://www.cfr.org/afghanistan/prospectsafghanistan-<strong>2014</strong>/p32094.<br />
Retrieved on Feb. 18, <strong>2014</strong>.
traction in places where they can<br />
train new recruits. Failed states such<br />
as Somalia and Syria provide fertile<br />
ground. If Afghanistan becomes a<br />
safe haven for Jihadi Salafists once<br />
again, this would be especially significant,<br />
because Al-Qaeda (as the<br />
spearhead for Jihadi Salafism) began<br />
here. If Jihadi Salafism is understood<br />
as the common denominator of Al-<br />
Qaeda and the Taliban, the potential<br />
danger here is clear.<br />
Jihadi Salafism<br />
The Arabic term Salaf literally means<br />
predecessors. Salafism claims that<br />
“true Islam” is based on (i) a literalist<br />
interpretation of the Quran and Hadith,<br />
the sayings of the Prophet Muhammad;<br />
(ii) a puritanical approach<br />
to traditional Islamic practices, rejecting<br />
them as bid’a, cultural innovations,<br />
that adulterate “pure” Islam<br />
(e.g. celebrating the birth of Prophet<br />
Muhammad and visiting the tombs<br />
of Sufi masters); and (iii) an exclusivist<br />
conception of religious truth<br />
and salvation. Salafists claim that<br />
only their interpretation of Islam can<br />
bring salvation. They often quote the<br />
hadith, sayings of Prophet Muhammad<br />
according to which Muslims<br />
will divide into seventy factions at<br />
the end of days, and only one group<br />
will be saved. They believe they are<br />
this group.<br />
Salafism calls on followers to purge<br />
Islam of cultural and mystical traditions<br />
and to reassert tawhid, the<br />
unity of God. The Salafist conception<br />
of tawhid is pitted against Sufi<br />
emphasis on the role of a master to<br />
guide one’s spiritual journey to God.<br />
The puritanical practice of Salafism<br />
The uncertainty in Afghanistan’s<br />
future brings global as well as<br />
national challenges because of<br />
the affinity among Jihadi Salafism,<br />
Al-Qaeda, and the Taliban.<br />
is based a rejection of all Islamic<br />
interpretations and practices that<br />
are not based on direct, literal references<br />
to the Quran and Hadith. These<br />
rejected practices are known as<br />
bid’a, innovations, that lead Muslims<br />
astray. They are particularly critical<br />
of Sufism, which involves mystical<br />
rituals, sometimes music, and guidance<br />
by spiritual masters. This is<br />
considered shirk, a violation of God’s<br />
unity. The Salafists are exclusivist<br />
because they reject all other interpretations<br />
of Islam. This exclusivism<br />
ranges from calling themselves “Ahl<br />
al-najat” (People of Salvation), indicating<br />
they are the only group that<br />
will be saved on Judgment Day, to<br />
outward rejection of all who do not<br />
follow their path as apostate, takfir.<br />
The literalist, puritanical, and exclusivist<br />
Salafist discourse provides<br />
a “simple and straightforward” understanding<br />
of Islam, which comforts<br />
those seeking certitude without<br />
questioning at the expense of<br />
other Muslims, considered to be<br />
misguided at best, and apostates at<br />
worst. The Salafists underline the<br />
differences in their discourse with<br />
the other Islamic interpretations in<br />
order to recruit more followers from<br />
other Islamic organizations. On the<br />
one hand, this attitude wins them<br />
new followers because they appear<br />
non-compromising and “authentic”<br />
with their emphasis on learning Arabic<br />
and dress code, which includes<br />
17<br />
CASPIAN REPORT, sprIng <strong>2014</strong>
AHMET YUKLEYEN<br />
18<br />
beards and long tunics for men and<br />
the niqab, or face veil, for women.<br />
Three sub-trends within Salafism—<br />
apolitical, political, and Jihadi—have<br />
emerged. 33 This division occurred in<br />
response to the arrival of US troops in<br />
Saudi Arabia during the First Gulf War<br />
in 1992. Apolitical Salafists believe<br />
that they should obey the Saudi King<br />
even though his decision to invite the<br />
“infidel” to sacred grounds was wrong.<br />
They preach that only God can make<br />
laws and that Muslims must refrain<br />
from being involved in politics because<br />
it leads to compromise and corruption<br />
of faith. They are interested<br />
in fulfilling rituals, as well as learning<br />
and spreading “true” Salafism. Political<br />
salafists have criticized the Saudi<br />
King and became independent and<br />
got involved in politics. They also perform<br />
selective readings of Sayid Qutb,<br />
which justifies violence under some<br />
circumstances. Jihadi Salafists believe<br />
that Islam is under global attack, especially<br />
by the United States, and that<br />
nobody is defending it. To them, this<br />
means that all Muslims are responsible<br />
for taking up arms and fighting. Indeed,<br />
Bin Laden issued a fatwā against<br />
the United States, which was first published<br />
in Al Quds Al Arabi, a Londonbased<br />
newspaper. 34 It was entitled<br />
“Declaration of War against the Americans<br />
Occupying the Land of the Two<br />
Holy Places” referring to Mecca and<br />
Medina in Saudi Arabia. The reference<br />
to ‘occupation’ in the fatwā referred<br />
to US forces based in Saudi Arabia for<br />
the purpose of controlling air space<br />
in Iraq, known as Operation Southern<br />
Watch.<br />
The Taliban, Al-Qaeda, and<br />
Jihadi Salafism in the Middle<br />
East<br />
The Taliban’s extremely strict and<br />
anti-modern ideology combines Pashtun<br />
tribal codes, or Pashtunwali, with<br />
jihadism of Osama bin Laden. 35 Their<br />
ideology marked a departure from the<br />
Islamism of the anti-Soviet mujahideen<br />
rulers they replaced, who tended<br />
to be mystical Sufis, traditionalists, or<br />
radical Islamists inspired by Sayyid<br />
Qutb. 36 Both Osama Bin Laden’s Jihadism<br />
and Taliban’s ideology were pragmatic.<br />
They have found ways to justify<br />
their actions based on religious ideals.<br />
For instance, between 1996 and 1999,<br />
Mullah Omar reversed his opinions<br />
on the drug trade, apparently as it<br />
only harmed the infidels or kafirs. The<br />
Taliban controlled 96% of Afghanistan’s<br />
poppy fields and made opium<br />
its largest source of taxation. 37 Taxes<br />
on opium exports became one of the<br />
mainstays of Taliban income and<br />
their war economy. 38 According to<br />
33.<br />
Quintan Wiktorowitz “Anatomy of the Salafi Movement,” Studies in Conflict & Terrorism 29 no.<br />
3, (2006): 2<strong>07</strong>-239.<br />
34.<br />
Peter L. Bergen (2002) Holy War, Inc.: Inside the Secret World of Osama bin Laden (New York:<br />
Free Press).<br />
35.<br />
Rashid, Ahmed (2000) Taliban: Militant Islam, Oil and Fundamentalism in Central Asia (New<br />
Haven: Yale University Press) p. 132, 139.<br />
36.<br />
Rashid, Ahmed (2000) Taliban: Militant Islam, Oil and Fundamentalism in Central Asia (New<br />
Haven: Yale University Press) p. 87.<br />
37.<br />
Chouvy, Pierre-Arnaud (2010) Opium: uncovering the politics of the poppy (Boston: Harvard<br />
University Press). p. 52.<br />
38.<br />
Dexter Filkins (2001) “A Nation Challenged: Rise and Fall; The Legacy of the Taliban Is a Sad and<br />
Broken Land” Dec. 31, 2001. http://www.nytimes.com/2001/12/31/world/nation-challengedrise-fall-legacy-taliban-sad-broken-land.htmlpagewanted=3.<br />
Retrieved on Feb. 10, <strong>2014</strong>.
Rashid, “drug money funded the<br />
weapons, ammunition and fuel for<br />
the war.” 39 In the New York Times,<br />
the Finance Minister of the United<br />
Front, Wahidullah Sabawoon, declared<br />
the Taliban had no annual<br />
budget but that they “appeared to<br />
spend US$300 million a year, nearly<br />
all of it on war.” 40 He added that the<br />
Taliban had come to increasingly rely<br />
on three sources of money: “poppy,<br />
the Pakistanis and bin Laden.” 41<br />
In a similar manner, Bin Laden’s<br />
pragmatism worked to justify the<br />
death of innocents during his first<br />
bombing attack on December 29,<br />
1992, which killed two people at the<br />
Gold Mihor Hotel in Aden. Al-Qaeda<br />
was reported to have developed its<br />
justification for the killing of innocent<br />
people. According to a fatwa<br />
issued by Mamdouh Mahmud Salim,<br />
the killing of someone standing near<br />
the enemy is justified because innocent<br />
bystanders will be rewarded<br />
by going to paradise, provided they<br />
were good Muslims, and to hell if<br />
they were bad or non-believers. 42<br />
Their ideological affinity was followed<br />
by an organizational alliance.<br />
In 1997, Bin Laden strengthened his<br />
alliance with the Taliban by sending<br />
several hundred Afghan Arab<br />
fighters to help the Taliban fight<br />
the Hazaras, the third largest ethnic<br />
group and overwhelmingly Shia and<br />
Persian speakers in Afghanistan. 43<br />
In February 1998, Osama bin Laden<br />
and Ayman al-Zawahiri co-signed a<br />
fatwa in the name of the World Islamic<br />
Front for Jihad Against Jews<br />
and Crusaders, which declared the<br />
killing of North Americans and their<br />
allies an “individual duty for every<br />
Muslim” to “liberate the al-Aqsa<br />
Mosque (in Jerusalem) and the holy<br />
mosque (in Mecca) from their grip”. 44<br />
Bin Laden left Sudan for Afghanistan<br />
on May 18, 1996 and forged a close<br />
relationship with Mullah Mohammed<br />
Omar along with 300 Afghan-<br />
Arabs, most of whom became Jihadist<br />
fighters.<br />
The ideological and organizational<br />
alliance between the Taliban and Al-<br />
Qaeda also has implications for the<br />
Middle East. Journalist and author<br />
Robin Wright sums up the differences<br />
between Wahhabis and Salafis<br />
as follows: “Not all Saudis are Wahhabis.<br />
Not all Salafis are Wahhabis,<br />
either. But Wahhabis are basically<br />
all Salafis.” 45 In other words, Saudi<br />
controlled Salafis are called Wahhabis.<br />
Saudi Arabia is using Salafis<br />
to develop its Middle East policies.<br />
The major threat of this dangerous<br />
approach is that it may fuel sectarian<br />
civil war in the Middle East. Accord-<br />
19<br />
CASPIAN REPORT, sprIng <strong>2014</strong><br />
39.<br />
Ibid. p. 3.<br />
40.<br />
Ibid. p. 3.<br />
41.<br />
Ibid. p. 3.<br />
42.<br />
Testimony of Jamal al-Fadl, U.S. v. Usama bin Laden, et al. http://cryptome.org/usa-v-ubl-dt.<br />
htm. Retrieved on Feb. 23, <strong>2014</strong>.<br />
43.<br />
Ahmed Rashid (2000) Taliban: Militant Islam, Oil and Fundamentalism in Central Asia (New<br />
Haven: Yale University Press) p. 139.<br />
44.<br />
World Islamic Front Statement (1998) “Jihad Against Jews and Crusaders” <strong>Issue</strong>d on February<br />
23. http://www.fas.org/irp/world/para/docs/980223-fatwa.htm. Retrieved on Feb. 20, <strong>2014</strong>.<br />
45.<br />
Robin Wright (2012) “Don’t Fear All Islamists, Fear Salafis” August 19.http://www.nytimes.<br />
com/2012/08/20/opinion/dont-fear-all-islamists-fear-salafis.html_r=0. Retrieved on Feb.<br />
20, <strong>2014</strong>.
Anti-war<br />
demonstrators<br />
rally near the<br />
Federal Building<br />
calling for a<br />
troop pullout in<br />
Afghanistan.<br />
AHMET YUKLEYEN<br />
20<br />
ing to Salafists, Shia are not Muslim<br />
– indeed, Al-Qaeda lists Shia along<br />
with “heretics, [...] America, and Israel”<br />
as the four principal “enemies<br />
of Islam.” 46 For instance, Al-Qaeda<br />
affiliated organizations attack the<br />
Syrian regime because they consider<br />
Alawites to be one of the enemies of<br />
Islam.<br />
Al-Qaeda has several direct and indirect<br />
affiliates in the Middle East. The<br />
Al-Nusra Front is a branch of Al-Qaeda<br />
operating in Syria and Lebanon.<br />
It announced its creation on January<br />
23, 2012. 47 Since then it has been<br />
described as “the most aggressive<br />
and successful” force up to ten thousand<br />
fighters and making up nine<br />
percent of the Free Syrian Army. 48<br />
The group has been designated as a<br />
terrorist organization by the United<br />
Nations. There are indirect affiliates<br />
of Al-Qaeda in Syria as well, such as<br />
the “Islamic State of Iraq and the Levant”,<br />
or ISIS in Arabic abbreviation.<br />
There have been claims and counter<br />
claims of a merger between the Al-<br />
Nusra Front and ISIS. Most recently,<br />
Al-Qaeda declared that they have cut<br />
off ties with ISIS. 49 The affiliations<br />
and ideological affinities of Al-Qaeda<br />
46.<br />
Lawrence Wright (2006) The Looming Tower: Al-Qaeda And The Road To 9/11 (New York:<br />
Knopf) p. 303.<br />
47.<br />
Agence France-Presse (2013) “Zawahiri disbands main Qaeda faction in Syria” Nov. 8.http://<br />
www.globalpost.com/dispatch/news/afp/131108/zawahiri-disbands-main-qaeda-factionsyria-0.<br />
Retrieved on Feb. 21, 2104.<br />
48.<br />
David Ignatius (2012) “Al-Qaeda affiliate playing larger role in Syria rebellion” Nov. 30.http://<br />
www.washingtonpost.com/blogs/post-partisan/post/al-qaeda-affiliate-playing-larger-rolein-syria-rebellion/2012/11/30/203d06f4-3b2e-11e2-9258-ac7c78d5c680_blog.html.<br />
Retrieved on Feb. 20, <strong>2014</strong>.<br />
49.<br />
Liz Sly (<strong>2014</strong>) “Al-Qaeda disavows any ties with radical Islamist ISIS group in Syria, Iraq” The<br />
Washington Post. February 3, http://www.washingtonpost.com/world/middle_east/al-qaeda-<br />
disavows-any-ties-with-radical-islamist-isis-group-in-syria-iraq/<strong>2014</strong>/02/03/2c9afc3a-8cef-<br />
11e3-98ab-fe5228217bd1_story.html. Retrieved on Feb. 25, <strong>2014</strong>.
in the Middle East illustrate that<br />
Jihadi Salafism remains the greatest<br />
challenge to global peace from<br />
Afghanistan.<br />
Conclusion<br />
Uncertainty calls for instability<br />
and powerbrokers negotiate even<br />
harder in Afghanistan. If the young<br />
people of Afghanistan lose hope in<br />
the establishment of a national will<br />
that overcomes the interests of local<br />
actors and power brokers, the<br />
future of Afghanistan will remain in<br />
jeopardy to the detriment of all. The<br />
future of Afghan politics and global<br />
peace are closely interlinked. If the<br />
Taliban returns to power and terrorist<br />
networks grow stronger, then the<br />
“War on Terror” will be lost. Even if<br />
a precarious stability is reached in<br />
Afghanistan, the threat from global<br />
Jihadism will remain. Jihadism can<br />
flourish as long as there are conflicts<br />
in Muslim-majority countries.<br />
No country can afford to believe<br />
that they can use Jihadists for their<br />
national interests without being<br />
harmed. For instance, the US sponsored<br />
the Mujahedeen against the<br />
Soviet Union in the 1980s, and then<br />
became the victim of Al-Qaeda Jihadists<br />
two decades later.<br />
Policies to counter terrorism require<br />
global collaboration. Even the<br />
comparison of various national programs<br />
to de-radicalize Jihadists have<br />
produced inconclusive results. 50 This<br />
is a global challenge that demands<br />
global cooperation. If national actors<br />
calculate their short-term narrow<br />
“national” interests as their only<br />
measurement in understanding and<br />
countering Jihadist terrorism, then<br />
people in Boston, London, Madrid,<br />
Moscow, Istanbul, Nigeria, and Damascus<br />
remain in danger. If Afghanistan<br />
falls into the hands of terrorist<br />
networks again, this will pose a serious<br />
threat to global peace. A successful<br />
political transition and stability in<br />
Afghanistan is necessary for global<br />
peace.<br />
21<br />
CASPIAN REPORT, sprIng <strong>2014</strong><br />
50.<br />
Angel Rabasa, Stacie L. Pettyjohn, Jeremy J. Ghez, and Christopher Boucek (2010)<br />
Deradicalizing Islamist Extremists (Arlington VA: RAND Corporation).
Matteo Verda<br />
22<br />
CONTRIBUTION OF<br />
Trans Adriatic<br />
Pipeline TO<br />
THE ITALIAN<br />
ECONOMY<br />
Matteo Verda<br />
SENIOR FELLOW, CENTER ON ENERGY AND ECONOMY, HASEN
The decision of building the Trans<br />
Adriatic Pipeline (TAP) represented a<br />
major breakthrough in the development<br />
of the European natural gas system.<br />
The decision of building the Trans Adriatic<br />
Pipeline (TAP) represented a major<br />
breakthrough in the development of<br />
the European natural gas system. The<br />
pipeline will eventually materialise the<br />
Southern Gas Corridor, after a decade of<br />
public discussion but no actual investment<br />
decision, and it will allow a muchawaited<br />
diversification of the European<br />
import routes. TAP is indeed designed<br />
to transport the natural gas coming<br />
from the field of Shah Deniz, in the <strong>Caspian</strong><br />
offshore, to the EU final markets.<br />
TAP is not a stand-alone pipeline, but<br />
it is the final branch of a composed infrastructural<br />
system which will include<br />
the South Caucasus Pipeline (SCP) and<br />
the Trans Anatolian Natural Gas Pipeline<br />
(TANAP). SCP is an already existing<br />
pipeline, running for 700 km from<br />
the Azerbaijani production facilities<br />
through Georgia, up to the border with<br />
Turkey. SCP will be upgraded to transport<br />
additional volumes, through the<br />
laying of a second line along the same<br />
route of the existing one. TANAP will be<br />
the second section of the infrastructure<br />
and it will transport Azerbaijani natural<br />
gas across Turkey, following a new<br />
route of 1.700 km. TANAP will end at<br />
the border with Greece, where TAP<br />
will start. 1<br />
This last section will run across<br />
Greek and Albanian territory, with<br />
a secondary branch directed from<br />
Greece to Bulgaria. TAP’s main destination<br />
will be the Italian market,<br />
which will be the largest and most<br />
important gas market connected to<br />
the pipeline. Despite a protracted crisis,<br />
indeed, in 2013 Italy consumed<br />
approximately 70 billion cubic metres<br />
(bcm), remaining the second gas<br />
market in continental Europe after<br />
Germany. 2<br />
TAP will be a 760 km-long pipeline<br />
and its estimated construction costs<br />
amount to 5,7 billion euros, mainly<br />
concentrated in Greece and in the offshore<br />
between Albania and Italy. After<br />
its commissioning, TAP is expected to<br />
work for at least fifty years and the<br />
greatest share of its capacity will be<br />
devoted to supply the Italian gas system.<br />
In fact, out of a capacity of 10<br />
bcm per year, 8 will be marketed in<br />
Italy. As a consequence, the long term<br />
impact of the pipeline will be mainly<br />
concentrated in that country.<br />
23<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
1.<br />
See TANAP website (http://www.tanap.com/en/) (accessed 30/04/<strong>2014</strong>).<br />
2.<br />
See Eurogas, Drop in 2013 EU gas demand emphasises need for swift change, 18/03/<strong>2014</strong>.
Matteo Verda<br />
24<br />
TAP will be a 760 km-long pipeline and its estimated<br />
construction costs amount to 5,7 billion<br />
euros, mainly concentrated in Greece and in the<br />
offshore between Albania and Italy.<br />
Contribution to the local<br />
economy<br />
Even if with to a limited extent, TAP’s<br />
contribution to the Italian economy<br />
will start during the construction<br />
period, mainly in Apulia, the southeastern<br />
region where the pipeline<br />
will join the Italian gas network. According<br />
to Nomisma Energia, a consultancy,<br />
the value of the activities<br />
directly related to the construction<br />
of the infrastructure will be approximately<br />
80 million euros per year. At<br />
the same time, an average of 150 jobs<br />
will be created locally. 3<br />
Direct effects will continue during<br />
the whole life of the pipeline, with<br />
fixed operating costs related to the<br />
maintenance of infrastructures. The<br />
estimated impact is 4 million euros<br />
per year, with the creation of 30 permanent<br />
jobs. Indirect effects at local<br />
level will include further 8 million<br />
euros per year of turnover and 220<br />
permanent jobs. The overall size of<br />
the impact is limited, but its local dimension<br />
and the long-term duration<br />
are a key part of the social acceptability<br />
of the infrastructure. Analogously,<br />
local taxation generated by property<br />
taxes on the infrastructures will be<br />
limited to less than half a million euros<br />
per year, but it will enhance local<br />
acceptation of the project, at least<br />
within local governments.<br />
Contribution to the energy<br />
security<br />
Besides its direct effects, TAP will<br />
have relevant indirect effects, beginning<br />
with the improvement of the Italian<br />
energy security. Natural gas represents<br />
one third of the Italian energy<br />
consumption and its supply depends<br />
on imports for more than 90%. As a<br />
consequence, a redundant and diversified<br />
natural gas import system is a<br />
priority for the reliability of the energy<br />
supplies to the Italian economy.<br />
Natural gas is also the most important<br />
fuel for power generation (38%) and<br />
the stability of the electrical system<br />
has a relevance which is not limited<br />
to the economic dimension, but it also<br />
involving a strong security dimension.<br />
Consequently, any improvement of<br />
the Italian import capacity of natural<br />
gas has a political relevance.<br />
During the past decade, state-owned<br />
Eni provided the strategy and investments<br />
for the development of the Italian<br />
natural gas system. The last major<br />
investment in import capacity made<br />
by Eni was the construction of the<br />
Green Stream, a pipeline linking Libya<br />
and Sicily, commissioned in 2004. After<br />
that period, Italian natural gas market<br />
adapted to the EU regulation and the<br />
central position of Eni was progressively<br />
dismantled, starting from the<br />
ownership of the transport infrastructure,<br />
which was completely unbundled<br />
in 2012. As a consequence of the transitional<br />
period, no new international<br />
pipeline has been built in Italy and only<br />
two new liquefied natural gas (LNG)<br />
3.<br />
See TAP social responsibility website (https://en.conoscitap.it/our-contribution) (accessed<br />
30/04/<strong>2014</strong>).
Greece’s<br />
Finance<br />
Minister Yannis<br />
Stournaras<br />
listens to<br />
Trans Adriatic<br />
Pipeline’s<br />
Managing<br />
Director Kjetil<br />
Tungland after<br />
the signing<br />
of an host<br />
government<br />
agreement in<br />
Athens.<br />
regasification facilities have been commissioned:<br />
Rovigo in 2009 and Livorno<br />
in 2013. At the same time the Italian<br />
market initially expanded, reaching<br />
its historical record of 84 bcm in 2005,<br />
then stabilising above 80 bcm, until the<br />
effects of the economic crisis reduced<br />
energy demand. 4<br />
During the past decade, the international<br />
context became more and more<br />
unpredictable, endangering the reliability<br />
of the flows directed to Italy.<br />
The single most important source of<br />
natural gas for the Italian market is<br />
Russia, which provides approximately<br />
one third of the consumption. Since<br />
all natural gas directed in Italy transits<br />
through Ukraine, economic and political<br />
instability in the country has created<br />
a potential risk for the stability of Russian<br />
supplies.<br />
Algeria is the second source of natural<br />
gas for the Italian market, accounting<br />
for approximately one quarter of its<br />
consumption. Algerian gas reaches<br />
the Italian market through Tunisia<br />
and both countries are exposed to the<br />
risk of instability, due to the difficult<br />
regional context and to the evolution of<br />
the internal political systems, including<br />
a relevant terrorism threat. Considering<br />
the interaction of those factors, instability<br />
in Northern Africa is a very serious<br />
risk for natural gas supplies to the<br />
Italian market, as demonstrated by the<br />
unstable trend shown by exports from<br />
Libya, ravaged by the consequences of<br />
the civil war.<br />
TAP will indeed provide a determinant<br />
contribution to increase the diversification,<br />
both in terms of suppliers and<br />
transit route. TAP’s gas will indeed<br />
come the <strong>Caspian</strong> region, which is a<br />
completely new source not only for the<br />
Italian market, but for the whole EU.<br />
Moreover, <strong>Caspian</strong> gas will come transiting<br />
through countries currently not<br />
included in other routes. This double<br />
diversification will reduce the risk level<br />
25<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
4.<br />
See Ministero dello sviluppo economico (MiSE), online database (http://dgerm.sviluppoeconomico<br />
gov.it/dgerm/bilanciogas.asp) (accessed 30/04/<strong>2014</strong>). Figures are standardised to a gross calorific<br />
value of 39 MJ/cm.
SHAREHOLDER<br />
STRUCTURE<br />
OF TAP<br />
Matteo Verda<br />
BP<br />
(20%)<br />
SOCAR<br />
(20%)<br />
STATOIL<br />
(20%)<br />
FLUXYS<br />
(16%)<br />
TOTAL S.A.<br />
(10%)<br />
E.ON<br />
(9%)<br />
AXPO<br />
(5%)<br />
26<br />
of the Italian imports. Albeit TAP’s contribution<br />
to the Italian energy security<br />
cannot be directly translated into a<br />
monetary value, it probably represents<br />
the single most important contribution<br />
of the new pipeline to the Italian<br />
economy.<br />
Contribution to the<br />
hub-strategy<br />
According to the system operator<br />
Snam Rete Gas, Italian natural gas consumption<br />
in 2023 will be 73 bcm per<br />
year, while domestic production will<br />
continue its slow decline. 5 The combined<br />
effect of growing demand and<br />
shrinking production will be an additional<br />
import demand of 7 bcm compared<br />
with 2013 level.<br />
However, if we consider pre-crisis levels,<br />
expected import demand for 2023<br />
is substantially at the same level of<br />
2008, when new LNG regasification<br />
facilities were not online. Those infrastructures<br />
added a combined capacity<br />
of nearly 12 bcm per year, substantially<br />
increasing spare capacity. As a<br />
consequence, existing infrastructural<br />
endowment is largely sufficient to ensure<br />
the reliability of the system, also<br />
considering the existing storage capacity,<br />
totalling more than 14 bcm. 6<br />
Nevertheless, the existing import capacity<br />
could be not enough for the<br />
future needs of the Italian gas system.<br />
The Italian National Energy Strategy<br />
devises indeed a role of southern European<br />
hub for the Italian gas network. 7<br />
5.<br />
Snam Rete Gas, Piano decennale di sviluppo delle reti di trasporto di gas naturale<br />
<strong>2014</strong>-2023, <strong>2014</strong>.<br />
6.<br />
See MiSE, Piano d’azione preventivo – Sistema gas Italia, 19/04/2013.<br />
7.<br />
See MiSE, Strategia energetica nazionale, 08/03/2013.
In practice, the Italian network should<br />
become a transit point for the natural<br />
gas directed in other European countries,<br />
thus gaining a central position<br />
for exchange activities, but also gaining<br />
from the transit fees of the natural gas<br />
transiting on the Italian gas network.<br />
create value for the state-owned Snam<br />
Rete Gas. Transit fees can be estimated<br />
approximately in 200 million euros<br />
per year for an export of 8 bcm, which<br />
would not be possible to collect without<br />
the construction of TAP. 8<br />
In terms of infrastructural development,<br />
this strategy entails the creation<br />
of both exporting and importing capacity.<br />
According to current plans, exports<br />
in 2023 are expected to amount to approximately<br />
8 bcm per year, directed to<br />
Northern markets through Switzerland.<br />
In particular, the plans include a permanent<br />
flow reversal of the Transitgas, the<br />
pipeline currently transporting natural<br />
gas from Netherlands and Norway to<br />
the entry point of Passo Gries.<br />
The role of TAP is therefore essential<br />
to provide new import capacity to the<br />
Italian system. Indeed, the additional<br />
capacity provided by TAP will be exactly<br />
the same size of the expected export<br />
flows, thus fully compensating them.<br />
Without TAP’s capacity, instead, the<br />
Italian system would lack the necessary<br />
spare capacity to maintain an adequate<br />
level of security and flexibility.<br />
From an economic perspective, the realisation<br />
of the hub-strategy would also<br />
The role of TAP is therefore essential to<br />
provide new import capacity to the<br />
Italian system.<br />
Contribution to the<br />
competitiveness of the<br />
market<br />
Despite the progress achieved by the<br />
Italian market, its competitiveness is still<br />
limited by the role played by the incumbent,<br />
Eni, which controls a large share of<br />
the import capacity. The construction<br />
of TAP would contribute to reduce Eni’s<br />
market power and to foster competition,<br />
by offering new volumes which can be<br />
used to compete and increase the market<br />
share of smaller operators.<br />
Seven energy companies with long term<br />
interests in Italy have already signed the<br />
contracts for all the volumes imported<br />
through TAP. 9 And none of them has a<br />
market share above 7%. 10 Therefore,<br />
27<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
8.<br />
The estimate is based on current transit fee, but it is purely approximate since tariffs are<br />
regulated by the National Authority. Moreover, while the exit point is known (Passo Gries, at<br />
the border with Switzerland), entry point for the exported gas is unknown. Finally, tariffs for<br />
the entry point in Apulia are yet to be defined.<br />
9.<br />
The companies are GdF Suez of France (2,6 bcm/y), E.ON of Germany (1,6 bcm/y), Shell of<br />
Great Britain and Netherlands (1 bcm/y), Hera of Italy (0,3 Gmc/a), Enel of Italy, Gas<br />
Natural Fenosa of Spain and Axpo of Switzerland (which haven’t disclosed the exact volumes<br />
purchased). Staffetta Quotidiana, Gasdotto Tap, chiusi contratti gas. In Italia arriveranno 8<br />
mld mc/anno, 19/09/2013.<br />
10.<br />
Autorità per l’energia elettrica, il gas e il sistema idrico (AEEG), Relazione annuale 2013,<br />
26/06/2013.
Matteo Verda<br />
28<br />
Azerbaijani gas will not entrench the<br />
position of the incumbent, but conversely<br />
will allow more competition<br />
and, in theory, a reduction of the wholesale<br />
prices. An important signal of the<br />
potential impact of those contracts is<br />
the pricing mechanism chosen by several<br />
operators, such as GDF Suez, to find<br />
innovative solutions non oil-indexed<br />
and increase the competitiveness of<br />
their volumes on the final markets . 11<br />
TAP’s positive impact on the competitiveness<br />
of the wholesale market is also<br />
a fundamental element in the decision<br />
of the Italian Energy Authority to grant<br />
to the pipeline a third party access<br />
exemption for 10 bcm per year for 25<br />
years, in cooperation with Albanian and<br />
Greek counterparts. Moreover, Energy<br />
Authority also expects a relevant effect<br />
in the final market: “due to the correlation<br />
between wholesale and retail gas<br />
prices in Italy, an improvement of the<br />
competitive structure at the wholesale<br />
level will most likely also have positive<br />
effects downstream at the retail level.” 12<br />
would create a significant supply increase,<br />
which in turn would create a<br />
downward pressure on prices. TAP’s<br />
volumes will amount to 8 bcm, for a<br />
market between 70 and 80: a sudden<br />
10% increase in the supply would<br />
be bound to have structural effects. A<br />
partial “over-supply effect” could also<br />
occur if the export capacity were only<br />
partially used, creating a minor but<br />
still significant downward pressure on<br />
prices.<br />
In any case, TAP’s positive effects on<br />
wholesale and final prices in the Italian<br />
market could be compensated by other<br />
factors. Rising demand at EU level, supply<br />
shortages, change in subsidisation<br />
policy for renewable energy sources<br />
are all fast-changing factors currently<br />
very hard to predict, but which could<br />
nullify any price reduction caused by<br />
TAP. In this case, TAP’s positive effect<br />
would be less evident but not less important,<br />
since it would contribute to<br />
avoid or reduce significant increase of<br />
the energy prices.<br />
Besides the effects on competition,<br />
TAP’s construction could also affect<br />
prices through a basic supply-demand<br />
mechanism, in the case of a mothballing<br />
of the hub strategy. Indeed, the<br />
hub-strategy could be delayed and TAP<br />
could start functioning before the commissioning<br />
of the exporting capacity at<br />
the border with Switzerland. Without<br />
relevant export flows, TAP’s volumes<br />
The sheer size of the Italian market<br />
nonetheless provides a strong multiplier:<br />
even a small change has a remarkable<br />
effect in absolute value. In<br />
2013, Italy imported 60 bcm at an average<br />
price at the border of 330 euros<br />
per thousand cubic metre (tcm), equal<br />
to approximately 20 billion euros. 13<br />
Considering that the average price of<br />
natural gas on the final market is 450<br />
11.<br />
TAP is indeed a joint-venture including BP of Britain (20%), SOCAR of Azerbaijan (20%),<br />
Statoil of Norway (20%), Fluxys of Belgium (16%), Total of France (10%), E.ON of Germany<br />
(9%) and Axpo of Switzerland (5%). About the pricing, see Sissi Bellomo, «Gas azero a prezzi<br />
sganciati dal petrolio. A Gdf Suez un contratto finora inedito in Europa», Sole24Ore,<br />
11/04/<strong>2014</strong>.<br />
12 .<br />
AEEG-RAE- ERE, Joint Opinion of the Energy Regulators on TAP AG’s Exemption<br />
Application, 26/<strong>07</strong>/2013.<br />
13.<br />
See MiSE, online database, and Istituto Nazionale di Statistica, online database<br />
(http://bit.ly/1hZcSMv) (accessed on 30/04/<strong>2014</strong>).
Coliseum,<br />
Rome.<br />
29<br />
euros per tcm, the value of the Italian<br />
final market is approximately 30 billion<br />
euros, taxes excluded. 14 Each single<br />
percentage point of shift in the price<br />
is therefore worth 300 million euros<br />
and TAP’s potential impact could be<br />
significant.<br />
Potential TAP’s expansion<br />
TAP’s first stage will have a capacity<br />
of 10 bcm per years. However, the infrastructure<br />
is designed to expand up<br />
to 20 bcm per year, by adding more<br />
compression capacity. The decision of<br />
expanding TAP’s capacity will depend<br />
on the availability of competitive upstream<br />
capacity and by the expected<br />
levels of consumption in the final<br />
markets.<br />
According to current forecasts, the Italian<br />
final market is expected to grow<br />
very slowly during the next decade.<br />
Even considering a further decrease<br />
of the domestic production, additional<br />
volumes deriving from a TAP’s<br />
upgrade would be largely redundant<br />
for the Italian market.<br />
The viability TAP’s expansion therefore<br />
will depend on the possibility of<br />
allocating a large share of the flows<br />
to markets other than the Italian one.<br />
A part of those flows could be allocated<br />
to the Balkan markets, also beyond<br />
Albania and Bulgaria. However<br />
those markets are unlikely to expand<br />
enough to absorb 10 bcm of Azerbaijani<br />
gas, especially if the South<br />
Stream will be completed during the<br />
current decade.<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
14.<br />
See AEEG, online database (http://bit.ly/PSAOtY) (accessed on 30/04/<strong>2014</strong>).
Matteo Verda<br />
30<br />
In the end, the viability of TAP’s expansion<br />
will depend on the possibility of<br />
symmetrically expanding the export<br />
capacity of the Italian gas network,<br />
in order to supply Northern European<br />
markets. If realised, the impact<br />
If realised, the impact of TAP’s expansion will<br />
be a further strengthening of the relevance<br />
of the Italian gas network as a transit route,<br />
with relative benefits for Snam Rete Gas.<br />
of TAP’s expansion will be a further<br />
strengthening of the relevance of the<br />
Italian gas network as a transit route,<br />
with relative benefits for Snam Rete<br />
Gas. Clearly, additional import capacity<br />
will also improve the level of security<br />
of the Italian supply.<br />
The relevance of TAP’s expansion<br />
could be very different in the case of a<br />
structural reduction of flows coming<br />
from another source, due for example<br />
to enduring political instability in<br />
Northern Africa and lack of upstream<br />
investments in the region. In this case,<br />
TAP’s additional capacity would replace<br />
missing volumes on a permanent<br />
basis and the Azerbaijani gas would<br />
substantially increase its share in the<br />
Italian supply.<br />
TAP’s current projects include only<br />
one expansion up to 20 bcm per year.<br />
Despite its relevance for the countries<br />
directly involved, and especially Italy,<br />
without a further expansion TAP’s impact<br />
at EU level is bound to remain limited.<br />
At the moment, constraints in the<br />
upstream and a weak demand on the<br />
final markets are limiting the viability<br />
of the second line. However, if the pipeline<br />
will be upgraded and its routes<br />
will include the Italian gas network,<br />
the impact for the Italian economy will<br />
be absolutely positive.<br />
Final remarks<br />
All in all, TAP’s impact on the Italian<br />
economy is consistently positive. During<br />
the construction period, it will<br />
provide small but still tangible positive<br />
effects on the territory where the<br />
infrastructure will be built (80 million<br />
euros per year), which will partially<br />
continue after its commissioning (12<br />
million euros per year). Once operating,<br />
it will increase competition among<br />
the operators on the final markets, in<br />
theory reducing wholesale and final<br />
prices.<br />
In the case of development of export<br />
capacity on the Italian gas system, TAP<br />
will provide the necessary volumes to<br />
preserve a security buffer on the Italian<br />
gas network and therefore allow<br />
significant export flows without endangering<br />
the stability of the final offer<br />
on the Italian market. Therefore, TAP<br />
will be essential for the export flows<br />
which will allow Snam Rete Gas to collect<br />
estimated 200 million euros as<br />
transit fees. If the export capacity will<br />
not be realised on time, Azerbaijani<br />
gas will flood final market with competitive<br />
natural gas, further reducing<br />
final prices. Potential savings for the<br />
final consumers will be 300 million euros<br />
for each percentage point of price<br />
reduction.<br />
TAP’s positive impact on the Italian<br />
economy is increased by the fact that<br />
the investment is completely covered<br />
by private capitals or, at least, not by<br />
the Italian public spending. Therefore,<br />
the Italian economy is benefitting from
more security, more competition and<br />
potential price reductions without<br />
resorting to the economic distortions<br />
caused by taxation.<br />
Besides its measurable economic impact,<br />
TAP’s construction will improve<br />
the Italian energy security. TAP will<br />
indeed provide an effective diversification<br />
of the Italian gas supply, considering<br />
both to the origin of the gas and to<br />
the route of the pipeline. For a country<br />
which imports 90% of its natural gas<br />
consumption, such diversification is a<br />
relevant achievement, whose economic<br />
value is difficult to assess. But which<br />
probably represents the most important<br />
contribution of TAP to the Italian<br />
economy.<br />
31<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
Aura Sabadus<br />
32<br />
Southern Gas<br />
Corridor and the<br />
potential for genuine<br />
diversification<br />
Aura Sabadus<br />
RESEARCH ASSOCIATE, EUROPEAN CENTRE FOR ENERGY AND<br />
RESOURCE SECURITY (EUCERS), KING‘S COLLEGE
The Southern Gas Corridor has been<br />
described as the successful outcome of the<br />
EU’s quest to diversify supplies and wean<br />
itself off Russian gas, a priority of its energy<br />
security strategy.<br />
The Southern Gas Corridor (SGC) – a<br />
3,500 km route that in its first stage<br />
will facilitate the transport of 10<br />
bcm/year of <strong>Caspian</strong> gas to Southern<br />
Europe by the end of the decade - has<br />
been described as the successful outcome<br />
of the EU’s quest to diversify<br />
supplies and wean itself off Russian<br />
gas, a priority of its energy security<br />
strategy.<br />
Nevertheless, such a description is<br />
somewhat simplistic. Firstly, it gives<br />
the false impression that energy<br />
security can be achieved simply by<br />
replacing one molecule of gas with<br />
another of different geographical<br />
origin, without emphasising that it is<br />
the diversity of norms and practices<br />
underpinning contractual agreements<br />
between buyers and sellers<br />
that offers greater choice, and implicitly<br />
greater flexibility, rather than<br />
merely swapping the products.<br />
Secondly, diversity of supply is not<br />
itself a guarantor of energy security,<br />
as demonstrated by the case of the<br />
US, which relies almost entirely on<br />
nationally produced gas. In Europe,<br />
where consumption is projected to<br />
increase to 550 bcm/year in 2020<br />
from 490 bcm/year in 2012, there<br />
is admittedly a need for more gas<br />
to plug the shortfall. In this context,<br />
multiple sources of supply can<br />
ensure greater security, providing<br />
they are physically deliverable, commercially<br />
attractive and politically<br />
invulnerable. 1<br />
This article proposes to assess the<br />
viability of the SGC against these<br />
three benchmarks, noting that despite<br />
its rather limited dimensions<br />
compared to Europe’s other sources<br />
of supply – notably Russian and Norwegian<br />
pipeline gas as well as the<br />
potential for increased LNG imports<br />
– the project could bring greater economic<br />
efficiency throughout the<br />
continent, help to integrate the EU’s<br />
more vulnerable south eastern region<br />
and establish itself as a link between<br />
east and west.<br />
The discussion will show that in<br />
the light of recent political tensions<br />
between Europe and Russia over<br />
Ukraine, there is also a pessimistic<br />
obverse to this scenario whereby the<br />
33<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
1.<br />
I am grateful to my colleagues Louise Boddy and Ben Wetherall for pointing these out.
Aura Sabadus<br />
34<br />
Russian-backed rival South Stream<br />
could challenge the project, as Moscow<br />
seeks alternative transit routes.<br />
Other challenges may come from<br />
potentially new Iranian pipeline or<br />
US LNG exports to European markets<br />
that could enter in direct competition<br />
and raise questions over the<br />
The partners in the Shah Deniz consortium have<br />
hinted at the possibility of expanding further<br />
into Western Europe by offering to supply<br />
Switzerland and France.<br />
ability of the SGC to deliver on any of<br />
those three key points.<br />
Physically deliverable<br />
The economics of the Southern Gas<br />
Corridor - equally supported by the<br />
EU and Azerbaijan, the country that<br />
will supply the gas - are eye-catching:<br />
a $45 billion project, transporting<br />
16 billion cubic metres of gas per<br />
year, including six to Turkey, along<br />
the shortest route from the <strong>Caspian</strong><br />
Sea to Italy and providing energy<br />
to seven million European homes<br />
when the second phase of the offshore<br />
Shah Deniz platform comes on<br />
stream in 2018/19. 2<br />
Some countries along the route may<br />
see their biggest ever investments as<br />
a result – Georgia, for instance. According<br />
to a conference report by the<br />
Jamestown Foundation last year, 3<br />
the expansion of the existing South<br />
Caucasus Pipeline (SCP), the first<br />
leg of the corridor - currently used<br />
to ship gas from the <strong>Caspian</strong> Sea to<br />
Turkey - will bring investments of up<br />
to $2.2 billion to Georgia as a transit<br />
country.<br />
At Erzurum in north-eastern Turkey,<br />
the SCP will connect with the newly<br />
built Trans Anatolian Natural Gas<br />
Pipeline (TANAP), which will travel<br />
westward to Turkey’s Greek border<br />
and bring some $8 billion in direct<br />
investments to the Turkish economy.<br />
From there, the volumes will head<br />
further west along the Trans Adriatic<br />
Pipeline (TAP) and offer added<br />
benefits to countries along the route.<br />
Greece will see cash inflows of $2.04<br />
billion and the creation of 2,000<br />
direct and 10,000 indirect jobs. In<br />
Albania, TAP will be its largest investment,<br />
allowing it to diversify its<br />
sources of energy, while in Italy TAP<br />
will contribute to the creation of permanent<br />
jobs and cover up to 12% of<br />
the country’s supplies. 4<br />
The partners in the Shah Deniz<br />
consortium have hinted at the possibility<br />
of expanding further into<br />
Western Europe by offering to supply<br />
Switzerland and France. TAP<br />
will also help Greece to lower its<br />
dependence on Russian gas, having<br />
already reduced it from 84.2%<br />
in 2000 to 52.8% in 2010 thanks to<br />
LNG imports. 5 Similarly, Italy has re-<br />
2.<br />
“The Southern Gas Corridor,” (July 2013), Holman Fenwick Willan, London<br />
3.<br />
“Azerbaijan and the Southern Gas Corridor; Implications for US and European Energy Security,” (13<br />
September 2013), The Jamestown Foundation.<br />
4.<br />
Ibid.<br />
5.<br />
Vatansever, A., Koranyi, D., (December 2013) “Lowering the Price of Russian Gas: A Challenge for<br />
European Energy Security,” Atlantic Council <strong>Issue</strong> Brief
duced the share of Russian gas from<br />
36.6% to 18.8% 6 over the same<br />
period and will require the <strong>Caspian</strong><br />
volumes to replace its declining production,<br />
tipped to decrease by 10%<br />
annually as well, as find substitutes<br />
for the Russian, Algerian and Libyan<br />
contracts that are expected to expire<br />
within the next decade.<br />
In a nutshell, the Southern Gas Corridor<br />
is not only physically deliverable,<br />
but also has the potential to reach<br />
deep into the economies of its target<br />
area.<br />
Critics, however, have pointed out<br />
that the previously proposed transit<br />
route – Nabucco West - a 1,300 km<br />
pipeline that would have carried the<br />
gas from the Turkish border to Austria<br />
via Bulgaria, Romania and Hungary<br />
- would have made a greater<br />
contribution to supply diversification<br />
in Eastern Europe, which remains<br />
overwhelmingly dependent<br />
on Russian gas. 7 The consortium<br />
In a nutshell, the Southern Gas Corridor<br />
is not only physically deliverable, but also<br />
has the potential to reach deep into the<br />
economies of its target area.<br />
operating Shah Deniz rejected the<br />
project last year in favour of TAP. A<br />
frequently quoted justification for<br />
the decision is the cheaper cost of<br />
TAP. 8<br />
In reality, others have said, the<br />
choice of TAP over Nabucco West<br />
delivered a resounding victory to<br />
Moscow, as Russia will now seek to<br />
forge ahead with the construction of<br />
its 63 bcm/year rival South Stream,<br />
a pipeline designed to reach out to<br />
both Central and South Eastern Europe.<br />
Consequently, argue proponents<br />
of this view, Europe has failed<br />
in its bid to diversify away from Russian<br />
gas and build infrastructure<br />
that would have been instrumental<br />
in its drive to integrate the eastern<br />
flank. 9<br />
35<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
The construction<br />
of TANAP project<br />
will kick off by early<br />
2015.<br />
6.<br />
Ibid.<br />
7.<br />
Abbasov, S., (19 July 2013), “Azerbaijan: When it Comes to Pipelines, It’s Not Personal, It’s Strictly<br />
Business,” Eurasianet.org<br />
8.<br />
Ibid.<br />
9.<br />
Dempsey, J., (1 July 2013), “Victory for Russia as the EU’s Nabucco Gas Project Collapses,”
Aura Sabadus<br />
36<br />
The criticism has gained traction in<br />
the light of the recent breakdown<br />
in relations between Moscow and<br />
Kiev, as Russia is expected to press<br />
ahead with the construction of South<br />
Stream as an alternative transit<br />
route to that offered by Ukraine. In<br />
this context, the physical deliverability<br />
of the Southern Gas Corridor will<br />
be tested on three accounts.<br />
The first test surrounds the ability<br />
of SGC to compete against South<br />
Stream, pitted in a David versus Goliath<br />
battle to capture EU markets.<br />
The 10 bcm/year expected to reach<br />
Southern Europe through TAP by<br />
2019 has already been pledged under<br />
long-term contracts signed between<br />
the Shah Deniz partners and<br />
the recipients of the gas.<br />
However, any attempts by the Shah<br />
Deniz partners to ramp up exports<br />
once Azerbaijan increases its production<br />
from the current 28 bcm/<br />
year to 55 bcm/year by 2020 may<br />
be stymied by the deluge of Russian<br />
gas reaching central and South Eastern<br />
Europe within a few years, saturating<br />
a region that already has low<br />
demand for the fuel. South Stream is<br />
designed to transport gas to Italy via<br />
Bulgaria, Serbia, Hungary and possibly<br />
Austria. It also aims to reach<br />
Western Balkan countries such as<br />
Croatia and Slovenia.<br />
The second question refers to the<br />
battle for the control of infrastructure<br />
assets along the route. Cohen<br />
points out that in 20<strong>07</strong>-2008, Moscow<br />
completed acquisitions of pipelines<br />
and storage facilities in Bulgaria,<br />
Serbia, Hungary and Austria<br />
in preparation for the rollout of the<br />
South Stream project. 10 Last year,<br />
Russia’s Gazprom and its Russian<br />
proxy, Sintez, attempted to purchase<br />
both the Greek incumbent DEPA and<br />
its subsidiary, the transmission system<br />
operator DESFA. The combined<br />
takeover would have given Russia<br />
control over Greece’s infrastructure<br />
and market. However, Russia pulled<br />
out of the tenders amid warnings<br />
that the takeover would contravene<br />
EU competition laws. In December<br />
last year, Azerbaijan’s incumbent SO-<br />
CAR, and one of the main partners in<br />
the SGC, was awarded a 66% share<br />
of DESFA.<br />
Russia already has an overwhelming<br />
grip on Europe’s pipelines, either<br />
through the legacy of the Soviet<br />
energy grid that placed central and<br />
Eastern European countries under<br />
the control of Moscow in a manner<br />
that remains difficult to alter, 11 or<br />
through the purchase of cheap assets<br />
in the energy sectors of these<br />
states immediately after the collapse<br />
of communism.<br />
The third question refers to the degree<br />
of flexibility and penetration<br />
that the Southern Gas Corridor will<br />
have in markets adjoining its route.<br />
South Stream proposes building<br />
spurs alongside the trunk line to<br />
feed the smaller western Balkan<br />
10.<br />
Cohen, A., (2009), p. 94, “Russia: The Flawed Energy Superpower” in Energy Security Challenges<br />
for the 21st Century: A Reference Handbook, ed. Gal Luft and Anne Korin (Greenwood Publishing<br />
Group: Santa Barbara, California)<br />
11.<br />
Jaffe, A.M, Soligo, R., (2009), p. 122 “Energy Security: The Russian Connection,” in Energy Security<br />
and Global Politics, ed. Daniel Moran and James A. Russell (Routlege, London)
states, potentially capturing market<br />
share targeted by SGC. Similarly,<br />
SGC hopes to reach out to Bulgaria<br />
through the Interconnector Greece-<br />
Bulgaria (IGB), which will have a capacity<br />
of one billion cubic metres per<br />
year and is expected to be financed<br />
and built by TAP. However, it will<br />
come up against competition from<br />
South Stream, which also targets the<br />
Bulgarian market.<br />
In sum, the question that emerges<br />
is: to what extent can the Southern<br />
Gas Corridor ensure the competitive<br />
delivery of gas in the long-term<br />
in a manner that fulfils Europe’s diversification<br />
goals in its vulnerable<br />
south eastern region The answer is<br />
straightforward – by offering everything<br />
that Russia will not.<br />
In its current form, the Southern Gas<br />
Corridor may not bring much added<br />
value to that already touted by South<br />
Stream. To a significant degree, both<br />
the SGC through TAP and South<br />
Stream will vie for the same European<br />
markets, including the largest<br />
along their routes - Italy.<br />
On the other hand, TAP has already<br />
been granted a 25-year exemption<br />
from third party access (TPA), placing<br />
its operators in control over midstream<br />
assets and barring adjacent<br />
countries from off-taking volumes.<br />
Russia is seeking a similar exemption,<br />
and at the time of writing the<br />
Bulgarian parliament expects to<br />
modify its domestic law to prevent<br />
TPA to South Stream.<br />
The EU, as the supporter of the SGC<br />
and the stakeholders of the SGC itself,<br />
should promote, finance and<br />
the question that emerges is: to what extent<br />
can the Southern Gas Corridor ensure the<br />
competitive delivery of gas in the long-term in<br />
a manner that fulfils Europe’s diversification<br />
goals in its vulnerable south eastern region<br />
develop small-scale interconnectors<br />
among regional countries and<br />
allow the free flow of any additional<br />
volumes that would come on stream<br />
once production is increased in<br />
Azerbaijan. These interconnectors<br />
should be linked either directly or<br />
indirectly to TAP, allowing regional<br />
countries access to <strong>Caspian</strong> gas. The<br />
connecting lines, already identified<br />
by the EU as projects of common interest<br />
(PCI) should facilitate reverse<br />
flows between Turkey and Bulgaria,<br />
Bulgaria and Greece, Bulgaria and<br />
Serbia, Bulgaria and Romania, Romania<br />
and Hungary, Croatia and Slovenia,<br />
Austria and Italy.<br />
With such a network of small-scale<br />
interconnectors, <strong>Caspian</strong> volumes<br />
would reach deep not only in the<br />
southern part of the continent, but<br />
also into central and Eastern Europe,<br />
ensuring greater security of supply<br />
and the integration of regional markets.<br />
They would also facilitate the<br />
free access and use of underground<br />
storage facilities across the region.<br />
Crucially, the free flow of <strong>Caspian</strong> gas<br />
through regional interconnectors<br />
would challenge Russia’s control<br />
over infrastructure and markets.<br />
In conclusion, the only way for the<br />
Southern Gas Corridor to be competitive<br />
in the long run, and to ensure<br />
that its ambitions for growth<br />
are not thwarted by Russia or any<br />
37<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
Aura Sabadus<br />
38<br />
other large rival that may enter the<br />
scene, is to offer flexibility and promote<br />
greater integration through appropriate<br />
infrastructure.<br />
It is expected that the price for <strong>Caspian</strong> gas paid<br />
by Turkish and European customers should be<br />
between 10 to 12% cheaper than that paid for<br />
Russian gas.<br />
Upholding the status quo by insisting<br />
on TPA exemption and failing to develop<br />
interconnectors with reverse<br />
flows connecting regional countries<br />
would not only fall short of Europe’s<br />
diversification goals, but also place<br />
the SGC at a severe disadvantage to<br />
South Stream.<br />
Furthermore, in their drive to secure<br />
further growth and lock in new<br />
markets, the Shah Deniz consortium<br />
should reconsider their ambitions to<br />
expand into Western Europe, which<br />
already benefits from multiple<br />
sources of supply and opt instead to<br />
compete directly with Russia in central<br />
and Eastern Europe, where there<br />
is a greater need for diversification.<br />
<strong>Caspian</strong> gas can beat off competition<br />
from South Stream, providing it is<br />
supported by flexible transport option<br />
and commercially viable terms.<br />
Commercially attractive<br />
A product is commercially viable if it<br />
brings financial benefits to both buyers<br />
and sellers.<br />
From a seller’s perspective it has<br />
been argued 12 that the choice of TAP<br />
was decidedly more attractive than<br />
its rival Nabucco West. TAP offered<br />
the Shah Deniz consortium a transit<br />
tariff of €3 ($4.11 at April <strong>2014</strong><br />
exchange rate) per 100 km of pipeline,<br />
fractionally cheaper than that<br />
advanced by Nabucco West over the<br />
same distance. TAP was also 459 km<br />
shorter than its competitor, making<br />
for even cheaper tariffs; the investment<br />
needed to build TAP was €4.4<br />
billion ($6 billion) compared to<br />
€6.6 billion ($9 billion) for Nabucco<br />
West. 13<br />
It is expected that the price for <strong>Caspian</strong><br />
gas paid by Turkish and European<br />
customers should be between<br />
10 to 12% cheaper than that paid<br />
for Russian gas. The exact values are<br />
not known, nor are the formulae by<br />
which they are determined. However,<br />
it may be assumed that they are<br />
largely linked to the price of oil and,<br />
from a buyer’s point of view, should<br />
be more competitive than those<br />
charged by Russia in the region.<br />
Nonetheless, the commercial viability<br />
of the Southern Gas Corridor<br />
should be seen not only against<br />
present conditions, but also in the<br />
long-term against the impact of two<br />
potential developments: competition<br />
from existing and emerging regional<br />
producers as well as US LNG<br />
and the future of oil indexation.<br />
This subchapter will discuss the viability<br />
of the SGC against these two<br />
developments and reflect on its potential<br />
to bring greater economic<br />
efficiency, its impact on the liber-<br />
12.<br />
Abbasov, S., Ibid.<br />
13.<br />
Ibid.
European natural<br />
gas network.<br />
alisation process in target countries<br />
and further afield and its ability to<br />
remain competitive in the long run.<br />
The regional and global energy scene<br />
is in flux. New gas producers such as<br />
Cyprus, (northern) Iraq and Israel<br />
are expecting to establish themselves<br />
as firm suppliers by the end of<br />
the decade, bringing into the equation<br />
more choice for Turkish and European<br />
markets. In that sense, they<br />
will be fulfilling the role that Azerbaijan<br />
expects to undertake within<br />
the Southern Gas Corridor.<br />
These projects are still in their early<br />
stages and have the added inconvenience<br />
of being fraught with political<br />
problems that will first have to be<br />
resolved. Nevertheless, it is widely<br />
discussed that up to 10 bcm/year<br />
and another 7 to 8 bcm/year could<br />
reach Turkey and possibly Europe<br />
from northern Iraq and Israel, respectively,<br />
by the end of the decade.<br />
Analysts have told this author that<br />
the price of northern Iraqi gas could<br />
be one of the cheapest in Turkey and<br />
Europe, while Israel’s may be close<br />
to that charged by Azerbaijan.<br />
Prospective buyers suggested in an<br />
interview with the author that if Israel<br />
opts to sell gas via pipeline to<br />
Turkey, rather than as LNG, the price<br />
for the volumes may contain an element<br />
of hub indexation, possibly one<br />
linked to the British NBP, bringing<br />
much greater flexibility than a purely<br />
oil-indexed value.<br />
Another regional competitor could<br />
be Iran if sanctions introduced in<br />
response to its alleged nuclear programme<br />
are lifted. Sitting on over<br />
33 trillion cubic metres of gas, the<br />
country has the potential to become<br />
an energy superpower. However, its<br />
infrastructure remains poor and<br />
would require multi-billion dollars’<br />
worth of investment to ramp up<br />
production for internal and regional<br />
needs.<br />
As an emerging supplier in great<br />
need of finance, Iran could consider<br />
establishing itself as a competitive<br />
39<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
Aura Sabadus<br />
40<br />
player by selling volumes at cheaper<br />
prices to Turkey and Europe. However,<br />
its present insistence on retaining<br />
a high export price to Turkey<br />
– its largest gas market – casts<br />
doubts over its willingness to grant<br />
discounts in the future.<br />
Another competitor that may<br />
emerge in the region is the US<br />
through the export of LNG. Countries<br />
such as Greece and Hungary<br />
have been lobbying Washington for<br />
volumes once they become available<br />
towards the end of the decade. Even<br />
though Turkey has not expressed<br />
interest, the competitive price expected<br />
to be charged for exports to<br />
Europe may be attractive enough for<br />
private licence-holders to enter the<br />
market. Under current conditions –<br />
high international LNG prices – and a<br />
capped regulated price, Turkish private<br />
companies cannot afford to purchase<br />
LNG. Greece itself may find the<br />
US LNG price attractive, compared to<br />
that, say, of Russian gas even now after<br />
Gazprom granted a 15% discount<br />
backtracked to June 2013.<br />
Prices to various European countries<br />
expecting to import US LNG will vary.<br />
However, news and price publishers<br />
ICIS estimate that depending on<br />
the shipping distance, landing prices<br />
into Europe could hover between<br />
$10.00 - $12.00/MMBTu based on a<br />
US Energy Information Administration<br />
(EIA) projected Henry Hub average<br />
for 2015 at $4.11/MMBTu. 14<br />
At an average $11.00/MMBTu<br />
($395.00/1000m 3 ) US LNG could be<br />
reportedly $2.00/1000m3 15 cheaper<br />
than the currently discounted Russian<br />
border price for Greece.<br />
However, Russian gas prices to European<br />
markets either through existing<br />
contracts, or as part of future<br />
agreements signed after the comple-<br />
14.<br />
“Focus: Eastern Europe warms to US LNG (27 February <strong>2014</strong>), Global LNG Markets (GLM), ICIS.<br />
15.<br />
“Greece’s DEPA secures 15% discount from Gazprom,” (26 February <strong>2014</strong>), European Spot Gas<br />
Markets (ESGM), ICIS.
tion of South Stream could be erratic.<br />
The example of Ukraine, which saw<br />
its contractual price fall and rise dramatically<br />
within less than six months<br />
amid political tensions, should send<br />
a strong warning signal to all offtakers<br />
of Gazprom-supplied volumes.<br />
Russian border prices to Turkey<br />
and EU markets vary largely and the<br />
discounts granted for exports are<br />
either politically motivated or come<br />
with strings attached. For example,<br />
Gazprom agreed this year to grant a<br />
10% discount to Turkey’s private importers<br />
on condition that next year’s<br />
price includes a 10% mark-up.<br />
Under current arrangements, <strong>Caspian</strong><br />
gas prices are likely to be comparatively<br />
more competitive than<br />
those for Russian gas and could help<br />
the economies of its target markets<br />
to become more efficient. However, it<br />
is important to remember that Russia,<br />
as the monopoly supplier in the<br />
region has greater leeway in offering<br />
discounts which are underpinned<br />
Under current arrangements, <strong>Caspian</strong> gas<br />
prices are likely to be comparatively more<br />
competitive than those for Russian gas<br />
and could help the economies of its target<br />
markets to become more efficient.<br />
by political motivations rather than<br />
commercial realities. In contrast, TAP,<br />
as a smaller project needs to stick to<br />
its commercial goals, without enjoying<br />
Russia’s flexibility in handing out<br />
generous discounts to preferential<br />
clients.<br />
Apart from the competition emerging<br />
from new and existing regional<br />
actors, a major challenge to sellers<br />
of gas in the Southern Gas Corridor<br />
could come from developments surrounding<br />
oil indexation.<br />
A recent article in Barron’s points<br />
out that new discoveries of oil in the<br />
US and worldwide, combined with<br />
flattening consumption, could drive<br />
down the price of crude from the<br />
current $100 to $75/barrel. 16 This<br />
means that gas prices in long-term<br />
contracts indexed to oil are likely to<br />
be revised down, raising questions<br />
about the competitiveness of such a<br />
formula.<br />
In order to establish and retain its<br />
competitive edge, the Southern<br />
Gas Corridor will have to pursue<br />
two goals: increase its capacity and<br />
reconsider its pricing structure<br />
in a way that would benefit all<br />
counterparties.<br />
As the supplier of <strong>Caspian</strong> gas for<br />
SGC, Azerbaijan is already considering<br />
ramping up exports once<br />
more gas comes on stream from additional<br />
offshore blocks such as Absheron,<br />
Umit, Babek, ACG Deep possibly<br />
after 2020. In addition, Shah<br />
Deniz partners may consider opening<br />
up TANAP and TAP to volumes<br />
from Israel and possibly Northern<br />
Iraq once they become available by<br />
the end of the decade.<br />
A senior SOCAR representative<br />
told the author that the company<br />
was interested in working with the<br />
Turkish incumbent BOTAS in shipping<br />
Israeli gas through TANAP<br />
41<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
16.<br />
Epstein, G., (29 March <strong>2014</strong>), “Here Comes $75 Oil”, Barron’s
and possibly further to Europe, although<br />
neither party has yet made<br />
official statements in this regard.<br />
The price of any additional volumes<br />
reaching Turkey and Europe will<br />
have to be responsive to demand<br />
and supply rather than follow rigid<br />
oil-indexed formulae.<br />
respond to the needs of both buyers<br />
and sellers will hinge on a crucial factor<br />
– its political invulnerability.<br />
Politically invulnerable<br />
Aura Sabadus<br />
42<br />
In the light of the two challenges<br />
looming on the horizon – greater<br />
competition from global LNG and<br />
regional supplies as well as uncertainty<br />
regarding the oil indexation,<br />
a hub rather than an oil-indexed<br />
price will be beneficial to both buyers<br />
and sellers. A competitive market<br />
price will enhance economic<br />
efficiency in the target and neighbouring<br />
countries. In this context,<br />
Turkey’s role in creating a liberalised<br />
traded gas market will take<br />
centre stage.<br />
Turkey is the only country in the region<br />
that has the size, demand and<br />
proximity to three quarters of the<br />
world’s conventional hydrocarbon<br />
reserves to establish a liquid hub<br />
similar to those seen in the UK or<br />
the Netherlands. The creation of a<br />
traded gas market in Turkey would<br />
have a domino effect on neighbouring<br />
South East European countries<br />
where the liberalisation process has<br />
so far failed.<br />
Nevertheless, the establishment of<br />
an effective Southern Gas Corridor<br />
that can accommodate along its already<br />
pledged <strong>Caspian</strong> gas, volumes<br />
from neighbouring regions at competitive<br />
market-driven prices that<br />
Turkey is the only country in the region that has<br />
the size, demand and proximity to three quarters<br />
of the world’s conventional hydrocarbon reserves<br />
to establish a liquid hub similar to those<br />
seen in the UK or the Netherlands.<br />
To what extent will the Southern<br />
Gas Corridor prove a reliable supply<br />
route for Turkey and Europe, unencumbered<br />
by political jostling as<br />
recently seen between Russia and<br />
Ukraine What guarantees does it<br />
bring that end consumers will not<br />
suffer from politically induced interruptions<br />
that could leave them out in<br />
the cold, literally After all, the transport<br />
of <strong>Caspian</strong> and possibly Iraqi<br />
or Israeli gas to Europe via Turkey<br />
will happen in an already politically<br />
sensitive environment fraught with<br />
complex and simmering tensions.<br />
Until the end of the Cold War, the<br />
concept of insecurity was typically<br />
associated with military threats as<br />
states concentrated capabilities to<br />
protect their sovereignty. However,<br />
after 1990 and with the emergence<br />
of a globalised world, the notion expanded<br />
into new terrain, as states<br />
sought security in diverse areas such<br />
the economy, environment, energy.<br />
Security can be defined as “freedom<br />
from threats”. 18 Depending on the<br />
18.<br />
Waever, O., (1995), p. 52) “Securitisation and Desecuritisation” in On Security, ed. Ronnie Lipschutz (New York: Columbia<br />
University Press)
fields they refer to, the threats can be<br />
of economic, military, ecological, etc.<br />
extraction. Extrapolated to energy,<br />
the definition of energy security is<br />
more complex since energy itself is<br />
an all-subsuming category. Nothing<br />
exists that is not energy or is not affected<br />
by energy. 19 Energy influences<br />
and is influenced by everything<br />
ranging from geopolitics, economics,<br />
environment, to our everyday existence.<br />
In that respect it is sought by<br />
states, as guarantors of free and reliable<br />
access to energy resources, and<br />
by individuals, as end consumers of<br />
those energy resources.<br />
In seeking to ensure energy security,<br />
states either take a hands-on approach<br />
or step back, allowing markets<br />
to regulate and guarantee the<br />
flow of resources. Different attitudes<br />
stem from the way in which states<br />
perceive various threats to their energy<br />
security. As Waever notes, in<br />
naming a certain development a security<br />
problem, the state can claim<br />
a special right, one that will, in the<br />
final instance be defined by the state<br />
and its elite. 20 In this context, if the<br />
geopolitical factor is deemed a risk<br />
to energy security, states, as quintessentially<br />
geopolitical actors, may<br />
assume exclusive authority over the<br />
provision of energy security and the<br />
actions associated with it.<br />
True to its laissez-faire philosophy,<br />
the US stepped back, allowing the<br />
market to handle risks as well as the<br />
delivery of energy resources, - its<br />
natural gas market being one of the<br />
most developed and competitive in<br />
the world. Other countries, such as<br />
China or Russia went in opposite direction<br />
as their governments (either<br />
themselves or through state-owned<br />
companies) took centre stage in underwriting<br />
energy security.<br />
Yet, the idea that risks are minimised<br />
if states engage in bilateral relations<br />
is challenged by at least two<br />
examples.<br />
Firstly, the EU succeeded in reducing<br />
its vulnerability to political shocks<br />
by putting in place reliable infrastructure,<br />
pushing for greater market<br />
integration, and, not least, by allowing<br />
markets to take control of the<br />
supply-demand balance. As a result,<br />
even though Ukraine still represents<br />
one of the main transit routes for<br />
Russian gas supplies into Western<br />
Europe, the fall-out from the current<br />
standoff between Kiev and Moscow<br />
is likely to have a smaller impact<br />
than it would have had in 2009 or<br />
2006 during the Russia-Ukraine gas<br />
wars.<br />
Secondly, as the current Russia-<br />
Ukraine crisis proves, state-to-state<br />
relations may leave countries exposed<br />
to volatile political environments.<br />
There are numerous other examples<br />
that support this argument,<br />
for example the interruption of oil<br />
or gas supplies from Iraq or Iran to<br />
Turkey in the aftermath of political<br />
disputes between or involving these<br />
countries.<br />
43<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
19.<br />
Ciuta, F., (April 2010), “Conceptual Notes on Energy Security: Total or Banal Security” in Security<br />
Dialogue 2010 41:123<br />
20.<br />
Waever, O., (1995) ibid, p.54
Aura Sabadus<br />
44<br />
The Southern Gas Corridor provides<br />
balanced state and private participation,<br />
which can guarantee greater<br />
stability and reduce risks. However,<br />
it is important to note that Turkey’s<br />
current representation in the project<br />
is exclusively through its state companies<br />
– the transmission system<br />
operator BOTAS and its oil and gas<br />
incumbent TPAO may enhance the<br />
political vulnerability of the SGC.<br />
Sensitive topics such as Turkey’s<br />
and Azerbaijan’s stance towards Armenia<br />
could place Ankara and Baku<br />
in a difficult relation to one another<br />
and enhance the potential for political<br />
spill-over into the energy sector.<br />
Since Turkey will be a crucial link<br />
in the Southern Gas Corridor, as<br />
well as an important recipient of<br />
its gas, neither Turkey itself nor<br />
the partners involved in the project<br />
can afford to incur political risks.<br />
For that reason, the Turkish government<br />
ought to be encouraged to<br />
take a back seat, allowing the private<br />
sector to establish itself as a<br />
buffer against the consequences of<br />
possible disputes emerging at state<br />
level. Admittedly, the Turkish government<br />
hinted in February at the<br />
possibility of putting up part of its<br />
20% stake in TANAP for privatisation,<br />
but since then there have been<br />
no further developments.<br />
Compared to other regional<br />
projects, notably Russia’s supply<br />
of gas through existing and upcoming<br />
infrastructure such as South<br />
Stream, the Southern Gas Corridor<br />
offers not only lower political risks<br />
thanks to the participation of public<br />
and private companies, but also<br />
establishes itself as a much-needed<br />
link between east and west. This<br />
connection will, on the one hand,<br />
allow Azerbaijan and possibly other<br />
gas-rich <strong>Caspian</strong> countries such as<br />
Kazakhstan or Turkmenistan as<br />
well as Middle Eastern or Levantine<br />
producers to gain a foothold<br />
in Turkey and the EU, and on the<br />
other open up exceptional trading<br />
opportunities deep into Eurasia for<br />
Turkey and Europe.<br />
Conclusion<br />
The Southern Gas Corridor is being<br />
hailed as the successful outcome<br />
of Europe’s diversification quest<br />
along its south eastern flank. It offers<br />
the prospect of cheaper prices<br />
than those asked by Russia and is<br />
less politically vulnerable thanks to a<br />
balanced participation of public and<br />
private companies.<br />
However, the emergence of the<br />
Moscow-backed South Stream following<br />
political tensions between<br />
Russia and its neighbouring transit<br />
country, Ukraine, could raise serious<br />
uncertainties for regional gas supply<br />
ventures. In its current format – a 16<br />
bcm/year project – the Southern Gas<br />
Corridor will find it difficult to rival<br />
the 63 bcm/year South Stream both<br />
in terms of market share and pricing.<br />
While Russia can afford to hand out<br />
price discounts to loyal political clients,<br />
the Southern Gas Corridor does<br />
not enjoy that luxury.<br />
In this context, the only way for the<br />
Southern Gas Corridor to beat off<br />
competition is to offer everything<br />
that Russia cannot: a more flexible<br />
infrastructure that reaches out not<br />
only to Southern Europe but also
anches off into the central and<br />
eastern part of the continent, prices<br />
that reflect supply and demand<br />
rather than political diktats and<br />
greater confidence in the private sector<br />
as the main driver of the project.<br />
For that reason, any new volumes<br />
that will be offered through the<br />
Southern Gas Corridor to Turkey<br />
and the EU from the <strong>Caspian</strong> region,<br />
the Middle East or the Levant under<br />
those terms will not only offer more<br />
competitive terms, but also represent<br />
a genuine contribution to Europe’s<br />
ambitions for diversification<br />
and market integration.<br />
45<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
Davide Tabarelli<br />
46<br />
Environmental<br />
effects of the Trans<br />
Adriatic pipeline<br />
Davide Tabarelli<br />
NE Nomisma Energia
On April 17 th <strong>2014</strong>, the TAP consortium<br />
handed an updated, 1,200 page version<br />
of the Environmental and Social Impact<br />
Assessment of the Italian section of<br />
the TAP project, as required by Italian<br />
authorities.<br />
Italy is probably the most difficult<br />
place on earth to build new industrial<br />
infrastructures, at least judging<br />
from the troubles encountered by<br />
any proposed energy project over<br />
the last several decades. In Italy almost<br />
all new producing plants or infrastructures<br />
are likely to face some<br />
opposition, and this is even more so<br />
for projects involving energy. Things<br />
are especially difficult in some areas,<br />
notably southern regions like Apulia,<br />
where TAP should come ashore.<br />
In order to get an idea of the highly<br />
complex environment faced by companies,<br />
it is helpful to begin with a<br />
brief summary of the lengthy and<br />
tortuous permissions process. Let’s<br />
start with the endpoint: on April 17 th<br />
<strong>2014</strong>, the TAP consortium handed<br />
the Italian Ministry of Environment<br />
(MATTM) and the Italian Ministry of<br />
Cultural Heritage (MINBAC) an updated,<br />
1,200 page version of the Environmental<br />
and Social Impact Assessment<br />
of the Italian section of the TAP<br />
project, as required by Italian authorities.<br />
After evaluating 12 alternative<br />
routes for the pipeline, as requested<br />
by MATTM and MINBAC in March,<br />
the document confirms that the<br />
one coming ashore near San Foca is<br />
the best solution in environmental,<br />
technical and socio-economic terms.<br />
The TAP consortium restated that<br />
the pipeline will be ready for operation<br />
in 2019.<br />
This was the last step in a very complex<br />
path towards attaining the<br />
relevant environmental authorisations<br />
for the project, as the 5.6 GB<br />
of publically available documents<br />
produced by the consortium stand<br />
to testify. The Environmental Impact<br />
Assessment (EIA) is a technical-administrative<br />
procedure that,<br />
according to Legislative Decree no.<br />
152/2006, is normally carried out<br />
by an ad hoc decision making process<br />
by competent agencies (Conferenza<br />
dei Servizi). The Conferenza<br />
dei Servizi review the decisions of<br />
all governmental agencies involved<br />
in the EIA procedure, including central<br />
and local governments. This<br />
type of coordination is designed to<br />
guarantee that all stakeholder interests<br />
are taken into consideration,<br />
while enabling the EIA to comply<br />
with its schedule, which should not<br />
exceed 150 days.<br />
For the TAP, as for any natural gas<br />
pipeline of that relevance, Legislative<br />
Decree no. 152/2006 requires an<br />
EIA procedure, in order to carefully<br />
47<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
Davide Tabarelli<br />
48<br />
evaluate potential environmental<br />
and cultural heritage risks. According<br />
to Article 21 of the same Decree,<br />
an EIA procedure may be preceded<br />
by a period of consultation (so called<br />
“scoping”), in which the proposers of<br />
the project agree with relevant authorities<br />
on the documents to be submitted<br />
for the following procedural<br />
steps. This phase is expected to take<br />
up to 60 days; for the TAP project, it<br />
took more than 11 months. In fact,<br />
the TAP consortium began consultation<br />
with the MINBAC in May 2011;<br />
the Ministry issued an opinion only 9<br />
months later (February 2012). Meanwhile,<br />
the TAP consortium begun to<br />
prepare the Environmental Impact<br />
Study, which was presented on March<br />
15 th 2012.<br />
In the period leading up to this first<br />
submission, a total of five alternative<br />
route options were investigated:<br />
the San Foca route was concluded<br />
to represent the optimal solution in<br />
environmental, technical, socioeconomic<br />
and safety terms. This solution<br />
brings the pipeline ashore near San<br />
Foca, and places the Pipeline Receiving<br />
Terminal (PRT), the facility to<br />
connect TAP into the Italian gas network,<br />
in Melodugno. This route was<br />
presented by the TAP consortium to<br />
the Italian authorities as the optimal<br />
solution.<br />
Inevitably, the TAP consortium had<br />
to revise its study in order to account<br />
for Ministry views, issued as part of<br />
the scoping phase. In December 2012,<br />
MINBAC gave the TAP Consortium 9<br />
months to consult with local authorities<br />
and local NGOs on the potential<br />
environmental and social impacts<br />
of the project. In September 2013,<br />
the Consortium came up with a new<br />
document, which addressed some of<br />
the comments received during the<br />
new consultation period. Under the<br />
revised plan, the pipeline still comes<br />
ashore at San Foca, but the landfall<br />
site was shifted slightly to diminish<br />
the impact on the seashore, to further<br />
prevent any damage to the area’s<br />
protected Posidonia sea grass, and<br />
to avoid any visual impact. A 1500 m<br />
micro tunnel 10 meters underground<br />
was also proposed. Furthermore, the<br />
Consortium decided to reduce the<br />
size and to optimize the location of<br />
the PRT in Melendugno, in order for<br />
it to conform with the typical configuration<br />
of local structures such as farm<br />
buildings, thereby reducing its visual<br />
impact.<br />
the TAP consortium made it clear that<br />
San Foca remained the best option for the<br />
pipeline to come ashore.<br />
The documents prepared by the TAP<br />
Consortium were considered by the<br />
main national (MATTM, Ministry of<br />
Tourism) and local (Apulia Region,<br />
Lecce Province, Melendugno Municipality)<br />
authorities. In January<br />
<strong>2014</strong>, Apulia Region issued a negative<br />
(non-binding) opinion on the EIA<br />
procedure, as it had already done in<br />
September 2012. This decision was<br />
based on “landscape-issues”, and<br />
the regional authorities requested<br />
the Consortium to consider another<br />
landfall site for the pipeline. In March<br />
<strong>2014</strong>, MINBAC and MATTM requested<br />
some integration to the Consortium<br />
submission of September 2013: the<br />
Ministries required the company to
Signing<br />
ceremony of<br />
host government<br />
agreement in<br />
Athens on June<br />
26, 2013.<br />
submit an in depth evaluation of alternative<br />
routes for the pipeline. In<br />
particular, some suggested that given<br />
that another pipeline (ITGI) is coming<br />
ashore near Otranto, around 20 km<br />
south of San Foca, and that it has already<br />
obtained the relevant authorisations,<br />
the TAP pipeline landfall site<br />
could be moved near Otranto. However,<br />
in its April <strong>2014</strong> delivery, the<br />
TAP consortium made it clear that San<br />
Foca remained the best option for the<br />
pipeline to come ashore; in the same<br />
document, the consortium provided a<br />
reasoned reply to the criticisms made<br />
by the Apulia Region authorities and<br />
other stakeholders.<br />
The difficulties faced by the consortium<br />
in obtaining the relevant<br />
authorisations and in rallying support<br />
for the project from local and<br />
national authorities are in contrast<br />
to the relevance of the infrastructure.<br />
In fact, the Italian government and<br />
the EU have repeatedly declared the<br />
TAP gas line to be of “strategic importance”.<br />
The reason is quite simple: it<br />
adds a new supply route to Europe,<br />
different from the traditional ones,<br />
like Russia, North Africa or even the<br />
North Sea, where reserves are falling<br />
very quickly. There is no need for any<br />
expertise in energy strategy or economics<br />
to understand that when you<br />
are highly dependent on an imported<br />
commodity, it makes sense to diversify<br />
supply sources in order to lower<br />
the risks of a sudden interruption,<br />
and also to generate lower prices<br />
through competition. It would be also<br />
the first time that gas from the former<br />
Soviet Union, from the Azerbaijani<br />
part of the <strong>Caspian</strong> Sea, is delivered to<br />
Europe without being absorbed into<br />
the Russian system of transport grids<br />
and, more importantly, commercial<br />
contacts.<br />
It is also important to note that the<br />
project is competing with future supply<br />
from Russia without posing any<br />
real threatening to Moscow. Europe<br />
is likely to need, if its economy recov-<br />
49<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
View of the old<br />
town Ostuni,<br />
Puglia, Italy.<br />
Davide Tabarelli<br />
50<br />
ers, some 200 billion cubic meters per<br />
year (bcm/y) of additional gas up to<br />
2030. Russia will not be able to cover<br />
the full scope of this demand, and<br />
there will be plenty of room left for<br />
gas supplies through South Stream,<br />
the other gigantic gas line that will<br />
bring Siberian gas to Europe through<br />
the so-called northern corridor.<br />
Thus, we should ask ourselves why<br />
this project is facing such a fierce opposition<br />
from the South of Italy. The<br />
answer is complex, with its roots<br />
reaching back centuries into the history<br />
of the poorest part of the country,<br />
where economic development,<br />
imposed from central governments<br />
with controversial results, has never<br />
been really achieved. Lagging behind<br />
the rest of the EU, the south of Italy<br />
is one of the weakest parts of the EU,<br />
with average levels of unemployment<br />
close to 20%, reaching peaks of 40%<br />
among the youngest. Emigration from<br />
has been a constant feature of the<br />
past century and has re-emerged as a<br />
major trend with the latest economic<br />
crisis forcing thousands of people<br />
to look for jobs abroad. Experience<br />
teaches us that as a territory develops,<br />
its inhabitants become increasingly<br />
familiar with industrial infrastructures,<br />
and thus it is more likely that<br />
the realisation of a new project will<br />
succeed. What has often happened<br />
in the past is that investors in the<br />
southern Italian regions anticipated<br />
a welcome from local authorities and<br />
people, since they thought they were<br />
bringing new opportunities for local<br />
development.<br />
But in the last few years, the opposite<br />
has happened. A very strong negative<br />
perception of any kind of industry<br />
grew in precisely those poor areas<br />
where industrial development could<br />
have helped most. This is a common<br />
problem all over Italy, where the<br />
media tends to focus on the negative<br />
impacts connected to pollution,<br />
deaths, and contamination. Due to<br />
this negative campaigning, factories,<br />
or any kind of investment, are seen as<br />
bringing harmful changes. As a consequence,<br />
the positive impacts on employment<br />
and economic development<br />
are ignored.<br />
Apulia Region has a complex relationship<br />
with industrial infrastructures,
as illustrated by the Ilva case. Ilva is<br />
Europe’s biggest steel factory, located<br />
near Taranto, 130 km from San Foca,<br />
and owned by the Riva Group, one of<br />
world’s largest steelmakers. In July<br />
2012, Ilva was forced to close after<br />
a judge ordered an asset freeze in<br />
an environmental probe. The court<br />
dispute centres on studies suggesting<br />
that up to 386 people might have<br />
died of cancer over the past 13 years,<br />
and that people living downwind of<br />
fumes from the plant have suffered<br />
negative health effects. The history<br />
of the Ilva industrial complex dates<br />
back to the beginning of the 20th century.<br />
The developments of July 2012<br />
are a single chapter in a very long<br />
struggle involving the plant’s high<br />
pollution levels, environmental risks<br />
and employment issues: the factory<br />
employed some 12,000 workers, and<br />
it was the largest private employer<br />
in the Apulia Region. The needs and<br />
the feelings of the local population on<br />
the subject were expressed on April<br />
14, 2013, when a referendum on the<br />
future of Ilva took place. Asked if they<br />
wanted the plant to shut down i, the<br />
majority of the population (80.4%)<br />
did not vote, indirectly supporting<br />
the preservation of workplaces.<br />
The big coal plant of Cerano, located<br />
10 km south of Brindisi and 40 km<br />
north of Melodugno, also faces heavy<br />
criticism. It is a 2,600 MW plant that<br />
burns imported coal. Given the low<br />
price of coal compared to gas, it is<br />
running at full speed. According to<br />
environmentalists, it is one of Europe’s<br />
most polluting plants. In reality<br />
it is an efficient and modern plant<br />
emitting a lot of CO 2<br />
simply because<br />
it produces a lot of electricity using<br />
large quantities of fossil fuel.<br />
Brindisi is famous for its international<br />
gas industry, particularly for<br />
Brindisi is famous for its international gas<br />
industry, particularly for the LNG terminal<br />
that BG fought - unsuccessfully - to build for<br />
almost a decade.<br />
the LNG terminal that BG fought - unsuccessfully<br />
- to build for almost a<br />
decade. The project, along with ten<br />
more all over Italy, was drawn up at<br />
the beginning of the 1970s and. Then,<br />
having been forgotten for years, it<br />
was resurrected in 2000 by the UK<br />
gas company. At the beginning, the<br />
proposal was welcomed, but immediately<br />
delays emerged. In August 2001,<br />
the UK Prime Minister Tony Blair sent<br />
a letter to the Italian Prime Minister<br />
Silvio Berlusconi complaining about<br />
the delays in the development of the<br />
project. The Berlusconi government<br />
then forced Enel, the Italian power<br />
utility, to enter into the project, in a<br />
bid to speed up the process. However,<br />
that did not happen, and later in 2005,<br />
Enel, having understood the difficulties<br />
facing the LNG terminal, decided<br />
to drop out. Despite all the legislative<br />
and bureaucratic hurdles, the British<br />
company succeeded in obtaining<br />
the relevant authorisations from local<br />
authorities, but new elections in<br />
2006 brought a new administration<br />
that rejected and appealed against<br />
it. Then, an investigation into bribes<br />
paid to obtain the first authorisation<br />
was launched, bringing further<br />
problems. The drop in domestic gas<br />
consumption, linked to the 2008 economic<br />
crisis, made the project much<br />
less attractive. Finally, in March 2012,<br />
after eleven years and an investment<br />
51<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
Davide Tabarelli<br />
52<br />
of some 200 million Euros - a significant<br />
part of which was spent on legal<br />
fees - BG decided to abandon Brindisi.<br />
The statement by the President of Apulia<br />
Region reflects a general resistance to<br />
anything complex, modern and with the<br />
potential to benefit private companies that<br />
often represent industries believed to harm<br />
public health.<br />
Even investments in renewable energy<br />
sources often face fierce opposition,<br />
a problem that has rescinded<br />
only because financial incentives to<br />
the sector were sharply reduced in<br />
2013. At the end of March <strong>2014</strong>, the<br />
President of the Apulia Region, Nichi<br />
Vendola, declared that Apulia “has already<br />
given a lot in terms of wind and<br />
photovoltaic plant; the construction<br />
of new plants should be capped. We<br />
are leaders in Italy in new renewable<br />
production with a share of 40% out<br />
of the total electricity output, against<br />
a European target of 20% by 2020.”<br />
Apulia, where the TAP project should<br />
come ashore, has a large amount of<br />
new renewables simply because it has<br />
been blessed with favourable natural<br />
conditions. One of the biggest Italian<br />
regions, its territory runs across vast<br />
planes. Its geographical location in<br />
the southern part of Europe and in<br />
the middle of the Mediterranean provides<br />
very good insolation levels and<br />
optimal wind conditions. Moreover,<br />
Apulia is sparsely populated with<br />
large parts of the Region inhabitated.<br />
Over the last decade, its once thriving<br />
agricultural sector has suffered from<br />
the economic downturn, which has<br />
pushed many farmers to welcome<br />
wind and photovoltaic plants in exchange<br />
for royalties. The statement<br />
by the President of Apulia Region reflects<br />
a general resistance to anything<br />
complex, modern and with the potential<br />
to benefit private companies that<br />
often represent industries believed to<br />
harm public health. This is the effect<br />
of the so-called antagonism applied in<br />
the realm of politics and to the decision-making<br />
authorisation process of<br />
a modern democracy whose economy,<br />
however, relies on complex industries.
In this regard, Nichi Vendola is one of<br />
the most meaningful cases in Europe,<br />
since he is a successful politician who<br />
in 2009 founded the SEL party (Sinistra<br />
Ecologia Libertà, literally Left,<br />
Ecology and Freedom). Throughout<br />
his political career, Vendola has received<br />
many votes not only from the<br />
far left, where his party should be<br />
placed, but also from an electorate<br />
that usually voted for other political<br />
factions, even right-wing parties.<br />
His ideas, well explained and clearly<br />
articulated given that he is a highly<br />
skilled politician, are based mainly on<br />
a brand of environmentalism that inevitably<br />
takes on anti-modernity positions,<br />
envisaging a poorly defined<br />
social vision in which people can<br />
achieve liberation from dependence<br />
on technology.<br />
The influence of local authorities in<br />
the permissions process is one of the<br />
most debated issues in relation to infrastructural<br />
developments, or rather<br />
the lack thereof. After more than ten<br />
years since the transfer of a major<br />
part of these competences from central<br />
governments to local authorities,<br />
a large political coalition now argues<br />
that it is time to re-centralise the full<br />
scope of these competences. In early<br />
2001, a weak left wing government<br />
managed, few days before resigning,<br />
to get parliament to approve changes<br />
to the 5 th section of the Italian constitution.<br />
These changes were later<br />
voted in by the Italian people through<br />
a referendum and thus signed into<br />
law in November 2011. In that period,<br />
the constant pressure to improve the<br />
efficiency of Italian politics paved the<br />
way for federal ideas (so-called “devolution”),<br />
as if this alone could solve<br />
the problems in national politics.<br />
The strongest party in some parts of<br />
the richer northern Italian regions<br />
was the Northern League, a quasiseparatist<br />
party. It was believed that<br />
increased involvement by regions,<br />
provinces and municipalities would<br />
help streamline the permissions<br />
process, at the same time as improving<br />
citizens’ support for democracy.<br />
Constitutional Law no. 3 of November<br />
2001 transferred competences<br />
from the central government to the<br />
regions, and energy was one of the<br />
issues involved in that transfer. This<br />
Law has been widely recognized as<br />
a failure, since the problems raised<br />
by local communications cannot be<br />
solved in any case. One of the objectives<br />
of the new government led by<br />
the young Matteo Renzi is to re-centralise<br />
some of the competences now<br />
managed by the regions and among<br />
these is energy. This would not be an<br />
easy process, but these are necessary<br />
steps if Italy wants to modernise its<br />
energy sector, and remain a major<br />
European and international economy.<br />
53<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
Iran Nuclear<br />
Negotiations and<br />
Turkey<br />
Mehmet AkIf Okur<br />
Mehmet Akif Okur<br />
DEPARTMENT OF INTERNATIONAL RELATIONS, GAZI UNIVERSITY<br />
54
The internal dynamics of the U.S. and Iran,<br />
along with their interpretation of regional<br />
and global balances, have contributed<br />
significantly to the provisional agreement.<br />
The fate of the nuclear negotiations<br />
between Iran and P5+1 and the future<br />
of the Iranian-Western relations<br />
are hot topics for academics and<br />
researchers working on the Middle<br />
East. If the ongoing negotiations give<br />
rise to an agreement, significant developments<br />
may occur both at the<br />
regional and global level. In order to<br />
fully understand this critical process<br />
and its possible consequences, the<br />
motivations and objectives of the<br />
parties involved should be carefully<br />
analysed.<br />
The internal dynamics of the U.S. and<br />
Iran, along with their interpretation<br />
of regional and global balances,<br />
have contributed significantly to<br />
the provisional agreement. Both<br />
parties have chosen to re-evaluate<br />
their worries, aims and expectations<br />
on different issues and establish<br />
a dialogue. Any achievements or<br />
problems encountered on the way<br />
from dialogue to agreement would<br />
either strengthen or destabilise each<br />
party’s initial motivations. However,<br />
in order to answer our questions,<br />
we must analyse the original and<br />
current motivations of the parties<br />
involved.<br />
We should go back to the U.S. invasion<br />
of Iraq. The pillars of the proposal<br />
for a direct meeting, reportedly<br />
presented to the U.S. in April 2003<br />
with Khamenei’s approval, provide<br />
significant clues about Iran’s expectations<br />
and objectives. 1 Essentially,<br />
Iran was suggesting full-scale cooperation<br />
with the U.S. in return for<br />
acknowledgement of its demands<br />
in relation to the new order to be<br />
established in Iraq. These included<br />
recognizing Iranian defence needs<br />
and “legitimate” interests in the Middle<br />
East, ending economic sanctions,<br />
maintaining its “peaceful” nuclear,<br />
biological, and chemical programs,<br />
and protecting the regime. The pro-<br />
55<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
1.<br />
Discussions about the details of Iran’s proposal for a “Grand Bargain” to the USA in May 2003 still continue. Some<br />
documents about the issue were published in New York Times in 20<strong>07</strong> by Nicholas D. Kristof. Nicholas D. Kristof, “Iran’s<br />
Proposal for a ‘Grand Bargain’”, The New York Times, April 28, 20<strong>07</strong>, http://kristof.blogs.nytimes.com/20<strong>07</strong>/04/28/<br />
irans-proposal-for-a-grand-bargain/
Mehmet AkIf Okur<br />
56<br />
posal stated that Iran would recognise<br />
a two-state solution in relation<br />
to the Israel- Palestine issue, support<br />
to Palestinian groups would be cut<br />
off within certain parameters, and<br />
Hezbollah would be transformed a<br />
political group whose activity was<br />
limited to Lebanon. It is believed<br />
that subsequent to rejecting this<br />
suggestion, the Bush administration<br />
decided to avoid dialogue with Iran,<br />
which it regards as a part of the “axis<br />
of evil”. 2 Thus, the proposals presented<br />
by President Rouhani’s delegation<br />
during the current nuclear<br />
negotiations between Iran and the<br />
European trio were not accepted by<br />
the U.S. Although Iran suspended<br />
its programme during the negotiations,<br />
it found the economic facilities<br />
offered by the European contingent<br />
for the final agreement to be inadequate.<br />
3 The actual objective was<br />
to reach an agreement with the U.S.<br />
uranium enrichment activities were<br />
resumed in 2006 when Iran was feeling<br />
much stronger in relation to the<br />
U.S., which was under pressure due<br />
to the escalating political unrest in<br />
Iraq. Would it open a “huge bargaining”<br />
window that is suitable for new<br />
balances in the future The similarity<br />
between the proposal rejected<br />
by the diplomatic mission under the<br />
leadership of Rouhani and Zarif, and<br />
the current status of Iran strengthens<br />
the belief that this was a key question<br />
during that stage.<br />
In examining the relationship between<br />
the fluctuation in nuclear negotiations<br />
and the changes in Iran’s<br />
domestic policy, the critical turning<br />
points are: overthrowing the reformist<br />
wing, the transition to the Ahmadinejad<br />
era, and Rouhani’s accession<br />
to power. 4 It is certainly true that<br />
Khamenei remains the ultimate decision<br />
maker on foreign policy issues<br />
such as nuclear negotiations within<br />
In examining the relationship between the<br />
fluctuation in nuclear negotiations and the<br />
changes in Iran’s domestic policy, the critical<br />
turning points are: overthrowing the reformist<br />
wing, the transition to the Ahmadinejad era,<br />
and Rouhani’s accession to power.<br />
the Iranian state system. The nuclear<br />
programme has gradually become a<br />
national issue that is supported by a<br />
large part of Iranian society. 5 However,<br />
these views do not assert that<br />
Iran lacks a political sphere that also<br />
incorporates nuclear negotiations.<br />
Regarding the negotiations, there are<br />
differences between the approach<br />
of the Revolutionary Guards 6 (who<br />
gained more power as Ahmadinejad’s<br />
2.<br />
Trita Parsi, “The Price of Not Talking to Iran”, World Policy Journal, Vol. 23, No. 4 (Winter, 2006/20<strong>07</strong>), pp. 11-17.<br />
3.<br />
For documents about the negotiations between the European Trio and Iran, see Great Britain/Foreign and Commonwealth<br />
Office, Iran’s Nuclear Programme: A Collection of Documents, The Stationery Office, 2008<br />
4.<br />
For an example about transition discussions, see Yonah Alexander, Milton M. Hoenig, The New Iranian Leadership:<br />
Ahmadinejad, Terrorism, Nuclear Ambition, and the Middle East, Praeger, 2008.<br />
5.<br />
For the relation between nuclear program and state identity at the discourse level and its transformation, see Homeira<br />
Moshirzadeh, “Discursive Foundations of Iran’s Nuclear Policy”, Security Dialogue, December 20<strong>07</strong> Vol. 38, no. 4, pp.<br />
521-543.<br />
6.<br />
Ali Alfoneh, “The Revolutionary Guards’ Role in Iranian Politics”, Middle East Quarterly, Fall 2008, Vol. 15 <strong>Issue</strong> 4, pp.3-14.
Iran’s Supreme<br />
Leader Ayatollah<br />
Ali Khamenei while<br />
visiting the Islamic<br />
Revolutionary<br />
Guard Corps<br />
Aerospace Force<br />
exhibition in<br />
Tehran.<br />
support increased), and the approach<br />
of Reformists/Pragmatists 7 (who<br />
play a significant role in the domestic<br />
politics of Iran). The Reformists<br />
understand the importance of developing<br />
Iran’s relations with the West<br />
in order to realise their visions at the<br />
domestic level. The military, political<br />
and economic elites at the conservative<br />
core of the regime, including the<br />
Revolutionary Guards, have a different<br />
conception of the current situation.<br />
They are aware of the benefits of<br />
pragmatic relations. Besides, they are<br />
not sure whether they can preserve<br />
their privileged position in the new<br />
equation, the dynamics of which will<br />
emerge as the dialogue continues.<br />
For example, members of the Iranian<br />
Revolutionary Guard, an essential<br />
part of national economic life since<br />
the Rafsanjani era, enjoy privileged<br />
political positions whereby they<br />
carry out high-budget construction<br />
and energy projects as well as overseeing<br />
high-income businesses. The<br />
income generated by some businesses<br />
operating under extraordinary<br />
conditions due to economic<br />
sanctions should also be included in<br />
this table. 8 Investigations launched<br />
after Rouhani’s victory in elections<br />
reinforced international opinion<br />
about the dimensions of those relations.<br />
The businessmen close to former<br />
President Ahmadinejad have<br />
been accused of embezzling more<br />
than two billion dollars. Zanjani, notably,<br />
was assigned to market Iranian<br />
petrol as a foreign import, and then<br />
to bring the money back into the Ira-<br />
57<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
7.<br />
For ideology/pragmatism aspects in Iranian foreign policy, see R.K. Ramazani, “Ideology and<br />
Pragmatism in Iran’s Foreign Policy”, The Middle East Journal, Volume 58, Number 4, October<br />
2004, pp. 1-11(11).<br />
8.<br />
Nader Habibi, “The Iranian Economy in the Shadow of the Sanctions”, in: Iran and the Global<br />
Economy: Petro Populism, Islam and Economic Sanctions, (ed.) Parvin Alizadeh, Hassan<br />
Hakimian, Routledge, 2013, s.187-190
Iranian President<br />
Hassan Rouhani<br />
and Iranian<br />
Foreign Minister<br />
Mohammad Javad<br />
Zarif.<br />
Mehmet AkIf Okur<br />
58<br />
nian economy via his companies in<br />
different countries. 9 The findings of<br />
the Parliamentary Commission obtained<br />
after scrutinizing the privatizations<br />
indicate that there may be<br />
even wider-scale proceedings, if balances<br />
of power allow. 10<br />
Given the vital role of large foundations<br />
in the Iranian economy, 11 it<br />
is important to note that there are<br />
balances of political economy in the<br />
background of the nuclear negotiations.<br />
In his first substantial address<br />
to the Revolutionary Guards, 12<br />
Rouhani stated that they should no<br />
longer be involved in big economic<br />
projects. This statement gives us an<br />
idea about the pillars of reform programme.<br />
The biggest changeover,<br />
which supports the extension of the<br />
civil sphere in Iran, will be the expansion<br />
of the economy over the settled<br />
actors within the government pyramid.<br />
This transformation is needed<br />
in order to attract the foreign capital<br />
investments that will connect Iran<br />
to the world. 13 Thus, the connection<br />
between reshaping the economic<br />
sphere and the nuclear negotiations<br />
is stronger than it first seems. Those<br />
who want the negotiations to be suc-<br />
9.<br />
Farangis Najibullah and Arash Hassan Nia, “Babak Zanjani, Iran’s ‘Economic Basij,’ Now In Trouble<br />
At Home”, Radio Free Europe, Sunday, March 16, <strong>2014</strong>, http://www.rferl.org/content/iranzanjani-corruption-charges/25217665.html<br />
10.<br />
Kourosh Avaei, “Iran still digging out of Ahmadinejad-era corruption”, Al Monitor, December<br />
21, 2013, http://www.al-monitor.com/pulse/originals/2013/12/iran-ahmadinejad-legacycorruption.html#<br />
11.<br />
Evaleila Pesaran, Iran’s Struggle for Economic Independence: Reform and Counter-Reform in<br />
the Post-Revolutionary Era, Taylor & Francis, 2011, p.35.<br />
12.<br />
Kourosh Avaei, “Will Iran’s Revolutionary Guard Reduce Economic Role”, Al Monitor, September<br />
19, 2013<br />
13.<br />
For an interview indicating the awareness level in Iran about the issue, see Behdad Bordbar,<br />
“Iranian economist says foreign competition key to growth”, Al Monitor, March 11, <strong>2014</strong>, http://<br />
www.al-monitor.com/pulse/originals/<strong>2014</strong>/03/iran-economy-reformists.html#ixzz2w9yeK3yG
cessful are actually pursuing their<br />
desire to gain a greater share in the<br />
economic wealth that will follow.<br />
There are similarities between their<br />
benefits and the international actors<br />
at the table. The other side of this<br />
equation is the interests of the given<br />
system and the expectations in case<br />
the negotiations fail.<br />
Khamenei is the most influential person<br />
in the Iranian power matrix, and<br />
he remains at the centre of all the<br />
power balancing. The reason he supports<br />
nuclear negotiations lies in the<br />
internal and external dynamics he<br />
faces. With the events of 2009, the<br />
opposition acquired political energy<br />
through public support; this entailed<br />
a process of alienation to the regime.<br />
These events should have been managed<br />
before they reached a devastating<br />
point. 14 It was impossible to do<br />
this without shedding the burden of<br />
economic sanctions. The increasing<br />
influence of the groups who mobilised<br />
against Khatami and Ahmadinejad<br />
should have been managed<br />
before they became a threat. 15 Moreover,<br />
the Obama administration’s desire<br />
to reduce U.S. engagement in the<br />
Middle East extended the bargaining<br />
ground. It should be recalled that<br />
there was an expectation that following<br />
its withdrawal from Iraq, the U.S.<br />
would seek to establish pragmatic<br />
collaboration with Iran rather than<br />
chasing a regime change. In this way,<br />
Rouhani - famous for his pragmatism<br />
despite his position at the core of the<br />
regime- has found a way to meet the<br />
needs and expectations in question.<br />
Khamenei is the most influential person<br />
in the Iranian power matrix, and he<br />
remains at the centre of all the power<br />
balancing.<br />
On the U.S. side, the vision and policy<br />
changes that have occurred under<br />
the Obama government play a major<br />
role in today’s structure. Firstly,<br />
the U.S. government tried to develop<br />
a new perspective for the Middle<br />
East while shifting the foreign policy<br />
axis to Asia, and started to implement<br />
projects to end its energy dependence<br />
on the region. 16 Then it<br />
dealt with the Israeli security issue<br />
in a way that the Israeli right wing<br />
did not appreciate. According to<br />
Washington, signing a peace agreement<br />
with Palestine in the evolving<br />
Middle East will not only ensure Israel’s<br />
security, but also pave the way<br />
for its rise in the region. The political<br />
psychology based on the tension<br />
between religious sects - which escalated<br />
with the Syrian civil war - increased<br />
Israel’s room for manoeuvre.<br />
If Israel were to sign a peace agreement,<br />
it would find new allies within<br />
regional balances. Moreover, a possible<br />
agreement would facilitate Iran’s<br />
return to the system.<br />
59<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
14.<br />
For the “Green Movement” in Iran and its consequences, see Hamid Dabashi, The Green<br />
Movement in Iran, Transaction Publishers, 2011.<br />
15.<br />
For the thesis claiming that the increasing power of the Revolutionary Guards in Iran can change<br />
the regime in the country, see Ali Alfoneh, Iran Unveiled: How the Revolutionary Guards Is<br />
Transforming Iran from Theocracy into Military Dictatorship, AEI Press, 2013.<br />
16.<br />
Robert D. Blackwill and Meghan L. O’Sullivan, “The Geopolitical Consequences of the Shale<br />
Revolution”, Foreign Affairs, March/April <strong>2014</strong>.
Mehmet AkIf Okur<br />
60<br />
The steps that Obama tried to take<br />
in this regard during the early years<br />
of his presidency failed due to the<br />
power of the Israel lobby. Netanyahu’s<br />
active dissident behaviour during<br />
his campaign for the second term<br />
was unprecedented in the history of<br />
U.S.-Israel relations. But still, the U.S.<br />
government has not given up. This<br />
process, the end of which remains<br />
difficult to predict, has the potential<br />
to yield crucial results with regard<br />
to U.S.-Iran relations beyond nuclear<br />
negotiations.<br />
The Obama administration’s policy<br />
of forcing Iran to transform through<br />
economic sanctions is based on a<br />
prudent strategy that keeps pragmatic<br />
cooperation opportunities at<br />
hand, using professional and clever<br />
diplomatic language and ‘back doors’<br />
ajar. The architecture of this strategy<br />
not only increases the cost of<br />
The steps that Obama tried to take in<br />
this regard during the early years of his<br />
presidency failed due to the power of the<br />
Israel lobby.<br />
avoiding negotiations, but also rewards<br />
actions taken toward reconciliation.<br />
In particular, the shared<br />
understanding of the opportunities<br />
offered by the Syrian civil war<br />
to Al Qaeda affiliates, the two parties<br />
found a way to build a common<br />
approach toward the region. ISIS’s<br />
activities in Ambar have brought<br />
the U.S., Iraq, and Iran together, and<br />
have given clues about future possibilities<br />
for cooperation.<br />
However, it remains unclear which<br />
of these alternative scenarios will<br />
become real - collaboration or conflict.<br />
Thus, the consequences of both<br />
possibilities for the Iranian system<br />
should be kept in mind. The highest<br />
priority for the dominant factions<br />
in Iran is to ensure the continuity<br />
of the regime to which they are tied,<br />
through ideological but also material<br />
interests. When we examine the possible<br />
scenarios, we can map out the<br />
scenario as follows. Signing an agreement<br />
after the nuclear negotiations<br />
will not only relieve Iran economically<br />
but also enable it to further develop<br />
its relations with the West in<br />
the future. Thanks to foreign investments<br />
and increased production triggered<br />
by technology, the rising level<br />
of national welfare will alleviate the<br />
social and economic problems that<br />
provide political ammunition for the<br />
opposition. However, that interaction<br />
will raise the demand for certain<br />
rights, particularly among minority<br />
groups that regard themselves as outside<br />
the power centre. This climate<br />
will heighten the impact of the West’s<br />
criticisms of Iran’s human rights violations,<br />
and could give rise to a future<br />
where contradictions within the regime<br />
are further questioned.<br />
In this case, while the dynamics<br />
that support the reformist movement<br />
in Iran are increasingly potent,<br />
it is likely that minority rights will<br />
become a flashpoint, with Turks,<br />
Arabs, Kurds and Baluchs expressing<br />
their identity-related demands<br />
more loudly. 17 Among these developments,<br />
the most important one is the<br />
17.<br />
For a study emphasizing the importance of the minority issue for Iran’s future, see Rasmus<br />
Christian Elling, Minorities in Iran: Nationalism and Ethnicity after Khomeini, Palgrave Macmillan,<br />
2013.
Israeli Prime<br />
Minister Benjamin<br />
Netanyahu<br />
criticized recent<br />
U.S. policy towards<br />
Iran under Obama<br />
administration.<br />
strengthening opposition based on<br />
different ethnic references among<br />
various Turkish groups that constitute<br />
less than one-third of the population.<br />
Sectarian identifications will<br />
lead to cumulative reactions against<br />
the regime, the erosion of national<br />
identity, and a tendency toward<br />
secularisation. Further questions for<br />
consideration include ‘the identity<br />
competition’ which emerged with<br />
the increasing Persian emphasis on<br />
secularization in Iran, and the attraction<br />
of Iran’s increasingly prosperous<br />
neighbours - Turkey and<br />
Azerbaijan. 18<br />
If nuclear negotiations are suspended,<br />
it is likely that relations between<br />
Iran and the West will become<br />
even more strained. If sanctions<br />
continue along certain lines, economic<br />
problems and social unrest<br />
will be sustained. This scenario will<br />
increase the pressure on the oppo-<br />
If nuclear negotiations are<br />
suspended, it is likely that relations<br />
between Iran and the West will<br />
become even more strained.<br />
sition due to increasing unrest in<br />
the future, and will increase the<br />
tendency toward bipolarization<br />
and radicalisation. Tension will accumulate<br />
on the fault line between<br />
the main opposition and the regime,<br />
and the alienation of ethnic/<br />
religious minorities will accelerate.<br />
The short-term success of coercive<br />
measures to suppress these various<br />
elements of unrest will create<br />
a more divided country in the medium<br />
and long-term. Identifying<br />
high factors will be triggered by<br />
this massive potential for instability<br />
is a concern for not only Iran but<br />
also many international actors, particularly<br />
its immediate geographical<br />
neighbours.<br />
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CASPIAN REPORT, SPRING <strong>2014</strong><br />
18.<br />
Conducted studies indicate that political conscious based on ethnic identity is strengthening<br />
in Azerbaijani Turks. For example, see Emil Souleimanov, Kamil Pikal ve Josef Kraus, “The Rise of<br />
Nationalism Among Iranian Azerbaijanis: A Step Toward Iran’s Disintegration”, MERIA Journal,<br />
2013, Vol. 17 <strong>Issue</strong> 1, p.1-23.
Mehmet AkIf Okur<br />
62<br />
It is possible to estimate the extent<br />
of the current concerns and expectations<br />
by looking at the geopolitical<br />
shockwaves across the Middle East<br />
following the signing of the interim<br />
agreement. Some Gulf countries<br />
think that the U.S. commitment to<br />
their security will soften and there<br />
will be more space for Iran. Those<br />
countries, particularly Saudi Arabia,<br />
have already embarked on a quest:<br />
the increasing interaction with Russia<br />
and China, and the struggle to<br />
determine a common position with<br />
Israel, demonstrates the complexity<br />
of the balances in the Middle East.<br />
Of course, Turkey will be among the<br />
most affected countries in terms of<br />
the consequences of either the U.S.-<br />
Iran rapprochement or an escalating<br />
conflict environment. The question<br />
being asked is: “Which Iran would be<br />
better to have as a neighbour” The<br />
multiplicity of future routes makes<br />
it harder to find simple answers.<br />
Nonetheless, setting aside the risk<br />
of ignoring the details and minor<br />
scenarios, we can talk about three<br />
major possibilities. If no agreement<br />
is signed after the negotiations, we<br />
should consider that the government<br />
bloc we face in Syria, Iraq and<br />
other areas will likely strengthen its<br />
position in Tehran. Ankara found an<br />
opportunity to test its strengths and<br />
weaknesses against Iran in the context<br />
of the Syrian civil war. As a member<br />
of the Western alliance, Turkey<br />
is a big power with a developed<br />
economy and qualified population.<br />
The same thing applies to its military<br />
capabilities. Turkey has built its security<br />
infrastructure on the basis of<br />
its alliances, and it has a protective<br />
shield as long as it avoids conflict<br />
with its current alliance structure.<br />
However, being a part of a system<br />
also entails some restrictions. We<br />
do not have the confidence of Iran,<br />
which can conduct proxy wars by<br />
organizing armed groups outside its<br />
borders. It is extremely difficult for<br />
us to carry out such activities without<br />
abandoning our pro-global system<br />
position. If Ankara cannot build<br />
Turkish capacity to catch up with the<br />
opponent in their areas of advantage,<br />
the best way is to encounter the opponent<br />
across platforms that will<br />
limit its current capabilities. We can<br />
predict that a transformation that<br />
pushes Iran toward integration into<br />
the international order will bring<br />
Ankara’s advantages to the forefront<br />
in the Turkey - Iran competition.<br />
The second scenario foresees that<br />
Iran will conclude the nuclear negotiations<br />
with an agreement, and<br />
develop pragmatic cooperation with<br />
the West while protecting its alliances<br />
and extensions in the Middle<br />
East. In this case, Iran will continue<br />
to utilise the qualifications and capacities<br />
that give it asymmetric advantages<br />
against Turkey, far from<br />
the reach of the West. Above all, if<br />
the U.S. and Iran succeed in adopting<br />
an approach that sees them fighting<br />
against “common enemies”, the balance<br />
of power will be disturbed in<br />
ways that affect Turkey.<br />
In the latter scenario, it is assumed<br />
that Iran will begin to resemble<br />
Turkey with a transformation both<br />
in the domestic and international<br />
level through integration into the<br />
global system. A scenario whereby<br />
Iran relinquishes the interventions<br />
and operations that it currently car-
ies out via third parties abroad and<br />
which are contrary to international<br />
law, and instead starts to extend<br />
domestic freedoms will be significantly<br />
more advantageous for Turkey.<br />
Thus, Ankara should utilise its<br />
limited transformative effect on bilateral<br />
relations in this regard. However,<br />
it must be noted that the actor<br />
which commenced the negotiations<br />
would not want to get into this way<br />
voluntarily. Khamenei wants to reconstruct<br />
the regime’s legitimacy<br />
by finding pragmatic solutions to<br />
cumulative problems, and he will do<br />
his best to prevent Iran turning into<br />
a country that he cannot control.<br />
the expected domestic reform process.<br />
Unsecurization of the demands<br />
for right in Southern Azerbaijan will<br />
lead to more stability in Iran and less<br />
hostility in the region. 20<br />
It is possible to evaluate Iran’s relations<br />
with Azerbaijan through the<br />
same lens. As long as Iran’s concerns<br />
(which underpin its hostile policy<br />
against Baku since its independence)<br />
are eliminated, the opportunities<br />
and legitimacy offered by the<br />
negotiations will strengthen former<br />
positions. 19 In order to draw a new<br />
road map, Iran needs to face the demands<br />
for freedom, which also cover<br />
ethnic/cultural rights. In view of the<br />
potential contribution to permanent<br />
stability in Iran, the steps taken in<br />
this regard will demonstrate the<br />
baselessness of Iran’s concerns towards<br />
Azerbaijan. If Iran reviews its<br />
priorities in relation to Armenia and<br />
its Caucasus policy in accordance<br />
with the new political realities, it will<br />
see the energy which will strengthen<br />
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CASPIAN REPORT, SPRING <strong>2014</strong><br />
19.<br />
Iran’s concerns about Azerbaijani Turks affect its approach toward the Caucasus, Turkey, and<br />
the Turkic world in general. For an assessment about this issue, see Alam Saleh, Ethnic Identity<br />
and the State in Iran, Palgrave Macmillan, 2013, p.77-79.<br />
20.<br />
Findings of a field study carried out in Ardabil underline the importance of the issue by indicating<br />
that “ethnic feelings are like the fire under the ashes” as stated by the researchers. Mansour<br />
Salehi and Mohammad Bagher Sepehri, Ethnic Challenges in Iran: A Case Study of Ardabil,<br />
Canadian Social Science, 6/30/2013, Vol. 9, <strong>Issue</strong> 3, p.74-83.
Frank Umbach<br />
64<br />
Strategic Perspectives<br />
for Unconventional<br />
Gas in the EU<br />
Frank Umbach<br />
ASSOCIATE DIRECTOR, EUROPEAN CENTRE FOR ENERGY AND<br />
RESOURCE SECURITY (EUCERS), KING‘S COLLEGE
The expanded role for natural gas in the<br />
world economy has prompted the IEA to<br />
envisage a “Golden Age of Gas” era with<br />
unconventional gas being a “game changer.”<br />
Introduction<br />
The U.S. shale gas development is not<br />
a technical revolution, but rather an<br />
evolution of modern techniques and<br />
the combining of two key technologies<br />
– horizontal drilling and “slick<br />
water” hydraulic fracturing. Together<br />
these can crack shale rock, and have<br />
thus cracked the code with regard to<br />
opening up major North American<br />
shale gas resources.<br />
The rapidly expanding production<br />
of shale gas has transformed the U.S.<br />
from the largest LNG import market<br />
to a self-sustaining gas producer and<br />
a net gas exporter. In 2009, the U.S.<br />
even overtook Russia as the world’s<br />
largest gas producer, and in 2010 it<br />
exceeded Qatar as the world’s largest<br />
LNG exporter by about 60%. In 2012,<br />
U.S. natural gas production increased<br />
to 681.4 billion cubic meters (bcm;<br />
20.4% of the global production),<br />
whereas Russia’s was just 592.3 bcm<br />
(17.6% of global production).<br />
The combination of three factors -<br />
(1) a drop in demand linked to the<br />
global economic recession, (2) a<br />
unexpected dramatic increase in<br />
incremental U.S. non-conventional<br />
shale gas production, and (3) the<br />
arrival of new LNG delivery capacity<br />
- have created a sudden “gas glut”.<br />
This stems from the overcapacity<br />
of LNG, which made LNG in Europe<br />
less expensive than pipeline gas<br />
(based on long-term contracts), and<br />
contributed to the de-linkage of the<br />
gas prices from the oil prices in at<br />
least Europe at present. This could<br />
become a permanent feature of the<br />
global energy market because the<br />
remaining global unconventional<br />
gas resources are considerably bigger<br />
than conventional ones. The U.S.<br />
could even overtake Russia as the<br />
world’s largest combined oil and gas<br />
producer by 2015.<br />
The development of unconventional<br />
gas in the U.S. since 2006 has not<br />
only triggered a revolution in U.S.<br />
energy markets, but has also laid the<br />
groundwork for an expanded role<br />
for natural gas in the world economy.<br />
This has prompted the IEA to envisage<br />
a “Golden Age of Gas” era with<br />
unconventional gas being a “game<br />
changer.” It has already transformed<br />
the global gas markets, which were<br />
in the past “sellers’ markets” rather<br />
than “buyers’ markets.”<br />
Meanwhile, some countries in Europe<br />
(Poland, United Kingdom, Romania,<br />
Lithuania, Spain and Ukraine)<br />
have become very interested at the<br />
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Frank Umbach<br />
66<br />
Many of the shale gas fields in Europe are<br />
situated in areas where the geology makes it<br />
much harder to extract than in the U.S.<br />
exploitation of their own unconventional<br />
gas resources. Others however<br />
have adopted a moratorium (Bulgaria,<br />
Czech Republic) or even a ban<br />
on the fracking technology (France)<br />
and the production of shale gas due<br />
to perceived environmental risks.<br />
Against this background, the article<br />
analyses the different policies in regard<br />
to unconventional gas in the<br />
EU-member states, some of which<br />
are in favor of shale gas production<br />
(Poland, the United Kingdom, Romania,<br />
Lithuania and Spain) and some<br />
of which have adopted (temporary)<br />
moratoriums (Germany, Bulgaria) or<br />
even a ban (France).<br />
Europe’s Unconventional<br />
Gas Resources and the<br />
Energy Policies of its<br />
Member States<br />
While initial assessments of Europe’s<br />
unconventional gas potential<br />
were relatively skeptical and conservative,<br />
Europe has depositories<br />
of significant unconventional gas resources<br />
with estimated total recoverable<br />
reserves of 33-38 tcm. Reserves<br />
in some states are now thought to<br />
be much larger than previously estimated,<br />
and in others, there is growing<br />
concern over the market dominance<br />
of the U.S. Some are also keen<br />
to break their dependence on Russian<br />
conventional gas. In June 2013<br />
the EIA published a new worldwide<br />
assessment of unconventional gas<br />
resources, which has added nine<br />
more countries to the total number<br />
of countries with technically recoverable<br />
shale gas resources. This<br />
number now stands at 41. For Europe,<br />
some country estimates have<br />
been increased, while others have<br />
been reduced. Worldwide, the EIA<br />
has estimated 10% more shale gas<br />
resources in comparison with its previous<br />
estimates of 2011.<br />
Many of the shale gas fields in Europe<br />
are situated in areas where the<br />
geology makes it much harder to extract<br />
than in the U.S. They are also<br />
in places with much higher population<br />
densities, and their service industries<br />
and infrastructure for the<br />
industry are much less developed.<br />
But the perceived risks are often<br />
overestimated, not very different to<br />
conventional gas drilling and often<br />
not related to the fracturing process<br />
itself.<br />
The IEA has remained cautious and<br />
has estimated that Europe’s unconventional<br />
gas production by 2035<br />
may reach not more than 20 bcm by<br />
2035 due to the unclear conditions,<br />
specifically, to what extent social and<br />
environmental concerns will lead<br />
to the tightening of the regulatory<br />
framework at the EU level.<br />
New geological analyses in Germany<br />
and Great Britain have confirmed<br />
the historical experiences of fossil<br />
fuels, whereby at the beginning of<br />
their findings and exploration the<br />
estimates of reserves and resources<br />
go up for a longer time alongside of<br />
using new technologies for discovering<br />
and exploration of fossil fuels before<br />
they are decreasing after having<br />
received their peak estimates and<br />
production levels.
EU Commissioner<br />
for Energy,<br />
Gunther Oettinger<br />
during a press<br />
conference on<br />
offshore oil and<br />
gas on October<br />
27, 2011 at the EU<br />
Headquarters in<br />
Brussels.<br />
In the view of the European Commission,<br />
Europe should at least be<br />
able to produce sufficient volumes<br />
of domestic shale gas to replace its<br />
depleting conventional gas reserves,<br />
so as not to become more dependent<br />
on imports from unreliable suppliers<br />
or politically unstable countries.<br />
In November 2012, the European<br />
In June 2013, the British Geological Survey<br />
published a new report showing that UK<br />
shale gas reserves, up to 40 tcm in England<br />
alone.<br />
Parliament followed the European<br />
Commission’s cautious policies by<br />
adopting two resolutions of the environmental<br />
and the industry and<br />
energy committee (ITRE) that favour<br />
unconventional gas exploration,<br />
albeit calling for “robust regulatory<br />
regimes.”<br />
But the Commission itself is politically<br />
divided; while the energy department<br />
favours European shale<br />
gas projects as a means of enhancing<br />
energy supply security and economic<br />
competitiveness, the Environmental<br />
and Climate Protection Department<br />
is presently considering an EU-wide<br />
regulation on methane emissions,<br />
which may further complicate the<br />
EU shale gas projects at this critical<br />
stage.<br />
United Kingdom<br />
Despite the spread of ‘Nimbyism’<br />
in Britain, the UK government, its<br />
Department of Energy and Climate<br />
Change, a parliamentary commission<br />
and new government commissioned<br />
reports by the Universities of Durham<br />
and Aberdeen on the environmental<br />
risks all support shale gas exploration<br />
and development projects.<br />
In December 2012, the British government<br />
lifted a ban (in place since<br />
May 2012). In June 2013, the British<br />
Geological Survey published a new<br />
report showing that UK shale gas reserves,<br />
up to 40 tcm in England alone,<br />
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CASPIAN REPORT, SPRING <strong>2014</strong>
Frank Umbach<br />
68<br />
are considerably higher than previously<br />
estimated (in fact, almost 20<br />
times higher). Around 10-20% is estimated<br />
as economically recoverable.<br />
These new figures were confirmed in<br />
a report by the Institute of Directors<br />
in September 2012 (a non-party political<br />
organization of British industry<br />
with approximately 38,000 members<br />
in the UK and overseas). The<br />
report estimated that around 35,000<br />
jobs can be created and that onshore<br />
shale gas production in Britain could<br />
produce enough gas to meet 10% of<br />
the UK’s gas needs for the next 103<br />
years, while decreasing carbon emissions<br />
by 45 million tonnes of CO 2<br />
.<br />
Even if Britain only gets 10% of this<br />
gas-in-place produced, it will supply<br />
the UK for 25-50 years. The most optimistic<br />
scenario has estimated the<br />
future shale gas production at up to<br />
122-255 bcm per year – more than<br />
twice the present annual consumption<br />
of almost 100 bcm.<br />
In November 2013, the new grand coalition<br />
government agreed on a “temporarily<br />
fracking ban”, until environmental<br />
issues like the use of toxic chemicals are<br />
resolved.<br />
Unconventional gas reserves provide<br />
the foundation for the government’s<br />
newly released “Gas Generation<br />
Strategy” in December 2012, which<br />
envisages the construction of 20 new<br />
gas-fired power plants, with 9 gigawatts<br />
(GW) by 2020 and 26 GW by<br />
2030.<br />
The Royal Society and Royal Academy<br />
of Engineering reviewed the<br />
scientific and engineering as well as<br />
related environmental risks associated<br />
with hydrofracking. The report<br />
concluded that those environmental<br />
risks can be managed effectively<br />
and enforced through strong<br />
regulation. It also sees fracking as<br />
an unlikely cause of ground water<br />
contamination.<br />
Energy companies expect that it will<br />
take as long as five years for production<br />
to reach a commercial scale.<br />
Like in other EU countries, public<br />
fears in regard to potential environmental<br />
risks have also increased and<br />
thus slowed down the planning and<br />
permissions processes for shale gas<br />
projects at the local level. An engineering<br />
consultancy advising the<br />
Department of Energy and Climate<br />
Change (DECC) has reduced the figure<br />
of jobs that could be created by<br />
the shale gas industry from 74,000<br />
(as Prime Minister Cameron was<br />
speculating) to 15,900-24,300. But<br />
the UK water and fossil-fuel industry<br />
lobbies have agreed to work together<br />
to minimize the environmental harm<br />
of the shale gas projects for the country’s<br />
water supply.<br />
The UK government is currently<br />
seeking new ways to simplify the<br />
permissions process for British shale<br />
gas projects. This process has been<br />
widely criticized as too complex for<br />
prospective investors. In December<br />
2013, the British government unveiled<br />
its plans to reduce the tax payable<br />
on a proportion of profits from<br />
62% to 30% in order to encourage<br />
investment in the shale gas industry.<br />
But more than half of Britain’s<br />
cabinet ministers may experience<br />
shale gas projects in their constituencies,<br />
which may further deepen
the political conflict over fracking,<br />
and weaken political support due<br />
to the “fear of unknown” in rural<br />
communities.<br />
Germany<br />
With an annual gas consumption of<br />
around 100 bcm, Germany’s domestic<br />
production covers just 12% of the<br />
national gas demand 40% of Germany’s<br />
gas consumption is supplied by Gazprom.<br />
With an annual gas consumption<br />
of around 100 bcm, Germany’s domestic<br />
production covers just 12%<br />
of the national gas demand. 40% of<br />
Germany’s gas consumption is supplied<br />
by Gazprom. Despite a moratorium<br />
adopted by the federal states of<br />
North Rhine-Westphalia and strong<br />
opposition to shale gas drilling on<br />
environmental grounds, several<br />
companies, including ExxonMobil,<br />
have acquired exploration licenses in<br />
six of the federal states: Nord Rhine<br />
Westphalia, Thuringia, Lower Saxony,<br />
Saxony-Anhalt, Hessen and Baden-<br />
Wuerttemberg. The state of Hessen<br />
has called for uniform practice and<br />
legal rules across the country, fearing<br />
a competition between federal<br />
states.<br />
But the previous government in<br />
Berlin and its Ministry for Environment<br />
have tried to slow down the<br />
discussions and any governmental<br />
decisions. The Environment Ministry<br />
has generally opposed fossil fuel<br />
resources and instead has always<br />
favoured heavily subsidised support<br />
for re¬new¬able energy projects.<br />
In July 2012, the German Federal<br />
Institute for Geosciences and Natural<br />
Resources (BGR) published its<br />
first estimate for domestic shale gas<br />
reserves and officially described<br />
them as “significant”. The estimates<br />
are considerably higher (up to three<br />
times) than those published by ExxonMobil<br />
in January 2012, and much<br />
higher than Germany’s conventional<br />
gas reserves. The BGR also concluded<br />
that environmentally friendly [fracking]<br />
technology is possible from a<br />
geo-scientific point of view and that<br />
“fracking and drinking-water protection<br />
are fundamentally compatible.”<br />
It also confirmed - together with the<br />
comprehensive environmental study<br />
“Hydrofracking Risk Assessment” -<br />
that the fracking risks can be controlled<br />
and regulated. At present, a<br />
third of Germany’s domestic production<br />
already uses fracking technologies<br />
- some for more than 50 years.<br />
Germany’s energy-intensive and<br />
manufacturing industry (i.e. Bayer,<br />
BASF at al.) has begun to voice its increasing<br />
concern about the implications<br />
of the U.S. unconventional gas<br />
revolution for its future economic<br />
competitiveness, as the reduced gas<br />
prices in the U.S. are an essential<br />
cost factor for petrochemical manufacturing,<br />
in particular ethane. These<br />
cheap feed stocks are reshaping the<br />
global competitive landscape for petrochemicals<br />
with a “quite phenomenal<br />
advantage” for the U.S. industry.<br />
“Cracking” ethane makes ethylene,<br />
which is the major building block for<br />
plastics such as polythene.<br />
In January 2013, the BGR criticised<br />
the lack of geo-scientific expertise<br />
on the deep underground and identified<br />
many instances of inconsistency<br />
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Frank Umbach<br />
70<br />
The UK government is currently seeking new<br />
ways to simplify the permissions process for<br />
British shale gas projects.<br />
and subjective argumentation as<br />
well as a trend of ignoring the broad<br />
knowledge base and modern methods<br />
of geo-scientific exploration. It<br />
also pointed out that this allegation<br />
of missing data on regional assessments<br />
is not supported by facts. The<br />
political debate moved away from<br />
an outright national ban of hydrofracking<br />
to the question how far to<br />
legislate environmental safeguards<br />
before the national parliamentary<br />
elections in September 2013.<br />
German Federal Institute<br />
for Geosciences and<br />
Natural Resources (BGR)<br />
July 2012 – Germany’s Shale<br />
Gas Reserves:<br />
• Total shale gas reserves: 6.8-22.6<br />
tcm;<br />
• Technically recoverable reserves:<br />
0.7-2.3 tcm (10% of total shale gas<br />
reserves)<br />
• ExxonMobil estimate of Germany’s<br />
exploitable reserves: 827 bcm<br />
• Conventional Gas reserves in comparison:<br />
150 bcm<br />
In November 2013, the new grand<br />
coalition government agreed on a<br />
“temporarily fracking ban”, until environmental<br />
issues like the use of<br />
toxic chemicals are resolved. Until<br />
non-toxic fracking fluids are available,<br />
the agreement is not a strict<br />
ban but rather a temporary moratorium.<br />
The German EU Energy<br />
Commissioner Gunther Oettinger<br />
repeatedly warned the previous<br />
German government against fully<br />
rejecting the shale gas exploration<br />
through fracking technology. In<br />
the summer 2013, three geological<br />
research institutes, the BGR in<br />
Hannover, the German Research<br />
Centre for Geosciences (GFZ) in<br />
Potsdam and Helmholtz Centre for<br />
Environmental Research in Halle<br />
launched a programme to support<br />
the exploration of the country’s<br />
shale gas potential by making the<br />
shale gas industry more environmentally<br />
friendly and the fracking<br />
technology “greener”, by developing<br />
biological alternatives to the<br />
chemicals being used for fracking,<br />
for instance.<br />
Poland<br />
Poland itself still generates more<br />
than 90% of its power from coal,<br />
but is seeking to replace part of<br />
its coal consumption with gas. In<br />
2012, Poland produced 5.5 bcm of<br />
conventional gas in its own country.<br />
But that covered only 30% of<br />
its domestic gas consumption, 16<br />
bcm in total. The shale gas reserve<br />
estimate from the Polish Geological<br />
Institute (PGI) in March 2012<br />
revised downwards the estimates<br />
of national reserves to around 2<br />
tcm, in contrast to EIA’s optimistic<br />
forecast of 5.3 tcm. Its technically<br />
recoverable gas reserves may<br />
amount to just 346-768 bcm. But<br />
these published figures included<br />
only archival data, predominantly<br />
from exploration testing in the<br />
1960s and 1970s. The preliminary<br />
estimate will be upgraded and revised<br />
on an annual basis. But even<br />
the lowest estimate of 346 bcm of
Global shale gas<br />
map.<br />
shale gas reserves would satisfy<br />
Poland’s domestic demand for 35<br />
years.<br />
The government’s proposed taxes<br />
exceeding 40%, for instance, have<br />
raised concerns among energy<br />
companies as they face exceptionally<br />
capital investments. Difficult<br />
geology, a non-competitive service<br />
sector, poor infrastructure, lengthy<br />
permissions processes, an uncertain<br />
regulatory and tax environment<br />
as well as lack of rigs have hindered<br />
development. In addition, preliminary<br />
costs per well have increased to<br />
US$15 million – nearly three times<br />
the cost in the U.S. As a result of the<br />
failure to provide an attractive investment<br />
climate, the uncertainties<br />
and bureaucratic constraints as well<br />
as unrealistic expectations for the<br />
short-term future, the pace of shale<br />
gas exploration in Poland has clearly<br />
slowed down in 2013. For the industry,<br />
287 wells still remain open for<br />
exploration, but at the present rate,<br />
the exploration process may not end<br />
before 2037.<br />
The government and Polish industry<br />
representatives still expect that domestic<br />
shale gas production will be<br />
significantly cheaper than Russian<br />
gas. In contrast to public opinion in<br />
Germany and France, the pro-shale<br />
gas policies are supported by more<br />
than 70%. The government has<br />
In contrast to public opinion in Germany<br />
and France, the pro-shale gas policies<br />
are supported by more than 70%.<br />
promised to change its shale gas regulations<br />
to speed up its exploration<br />
and announced last May that it will<br />
not collect taxes on the production of<br />
shale gas until 2020.<br />
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CASPIAN REPORT, SPRING <strong>2014</strong>
With Russia’s<br />
President Vladimir<br />
Putin watching,<br />
Rosneft CEO<br />
Igor Sechin<br />
and President<br />
of ExxonMobil<br />
Stephen Greenlee<br />
signing documents<br />
on February 13,<br />
2013.<br />
Frank Umbach<br />
72<br />
ExxonMobil’s withdrawal from<br />
shale gas exploration in Poland last<br />
June can be seen as a warning signal<br />
against the unrealistic hopes that<br />
Poland will become the “sheikh of<br />
Europe”. But the withdrawal - less<br />
than three months after the Polish<br />
government reduced its estimates of<br />
shale gas reserves - is not necessarily<br />
a confirmation of those more limited<br />
estimates. In fact, it came only few<br />
days after ExxonMobil agreed with<br />
Russia’s Rosneft to develop “tight<br />
oil” reserves in western Siberia, allowing<br />
it access to Russia’s vast oil reserves<br />
in its Artic region by replacing<br />
BP. However, two other energy<br />
companies, Talisman and Marathon<br />
Oil Corp. have also left Poland after<br />
the exploration yielded disappointing<br />
results.<br />
In June 2013, the EU’s highest Court,<br />
the European Court of Justice, issued<br />
a ruling that Poland had violated European<br />
law by allowing licenses to<br />
be issued for the shale gas projects<br />
without fully open tenders.<br />
The Polish government’s promotion<br />
of its large unconventional gas resources<br />
is driven by its energy supply<br />
security concerns and its desire<br />
to reduce its gas imports from Russia<br />
and to build a diversification strategy<br />
for supply sources and imports. Poland’s<br />
Supreme Audit Office (NIK)<br />
has criticized unnecessarily high gas<br />
prices, allegedly because of poorly<br />
conducted negotiations with Gazprom.<br />
Poland’s gas prices rose from<br />
US$331 in 2010 to US$433 per thousand<br />
cubic meters in 2012.<br />
France<br />
After France banned shale gas exploration<br />
in July 2011, the new socialist
French government has opposed any<br />
lifting of the embargo since its inauguration<br />
in May 2012, despite having<br />
the third largest shale gas resources<br />
in Europe (after Russia and Poland)<br />
with technically recoverable shale reserves<br />
of 3.88 tcm. However, debates<br />
have intensified and have become<br />
more polarized – even within President<br />
Hollande’s socialist party itself.<br />
Furthermore, though the “Jacob law”<br />
of 2011 banned hydraulic fracturing,<br />
other means of shale gas extractions<br />
are allowed, as well as fracking under<br />
certain restrictions in pursuit of<br />
“scientific experimentation”.<br />
The French Economy and Finance<br />
Ministry want to lift the embargo.<br />
The French Commissioner for Investment,<br />
Louis Gallois, called for<br />
the government to revoke the ban<br />
on shale gas extraction in France in<br />
the November 2012 “Pact for the<br />
Competitiveness of French Industry”.<br />
GDF Suez SA (GSZ) and Total SA (FP)<br />
have been the most vocal industrial<br />
supporters of shale gas projects in<br />
France. Arnaud Montebourg, the<br />
Minister of Industrial Renewal, has<br />
also repeatedly supported a rethinking<br />
of shale gas exploration and<br />
seeks to circumvent the present ban<br />
by developing strict guidelines. The<br />
former French Prime Minister, Francois<br />
Fillion, has also deplored plans<br />
to ban research into shale gas developments<br />
as “criminal” and indicative<br />
of a “medieval mind set”. The IEA expects<br />
a reversal of the moratorium<br />
and ban on hydrofracturing, and a<br />
subsequent rise in shale gas production<br />
after 2020 to around 8 bcm by<br />
2035, exceeding its peak gas production<br />
back at the end of the 1970s.<br />
While the French energy giant Total<br />
has moved forward with shale gas<br />
exploration in the U.S. and has begun<br />
or declared its intention to invest in<br />
shale gas exploration projects in UK,<br />
Poland, Denmark, China and Argentina,<br />
the French policies for shale<br />
gas explorations will be determined<br />
by the progress in other European<br />
countries like Poland and the UK<br />
President Hollande made it clear that<br />
under his presidency no shale gas<br />
projects will be allowed in France.<br />
rather than by domestic developments<br />
in the coming years. Even<br />
the dismissal of Minister of Ecology,<br />
Sustainable Development and Energy,<br />
Delphine Batho, in July 2013<br />
did not change the French government’s<br />
position; President Hollande<br />
made it clear that under his presidency<br />
no shale gas projects will be<br />
allowed in France. Furthermore, the<br />
French Constitutional Council – the<br />
country’s highest constitutional authority<br />
– rejected a legal challenge<br />
concerning the government’s ban<br />
on fracking after the U.S. gas company<br />
Schuepbach Energy, which was<br />
originally granted two exploration<br />
licenses before the anti-shale legislation<br />
was introduced in 2011, issued<br />
complaint against the legal ban. But<br />
the debates are continuing.<br />
A report by the French bank Société<br />
Génerale warned at the end of<br />
October 2013 that European shale<br />
gas could be the only answer to the<br />
poorly-functioning EU gas market<br />
in which four foreign national oil<br />
companies (Gasprom from Russia,<br />
Statoil from Norway, Qatar Petro-<br />
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CASPIAN REPORT, SPRING <strong>2014</strong>
Frank Umbach<br />
74<br />
During the last three years, exploration<br />
licenses for Spain’s conventional and<br />
unconventional hydrocarbon resources<br />
have almost doubled.<br />
leum and Sonatrach from Algeria)<br />
control around 50% of the European<br />
gas supply. France’s Académie<br />
des Sciences has recommended that<br />
further research into shale gas extraction<br />
be undertaken, and has also<br />
called for an “independent and multidisciplinary<br />
scientific authority” to<br />
assess the methods and operating<br />
practice.<br />
Spain<br />
The Spanish Energy Ministry and<br />
the Autonomous Communities have<br />
granted numerous exploration permits<br />
in various autonomous regions<br />
(mainly in the northern part of the<br />
country) after recent discoveries of<br />
shale gas deposits. During the last<br />
three years, exploration licenses for<br />
Spain’s conventional and unconventional<br />
hydrocarbon resources have<br />
almost doubled in the Asturias/<br />
Cantabria/Basque Country onshore<br />
and offshore areas, as well as in the<br />
offshore regions of Fuertenventura,<br />
Lanzarote in the Canary Islands. In<br />
the latter region, shale gas deposits<br />
are reportedly much larger than<br />
in peninsular Spain. In the Basque<br />
Country area, a “world-class-shalegas<br />
play” has been identified. With<br />
the strong support of regional governments<br />
and North American exploration<br />
companies, the Spanish<br />
unconventional gas industry hopes<br />
to expand exploration activities and<br />
go into the production of its shale<br />
gas reserves in the mid-term.<br />
In August 2013, the Spanish government<br />
prepared a project for the<br />
Law of Environmental Evaluation,<br />
which would require all projects using<br />
fracking technology to submit an<br />
“evaluation of impact” report. The<br />
government has advanced the use of<br />
fracking and given legal protection<br />
to the controversial technology. Due<br />
to the severity of Spain’s economic<br />
crisis, the concept of using cheap<br />
domestic energy resources has had<br />
greater resonance among the Spanish<br />
population than in most other<br />
European countries.<br />
The Superior College of Mining Engineering<br />
has estimated that Spain’s<br />
shale gas resources can provide 39<br />
years of domestic gas consumption.<br />
Spanish fracking companies<br />
have formed the lobby group “Shale<br />
Gas Espana” to promote shale gas<br />
projects and to dispel myths surrounding<br />
suspected environmental<br />
risks of the fracking technology.<br />
Despite its dependence on imports<br />
of hydrocarbons up to 99% - leading<br />
to an energy deficit worth 45 billion<br />
Euros (almost 4% of the national<br />
GDP) - environmental groups and<br />
dozens of Town Halls and provincial<br />
governments as well as the Spanish<br />
Federation of Municipalities and<br />
Provinces (FEMP) have presented<br />
103 motions against fracking.<br />
At the end of last October, parliament<br />
passed an amendment to the<br />
country’s hydrocarbon law, which<br />
will speed up the development<br />
of unconventional gas projects in<br />
Spain. The law prevents regional<br />
governments from banning hydraulic<br />
fracturing projects. Com-
panies are obliged to submit an<br />
environmental impact assessment<br />
to pass the highest environmental<br />
approvements. However, Spain’s<br />
history of excessive bureaucracy<br />
causes doubts about future shale<br />
gas projects. But despite the country’s<br />
heavy dependence on LNG imports,<br />
Spain is tied into relatively<br />
few long-term take-or-pay gas contracts<br />
for pipeline gas. This gives<br />
Spain much commercial flexibility<br />
for its shale gas projects.<br />
Lithuania<br />
For the Baltic states (as with Poland),<br />
the exploration and development of<br />
shale gas projects represent an important<br />
strategy for diversifying gas<br />
supplies, to reduce their gas dependence<br />
on Russia and to access much<br />
cheaper gas than the expensive Gazprom<br />
imports.<br />
After Poland, Romania, and Ukraine,<br />
Lithuania is considered as the fourth<br />
most attractive country for shale<br />
gas production in Central Eastern.<br />
Lithuania could hold 480 bcm of<br />
unconventional gas with around<br />
recoverable 120 bcm. If these unconventional<br />
gas reserve estimates<br />
are confirmed, Lithuania - consuming<br />
3.4 bcm in 2011 (all supplied by<br />
Gazprom) - could supply its domestic<br />
gas demand for the next 30-40 years.<br />
After Poland, Romania, and Ukraine, Lithuania<br />
is considered as the fourth most attractive<br />
country for shale gas production in Central<br />
Eastern.<br />
Lithuania was the first Baltic state<br />
to announce a shale gas tender<br />
in June 2012. In September 2013,<br />
Chevron won a tender for a license<br />
to explore shale gas resources. But<br />
few weeks afterwards, Chevron retreated.<br />
The investment and legal<br />
regulations adopted by the Lithuanian<br />
government shortly after the<br />
tender included chaotic changes to<br />
the legal, fiscal and regulatory frameworks<br />
(due to a lack of governmental<br />
coordination, which made the<br />
tender increasingly less attractive<br />
and commercially viable. Chevron’s<br />
withdrawal considerably damaged<br />
Lithuanian’s pursuit of energy independence,<br />
or at least its aim for<br />
reducing gas imports from Russia.<br />
It has also damaged the national<br />
economy by deterring other foreign<br />
investors. But it did reveal that the<br />
government did not seek to obtain a<br />
broad base of public support. Nonetheless,<br />
the government remains optimistic<br />
that a new tender will attract<br />
serious investors.<br />
Romania<br />
Bulgaria, Romania and Hungary<br />
have around 538 bcm of technically<br />
recoverable shale gas reserves. Romania’s<br />
annual gas consumption<br />
is 13-14 bcm, most of which it can<br />
cover with its own significant gas<br />
reserves – unlike many of the neighbouring<br />
Balkan countries. In 2012,<br />
Romania imported 2.17 bcm of gas<br />
from Gazprom. Despite a temporary<br />
until the beginning of 2013, the<br />
Romanian government continued<br />
its negotiations with Chevron for a<br />
shale gas exploration project in Constanta<br />
County. In December 2012,<br />
the Hungarian energy company MOL<br />
and Canada’s East West Petroleum<br />
also obtained exploration licenses<br />
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CASPIAN REPORT, SPRING <strong>2014</strong>
Frank Umbach<br />
76<br />
approved by the government. In the<br />
same month, a local referendum on<br />
the use of fracking technology for<br />
shale gas production was declared<br />
invalid because less than 50% of voters<br />
participated.<br />
At the end of January 2013, the Romanian<br />
government awarded Chevron<br />
exploration licenses to pursue<br />
unconventional gas production, despite<br />
environmental concerns. Prime<br />
Minister Victor Ponta has warned<br />
that Romania’s economic competitiveness<br />
vis-à-vis Poland and other<br />
countries will suffer if shale gas is<br />
not exploited. He also hopes to reduce<br />
the country’s dependence on<br />
Russia and Gazprom, with the further<br />
benefit of purchasing gas much<br />
more cheaply in comparison with<br />
Russia’s high prices of US$450 per<br />
1,000 cubic meters. But he believes<br />
that the exploration and confirmation<br />
of existing or non-existing economically<br />
exploitable resources may<br />
take up to five years before a final<br />
decision to produce shale gas can be<br />
made by the government. Together<br />
with its newly discovered offshore<br />
conventional gas resources in the<br />
Black Sea holding 42-84 bcm (which<br />
would cover its gas demand for nine<br />
years), Romania’s even higher shale<br />
gas resources could cover its net domestic<br />
demand and make the country<br />
self-sufficient in terms of gas.<br />
In November 2013, the European<br />
Centre for Excellence in the field of<br />
natural gas (CENTGAS) and part of<br />
the Romanian National Committee<br />
of the World Energy Council (RNC-<br />
WEC) published a study concluding<br />
that Romania’s shale gas resources<br />
could represent a real alternative<br />
for strengthening Romania’s energy<br />
security and energy independence.<br />
Romania’s unconventional gas resources<br />
could transform the country<br />
into a gas exporter by the beginning<br />
of the next decade, contributing 1.5%<br />
to annual GDP, reducing gas prices by<br />
12% in the short-term and by 33%<br />
in the long-term, creating jobs and<br />
generating more tax for the state<br />
budget with estimated annual revenues<br />
of US$176.2 million. New hydraulic<br />
fracturing technologies and a<br />
responsible water management can<br />
reduce the risks of technical accidents<br />
and environmental impacts, as<br />
responsible water management will<br />
eliminate potential sources of water<br />
pollution.<br />
Bulgaria<br />
Bulgaria has an annual gas consumption<br />
of around 3 bcm and is almost<br />
completely dependent on imports<br />
from Gazprom. The Bulgarian government<br />
adopted a moratorium<br />
on the exploration of shale gas and<br />
the fracking technology in January<br />
2012 as a consequence of local<br />
opposition, months of protest and<br />
pro-Russian attitudes. Legislation<br />
was amended in May 2012 to allow<br />
the development of natural gas<br />
projects by conventional drilling<br />
technologies, for instance for the<br />
newly discovered offshore gas fields<br />
on Bulgaria’s Black Sea coast. However,<br />
fracking technology for shale<br />
gas exploration is still not permitted.<br />
Since then, there has been a push to<br />
lift or at least review the ban by the<br />
Movement for Energy Independence<br />
(DEN), parts of the government and<br />
the Bulgarian President Rosen Plevneliev.<br />
Even Bulgaria’s Environment
Minister stated that the moratorium<br />
on hydraulic fracturing is rather a<br />
temporary measure until a review of<br />
potential environmental and health<br />
risks have been conducted and prove<br />
that those environmental risks can<br />
be controlled and managed.<br />
Romania’s issuance of exploration licenses<br />
for its shale gas reserves and<br />
early successful lighthouse projects<br />
will shape the future trajectory of<br />
Bulgarian discussions and decisions<br />
in regard to the current moratorium<br />
on hydrofracking. However, many<br />
energy experts believe that this decision<br />
is likely to be reversed once environmental<br />
studies are completed.<br />
Estimated European shale<br />
gas reserves:<br />
• UK: Up to 1,700 trillion cubic metres.<br />
Original estimates were as high<br />
as 5.3 tcm.<br />
• Germany: 6.8-22.6 tcm, with technically<br />
recoverable reserves of 0.7-2.3<br />
tcm (10% of total shale gas reserves).<br />
• ExxonMobil estimate of Germany’s<br />
exploitable reserves: 827 bcm.<br />
• German conventional gas reserves<br />
in comparison: 150 bcm.<br />
• Bulgaria, Romania and Hungary:<br />
538 bcm of technically recoverable<br />
shale gas reserves.<br />
Conclusions and<br />
Perspectives<br />
Notwithstanding its own unconventional<br />
gas prospects, the EU-28<br />
stands to benefit from the expanding<br />
worldwide unconventional gas<br />
production in various ways. This<br />
emerging global trend will open up<br />
new sources of LNG imports, including<br />
from the U.S. and countries for<br />
which exporting gas is an entirely<br />
new industry.<br />
The U.S. shale gas revolution cannot<br />
be replicated in Europe with the<br />
same low costs of shale gas production;<br />
nor will it reach the same volumes.<br />
It will take place in an evolutionary<br />
(rather than ‘revolutionary’)<br />
way. Nonetheless, it is expected to<br />
become an economically competitive<br />
source of energy, in particular<br />
compared to imported Russian conventional<br />
gas from its new and very<br />
expensive gas fields in the remote<br />
regions of Yamal and Siberia, transported<br />
via long distance pipelines.<br />
With the growing use of LNG on the<br />
global gas market, traditional oilindexed<br />
gas contracts will gradually<br />
decrease as the global gas market<br />
becomes increasingly integrated,<br />
whereas spot markets for gas will<br />
expand both in number and importance.<br />
Embracing unconventional<br />
gas will keep costs lower than any<br />
future conventional production<br />
from new gas fields in remote regions,<br />
including the Arctic in Russia,<br />
as well as the hugely expensive new<br />
(underwater) gas pipelines. Cheaper<br />
European shale gas will help break<br />
Europe’s overdependence on very<br />
costly future Russian gas supplies.<br />
The short and mid-term consequences<br />
of ignoring or denying the<br />
positive strategic dimensions of Europe’s<br />
domestic unconventional gas<br />
reserves are increased gas imports<br />
from Russia, plus higher volumes<br />
of LNG from often politically unstable<br />
producer countries outside<br />
of Europe. In 2012, the EU-27 spent<br />
77<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
Shale gas drilling<br />
rig.<br />
Frank Umbach<br />
78<br />
€408 billion on energy imports – six<br />
times more than in 1999, and equal<br />
to 3.9% of GDP. This “alternative”<br />
not only threatens Europe’s energy<br />
supply security and economic competitiveness,<br />
but also creates a much<br />
bigger CO 2<br />
-footprint. If lifecycle<br />
analyses are calculated based on<br />
emissions not only from the production<br />
process, but also from the long<br />
distance transport via thousands of<br />
kilometres of pipelines from Russia,<br />
CO 2<br />
emissions from domestic shale<br />
gas resources would be around 30%<br />
lower. The alternatives to domestically-produced<br />
shale gas would<br />
therefore lead to higher gas prices,<br />
reduced supply security and higher<br />
CO 2<br />
emissions. In other words: the<br />
use of domestically-produced unconventional<br />
gas serves all three major<br />
objectives of the “energy triangle”:<br />
supply security, economic competitiveness<br />
and environmental/climate<br />
protection.<br />
With the increasingly wide price gap<br />
between the North American and<br />
the European oil and gas market<br />
(gas: US$4.5 per million British thermal<br />
units in the U.S. in comparison<br />
with US$9 in Europe and US$18 in<br />
Asia), a “re-industrialization” of energy<br />
intensive and other industries
is already underway on the U.S. side.<br />
The future economic competitiveness<br />
of Europe and Asia towards the<br />
U.S. faces increasing challenges with<br />
much higher gas and other energy<br />
prices. Confronted with rising oil<br />
and import dependency (in contrast<br />
to the U.S.) from politically unstable<br />
or other problematic suppliers, EU<br />
energy security faces even more severe<br />
risks, vulnerabilities, and uncertainties<br />
in the future. Increased<br />
European efforts to maximise the<br />
potential of its own unconventional<br />
oil and gas resources could also help<br />
the EU to retain or create industrial<br />
sector jobs, contributing to its overall<br />
future economic competitiveness.<br />
79<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
THE IMPORTANCE<br />
OF TAP FOR ITALY<br />
SOME SCENARIOS<br />
Antonio Sileo<br />
Senior Research Fellow, Institute for Competitiveness<br />
(I-com)<br />
AntonIo SIleo<br />
80
It was suggested that Italy, with its geographical<br />
position at the junction of North-African, North-<br />
European and Russian streams, could be turned<br />
into the “Southern Europe gas hub.”<br />
1. Introduction<br />
Italy, like most European countries,<br />
is heavily dependent on gas imports<br />
from outside the EU. Yet, as Italy’s<br />
gas consumption grows, mainly due<br />
to the completion of the methane<br />
pipeline system in the country and<br />
the increased use of gas for power<br />
generation, there is a corresponding<br />
decline in domestic production. 1 Inevitably,<br />
the historical condition of<br />
dependence will worsen. These circumstances<br />
affect the market structure,<br />
as almost 93% of Italian imports<br />
flow through pipelines.<br />
Among the possible interventions<br />
considered over the last decade, it<br />
was suggested that Italy, with its geographical<br />
position at the junction of<br />
North-African, North-European and<br />
Russian streams, could be turned<br />
into the “Southern Europe gas hub.”<br />
This was clearly articulated in Italy’s<br />
most recent National Energy Strategy<br />
(NES). In this context, Snam, the<br />
Italian transmission system operator<br />
(TSO) provided for by the lawdecree<br />
(D.L.) of January 24 th 2012,<br />
n.1, modified in Law (L.) 24 th March<br />
2012, n.27, and by the decree of the<br />
Prime Minister (DPCM) 25 th May<br />
2012, should play a major role in<br />
contributing to supply security and,<br />
in general, national energy security<br />
(Sileo; 2012). 2 However, energy security<br />
is not exclusively guaranteed<br />
by a long-term strategy; a comprehensive<br />
approach also demands the<br />
ability to manage possible shortterm<br />
supply shocks. The Italian gas<br />
system has recently faced critical<br />
situations, in particular in 2005 and<br />
2006. Based on its practical experience,<br />
Italy has learned how to cope<br />
with emergencies, and always managed<br />
to ensure the supplies for its<br />
final domestic consumers. Moreover,<br />
since 2008, gas consumption<br />
has dropped, thanks to the financial<br />
crisis. Having stopped growing, by<br />
81<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
1.<br />
It is important to say that Italian natural gas domestic production has inverted the trend since July 2011, returning to increase.<br />
2.<br />
According to the Italian legislation a decree-law is a decree passed by the Italian Government as an urgent measure, which has to<br />
be approved by the Parliament within 60 days in order to become law.
AntonIo SIleo<br />
82<br />
the end of 2011, gas consumption<br />
reached its 2003 level.<br />
the Trans Adriatic Pipeline (TAP), at present the<br />
most ambitious project concerning the Italian<br />
gas infrastructure system, can be considered<br />
consistent with a security-led strategy.<br />
On this basis, the Trans Adriatic<br />
Pipeline (TAP), at present the most<br />
ambitious project concerning the<br />
Italian gas infrastructure system,<br />
can be considered consistent with a<br />
security-led strategy. TAP’s rationale<br />
is mainly one of diversification: carrying<br />
10 bcm of Azerbaijani natural<br />
gas from the Shah Deniz II field each<br />
year, TAP would provide a new and<br />
significant energy source. Moreover,<br />
a second phase is already planned,<br />
in order to increase the nominal capacity<br />
of the pipeline up to 20 bcm/<br />
year, through a new compression<br />
station. This additional capacity may<br />
play a pivotal role in the Italian supply<br />
strategy, which depends heavily<br />
on imports (particularly from Russia,<br />
Algeria and Libya), both in terms<br />
of security and industry. In the recent<br />
past, Italy has experienced gas<br />
shortages, due to the particularly<br />
rigid climatic conditions and lack of<br />
flexibility in the volumes imported<br />
from abroad. On those occasions,<br />
the storage infrastructures played a<br />
much larger role than usual, raising<br />
questions about their economic and<br />
strategic sustainability. Moreover,<br />
alternative uses of gas, such as unconventional<br />
industrial uses in steel<br />
production and a substantial shift<br />
in fuel transportation, are likely to<br />
emerge.<br />
3.<br />
A similar figure for 2012: 11.5% (equal to 8.7 bcm).<br />
A new southern route may also<br />
have strategic implications for Italy,<br />
strengthening its role as an entry<br />
point for non-Russian, non-LNG gas<br />
to travel to Northern Europe. In this<br />
sense, the efforts of the European<br />
Commission through the Southern<br />
Gas Corridor initiative - despite the<br />
obstacles posed by divergent national<br />
interests – has a strong basis. In this<br />
sense, TAP may play an important role<br />
in fulfilling the demand of other European<br />
countries, whose consumption<br />
patterns also seem to be shrinking.<br />
2. Trends in the Italian gas<br />
market: an overview<br />
Supply and Sources<br />
Italy is heavily dependent on gas<br />
imports. In 2013, the national production<br />
share was limited to 11% of<br />
total consumption (7.7 bcm), 3 while<br />
net imports (imports minus exports)<br />
amounted to almost 88% of the total<br />
(61.7 bcm). Most of this imported gas<br />
comes from Algeria and Russia. In<br />
2011, Italy imported 22.9 bcm from<br />
Algeria and 19.7 bcm from Russia.<br />
Among others, Qatar (6.2 bcm) is the<br />
main LNG importer, through two regasification<br />
terminals (Panigaglia and<br />
Portoviro).<br />
Domestic Demand<br />
Italian natural gas demand has continued<br />
to shrink over the last decade,<br />
aside from a minor and temporary<br />
recovery in 2010. This decline was<br />
anticipated, and indeed industry-led<br />
since 2004: total industrial consumption<br />
has dropped by more than 35%
over 10 years (from 21 to 13 bcm).<br />
This reduction is due to: 1) a reduction<br />
in gas use as a result of the economic<br />
crisis, particularly harsh for<br />
the industries involved, and 2) more<br />
efficient use of gas, considered a key<br />
factor in competitiveness.<br />
Meanwhile, the household gas consumption,<br />
which amounts to roughly<br />
half of the total, has experienced a<br />
slight increase, also due to the cold<br />
temperatures this winter. Unfortunately,<br />
the use of gas for heating<br />
is unpredictable, and the patterns<br />
observable in the past years can be<br />
considered exceptional; therefore<br />
few can be used to predict future<br />
trends. In addition, natural gas is facing<br />
new competition, such as heating<br />
pumps, induction stoves and heaters,<br />
which will probably limit growth in<br />
consumption.<br />
Power generation of electricity significantly<br />
affects Italian natural gas<br />
consumption: in fact, it has historically<br />
amounted to one-third of the<br />
total. Despite the installation of further<br />
capacity in terms of combined<br />
cycle plants over the last decade,<br />
consumption of thermoelectric generation<br />
has dropped significantly<br />
since 2009. A structural fall is evident<br />
following the peaks in 20<strong>07</strong><br />
and 2009 (33 – 34 bcm), when thermoelectric<br />
plants helped to fill the<br />
power deficit of the electric system.<br />
The contraction of consumption in<br />
recent years can be explained based<br />
on two main factors: 1) the overall<br />
decline in electricity consumption<br />
and 2) the upsurge in renewable energy<br />
sources.<br />
All in all, consumption patterns in<br />
Italy show both a temporary low<br />
and a structural contraction: the<br />
actual bottom is surely related to<br />
the economic crisis. While that will<br />
eventually end, the decline is also<br />
the consequence of a permanent<br />
shift in the consumption paradigm.<br />
In particular, we attend to the rise<br />
of the relative (and possibly absolute)<br />
importance of residential use.<br />
This has two major implications.<br />
First, whether or not total gas vol-<br />
83<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
A fire at the Ilva<br />
steel plant in<br />
Taranto after it was<br />
hit by a tornado.
AntonIo SIleo<br />
84<br />
Power generation of electricity<br />
significantly affects Italian natural gas<br />
consumption.<br />
umes bounce back to 2005 levels,<br />
the overall volatility of the market<br />
will change. In fact, domestic use is<br />
strictly related to climatic and seasonal<br />
conditions (i.e. winter consumption<br />
is much higher than summer<br />
consumption) and from year to<br />
year (for example, in the event of a<br />
particular cold winter).<br />
The second consequence raises security<br />
issues: given the EU regulation<br />
on security of supply 4 and its implementation<br />
within national law, domestic<br />
consumers are protected in<br />
case of supply shortages. 5 This protection<br />
guarantees supplies to consumers<br />
in case of: 1) extreme temperatures<br />
during a 7-day peak period<br />
occurring with a statistical probability<br />
of once in 20 years; 2) any period<br />
of at least 30 days of exceptionally<br />
high gas demand, occurring with a<br />
statistical probability of once in 20<br />
years; and 3) for a period of at least<br />
30 days in case of the disruption of<br />
the single largest gas infrastructure<br />
under average winter conditions. An<br />
increasing impact of domestic consumption<br />
also increases the share of<br />
protected consumers, and therefore<br />
of the supply that must be secured to<br />
the expenses of other uses, such as<br />
power generation. Given the impact<br />
of thermoelectric power generation<br />
on total power generation in Italy, the<br />
European provisions on supply security<br />
raise serious concerns in case of<br />
a winter disruption, when electricity<br />
demand is high, photovoltaic produc-<br />
4.<br />
Regulation n. 994/2010.<br />
5.<br />
With other civil consumers, whose total consumption is less than 50,000 cubic meters per year.
tion is negligible and priority is given<br />
to domestic consumers.<br />
3. Security issues: lessons<br />
from the recent past<br />
The Italian gas system has significant<br />
experience of critical and unexpected<br />
situations. Two exceptional events<br />
have taken place in recent years: the<br />
interruption of the Greenstream flow<br />
due to the outbreak of the conflict in<br />
Libya at the end of February 2011,<br />
and the 6-month shutdown of the<br />
Transitgas pipeline (which connects<br />
Italy to Northern Europe), from July<br />
to December 2010, because of a landslide<br />
in Switzerland.<br />
In the attempt of realizing a crisis infrastructural<br />
equipment, which can<br />
face the interruption of a pipeline or<br />
the consequences of an exceptional<br />
cold snap, storage infrastructures<br />
stand as key-asset for the system.<br />
In the current system, those facilities<br />
play a crucial role in satisfying<br />
consumption modulation, because<br />
they ensure the flexibility required<br />
for the execution of administration<br />
contracts to the selling companies.<br />
Good storage capacity has also been<br />
proven to be a basic precondition<br />
for the creation of a liquid market,<br />
both in the gas and electricity sector,<br />
increasing arbitrage opportunities<br />
among markets in different countries.<br />
Such liquidity is currently not<br />
a feature of the Italian system, that<br />
cannot rely on satisfying networks<br />
neither at the internal nor at the<br />
European. To further illustrate this<br />
point, it is useful to consider a spe-<br />
cific case: the emergency situation<br />
that arose in February 2012.<br />
On February 1 st 2012, Gazprom did<br />
not appear to be able to meet the<br />
increased supply demand its European<br />
clients. In the Italian context,<br />
this imbalance was reflected in a<br />
discrepancy between requirements<br />
and transits of 12.3% at the entry<br />
point of Tarvisio. The gap increased<br />
up to 24.2% the following day, and<br />
up to 30% by February 3 rd . Despite<br />
the geopolitical tensions arising<br />
from polarised views of Ukraine’s<br />
alleged violation of the gas agreements<br />
- having withdrawn more gas<br />
than its contract allowed for - the<br />
main factor in the 2012 crisis was<br />
simply the cold snap which struck<br />
Europe, Turkey and indeed Russia<br />
itself.<br />
The withdrawing of stored volumes<br />
has thus covered, once again, 6 the<br />
Russian shortage. Friday 3 rd February,<br />
32 mcm were withdrawn from<br />
storage, in order to meet an unusual<br />
high demand: 414.7 mcm daily. The<br />
following week, due to the extreme<br />
cold and intense industrial activity,<br />
the demand did not shrink, reaching<br />
record highs on February 6 th and<br />
February 7 th . Consumption on February<br />
7 th was 465.9 mcm, setting an<br />
absolute record of network intakes.<br />
A comparison with the comparable<br />
Tuesday in 2011 illustrates the exceptional<br />
nature of this peak (Figure<br />
2).<br />
As a result, gas withdrawals in the<br />
industrial sector in 2010 were heav-<br />
85<br />
CASPIAN REPORT, SPRING <strong>2014</strong><br />
6.<br />
Similar extraordinary condition where met in 2005 and 2009.
ily limited because of the emergency<br />
procedures that were activated. 7 It<br />
is therefore easy to see that the supply<br />
shortage was the result of the low<br />
temperatures, even if it is more difficult<br />
to recognise the size of the increase<br />
in consumption. The obvious<br />
practical implication of resorting to<br />
stored natural gas at the beginning<br />
of the season is the performance decline<br />
acceleration. Italy had already<br />
experienced this phenomenon during<br />
the winter of 2005.<br />
peak demand; that role is carried out<br />
by storage facilities. It can, however,<br />
ensure the replenishment of the reservoirs<br />
during the year, especially<br />
if new storage infrastructures are<br />
build. TAP supplies will also cover a<br />
substantial proportion of demand in<br />
case of the main import routes (e.g.<br />
from Russia or Algeria) experiences<br />
long term disruption.<br />
4. Environmental<br />
implications<br />
AntonIo SIleo<br />
86<br />
Some arguments have been made<br />
in favour of increasing the storage<br />
capacity. In fact, the greater the storage<br />
capacity, the greater the likelihood<br />
of guaranteed supply and, consequently,<br />
Italian energy security.<br />
This capacity, however, comes at an<br />
economic cost (the remuneration of<br />
its capital and operating expenses).<br />
Moreover, while this is a feasible<br />
solution in case of harsh climatic<br />
conditions, Italy is unable to handle<br />
a structural shortage, such as a permanent<br />
reduction in Russian or Algerian<br />
imports.<br />
Italy’s past experiences demonstrate<br />
its heavily storage-dependent<br />
security strategy, shedding light on<br />
the possible implications of a new<br />
source: the TAP. In fact, an Adriatic<br />
pipeline could be a viable alternative<br />
both in terms of capacity (especially<br />
with the extra 20 bcm/year) from<br />
phase II, and in economic terms.<br />
Provided that TAP will work at 80%<br />
of its capacity, it will be able to provide<br />
more than 40 additional bcms<br />
per day. Such volumes cannot meet<br />
The Ilva Case<br />
The Ilva plant in Taranto is the largest<br />
steelworks in Europe. Last year, it<br />
was investigated for its environmental<br />
impact. After the government<br />
commissioner was appointed to<br />
manage the plants transition, there<br />
has been much discussion of ways<br />
to achieve more sustainable production<br />
in the medium and long term.<br />
The production activities of Ilva have<br />
been deemed so harmful to the environment<br />
in terms of pollution that<br />
multiple measures to limit the production<br />
itself have been taken. The<br />
repeated shutdowns of some parts<br />
of the plant in recent years. This culminated<br />
with an AIA (Autorizzazione<br />
Integrata Ambientale) decision<br />
to limit production to 8 mt of steel<br />
per year. This has had repercussions<br />
for the entire Italian steel industry,<br />
which was already in trouble.<br />
Among the potential plans for modernising<br />
the plant to make it more<br />
competitive and sustainable, one<br />
entails a radical change in the pro-<br />
7.<br />
Just planned to face the lack of gas requirements coverage in case of adverse climate events in the<br />
decree of the former Ministry of Industry on 26 th September 2001.
Kyoto Protocol<br />
meeting on<br />
December<br />
10, 2009 in<br />
Copenhagen.<br />
In the current plant configuration, a<br />
huge amount of coal is held in stockyards<br />
and used in order to produce<br />
coke, the chemical agent used in the<br />
blast furnace to make hot metal. In<br />
the blast furnace, iron oxides in the<br />
shape of ores, sinter and pellets are<br />
transformed into hot metal by reduction<br />
process of steel that involves<br />
the use of natural gas, instead of coal.<br />
This change falls within the measures<br />
laid down by the AIA designed<br />
to increase productivity and improve<br />
environmental and human protections<br />
through the use of innovative<br />
technologies. The use of these technologies<br />
is in fact one of the points<br />
contained in the “Proposta di piano<br />
delle misure e delle attività di tutela<br />
ambientale e sanitaria” which was<br />
recently prepared for the Company<br />
by an expert committee appointed<br />
by the Minister of Environment.<br />
In the past, a number of measures<br />
have been taken to reduce the environmental<br />
impact of the plant, but<br />
the majority have been related to<br />
post-treatment technologies. The<br />
success of these measures in limiting<br />
the diffusion of fugitive dust<br />
emissions has been disputed. Since<br />
September, experts have been working<br />
on preliminary experiments,<br />
checking whether the plants are<br />
compatible with the new technology<br />
and the new production process,<br />
i.e. producing steel with natural gas.<br />
This solution would replace the classical<br />
configuration, in place since the<br />
late nineteenth century: the coke<br />
oven-blast furnace-converter. So far,<br />
tests results seem positive, and further<br />
developments will likely be announced<br />
in the coming months.<br />
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CASPIAN REPORT, SPRING <strong>2014</strong>
AntonIo SIleo<br />
88<br />
ductant chemical reactions generated<br />
by coke and carbon oxides (developed<br />
through the combustion of<br />
coke).<br />
In the new gas-based configuration,<br />
the reductant is natural gas. Since<br />
this hydrocarbon, in its virgin form,<br />
has a low reducing power, it has to be<br />
converted into a mixture of H2 and<br />
CO. This conversion takes place in<br />
reactors and is called the reforming<br />
process. During this process, both<br />
the calorific value and the proportion<br />
of reducing gas in relation to the<br />
oxidizing gases (like CO 2<br />
) increase.<br />
When natural gas rather than coal is<br />
used to make iron, CO 2<br />
production<br />
could be 50-65% lower, depending<br />
on how one accounts for the CO 2<br />
sources. In addition to the drastic reduction<br />
of emissions from the plant,<br />
the production could benefit from<br />
greater flexibility and increased productivity.<br />
Flexibility is guaranteed<br />
based on the fact that the plant can<br />
operate at a wide spectrum of hydrogen<br />
to carbon monoxide ratios<br />
(0.5 to 3.5). The quality of the steel<br />
produced with the gas technology is<br />
also higher in respect to the conventional<br />
steel making process, because<br />
the virgin iron contains lower levels<br />
of unwanted elements such as zinc<br />
and copper. Additional benefits can<br />
also be identified in terms of operating<br />
costs, which, defined as materials<br />
management, are much lower.<br />
Despite these advantages, many<br />
doubts remain about the practical<br />
feasibility of the new project. So far,<br />
experts are mainly assessing the<br />
technical feasibility of the transformation<br />
of the production process,<br />
but a detailed analysis regarding<br />
the investment costs still has to be
conducted. New natural gas-based<br />
plants around the world have shown<br />
investment costs greater than 500<br />
million Euros. According to Carlo<br />
Mapelli, the Ilva consultant for the<br />
implementation of the AIA, the natural<br />
gas needs for the Taranto plants<br />
could rise up to 1.5 bcm/y (representing<br />
10% of the Italian industrial<br />
gas demand recorded in 2012).<br />
Fuel Shift in Transportation<br />
the biggest deterrent to the development<br />
of natural gas in the transportation<br />
sector, considering also<br />
the limited autonomy of the CNGpowered<br />
vehicles. In recent years<br />
progress have been made in the<br />
The use of natural gas for transportation<br />
is one of the objectives of the European<br />
Commission.<br />
The use of natural gas for transportation<br />
is one of the objectives of the<br />
European Commission: Member<br />
States are to adopt national policies<br />
in order to develop markets for alternative<br />
fuels and their infrastructures.<br />
In fact, the EU aims to promote<br />
the sustainable development<br />
of the transport sector, accelerating<br />
the use of fuel-efficient vehicles<br />
for transport, thereby reducing CO 2<br />
emissions. Italy is responding to this<br />
with the increasing use of natural<br />
gas-powered vehicles, in particular<br />
CNG (compressed natural gas) cars<br />
and commercial vehicles. Indeed,<br />
CNG vehicles currently represent a<br />
concrete answer to two key factors:<br />
the reduction of CO 2<br />
emissions along<br />
with costs for motorists. Although<br />
the consumption of natural gas for<br />
vehicles constitutes only 1.23% of<br />
total demand, the sector has experience<br />
rapid growth recently, and Italy<br />
is now the leading EU country in<br />
terms of CNG vehicle adoption, with<br />
847,000 units. In the EU, three natural<br />
gas vehicles out of four are Italian.<br />
However, despite the strong growth<br />
in recent years, the feeling is that the<br />
Italian market could do more. The<br />
scarcity of distributors is certainly<br />
implementation of the distribution<br />
network. The number of CNG stations<br />
has grown by 37% in the last<br />
four years (Figure 15), but the sector<br />
needs even greater momentum<br />
to overcome the obstacles to greater<br />
market penetration.<br />
At the Italian level, on August 9 th<br />
2013, decree n. 69/2013, containing<br />
measures for economic recovery,<br />
entered into law. Specifically,<br />
Article 4, paragraph 7 promotes the<br />
implementation of the liquid fuels<br />
distribution network and the use of<br />
methane as a fuel. The fund for the<br />
implementation of the distribution<br />
network also aims to provide grants<br />
for the closing and contextual transformation<br />
of liquid fuels distribution<br />
systems into exclusive methane distribution<br />
facilities.<br />
AIEE, based on a study of Federmetano,<br />
which indicates 2,370,000<br />
as the hypothetical natural gas road<br />
fleet in 2020, has estimated the demand<br />
for natural gas for low duty<br />
vehicles at around 1.64 bcm in 2020,<br />
and up to 4 bcm in 2030, considering<br />
both the new CNG vehicles and those<br />
with retrofitted engines. Moreover,<br />
liquefied natural gas (LNG) is set to<br />
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CASPIAN REPORT, SPRING <strong>2014</strong>
AntonIo SIleo<br />
90<br />
emerge as a significant new transportation<br />
fuel over the next years,<br />
both for the maritime sector and for<br />
heavy duty road vehicles. According<br />
to AIEE, the use of natural gas as a<br />
fuel for ferries, for example, assuming<br />
the use of 276 ferries powered<br />
by LNG by 2030, would lead to an<br />
increase of approximately 1 bcm of<br />
natural gas in demand.<br />
5. Final remarks<br />
TAP will bring additional import capacity<br />
to Italy of up to 20 bcm/year<br />
once phase II is at full speed. This capacity<br />
will face shrinking consumption<br />
(especially on the industrial and<br />
power generation side) and a more<br />
volatile and unpredictable demand.<br />
However, the 2010 European Commission<br />
regulation security of supply<br />
emphasises the importance of<br />
protecting consumers again disruption.<br />
Given the increasing political<br />
tensions in Russia and Ukraine, it is<br />
important to consider whether TAP<br />
can truly play a role in assuring supply,<br />
as it stated in the National Energy<br />
Strategy (SEN). Looking at Italy’s<br />
past experiences, it is difficult to<br />
argue that TAP alone will be able to<br />
provide additional gas in the event of<br />
a major interruption coinciding with<br />
a demand peak. It can, however, improve<br />
supply conditions to the soonto-be-build<br />
storage infrastructures,<br />
especially in the event of a structural<br />
reduction in imports from one of the<br />
exporting countries.<br />
Aside from the security and the economic<br />
perspectives, environmental<br />
impacts are anticipated in two cases.<br />
First, it is at a debate (though at its<br />
initial phase) whether a possible<br />
conversion of the Ilva steel plant<br />
in Taranto from a coal-based plant<br />
to a natural gas-based one, is economically<br />
feasible. It is estimated<br />
that such an intervention will significantly<br />
reduce the plant’s harmful<br />
emissions, which currently cause<br />
production to be heavily limited (i.e.<br />
it would be allowed to return to full<br />
production capacity). Second, from
the long term perspective, the additional<br />
gas can be used in transportation,<br />
with a lower environmental<br />
impact.<br />
A final remark must be made in relation<br />
to the “Southern-European gas<br />
hub” opportunity. In principle, Italy<br />
has the geographic and infrastructural<br />
potential to become an important<br />
hub in an integrated European<br />
gas system. Importing gas from<br />
Azerbaijan (through Turkey), Algeria,<br />
Libya and from the Arabic LNG<br />
sources such as Qatar, Italy could<br />
to export gas to other European<br />
countries. But if Italy is to become<br />
the Southern-European gas hub (or<br />
Euro-Mediterranean), it must seek a<br />
new model, encouraged by community<br />
regulations and focused on flexibility<br />
and competition, as the European<br />
Union is currently developing.<br />
National and European market competition<br />
should be associated with<br />
the creation of a commercial and<br />
infrastructural hub, serving not only<br />
national but also European demand,<br />
especially from the Central Eastern<br />
market. In order to do this, investments<br />
must be made not only in the<br />
import capacity, but also in internal<br />
transportation infrastructures and<br />
at the borders with Swiss, Slovenia<br />
and Austria, expanding the network<br />
of reverse flow pipes.<br />
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Radu Dudau<br />
92<br />
Romania’s Energy<br />
Strategy Options:<br />
Current Trends in<br />
Eastern Europe’s<br />
Natural Gas Markets 1<br />
Radu Dudau<br />
Director of the Energy Policy Group and Associate<br />
Professor, Bucharest University
The year 2020 stands out as a deadline<br />
of sorts for achieving Romania’s strategic<br />
objectives. Geology and geopolitics are<br />
the main factors in shaping national and<br />
regional strategic options, though domestic<br />
policy elements also come into play.<br />
Introduction<br />
Romania’s most important foreign<br />
energy policy project, the Nabucco<br />
gas pipeline, collapsed in June 2013<br />
as the rival Trans Adriatic Pipeline<br />
(TAP) won out in the bidding war to<br />
transport Azerbaijani gas to the EU.<br />
Hence, the Southern Gas Corridor<br />
(SGC) will link the <strong>Caspian</strong> Basin to<br />
Southern Italy via Turkey, Greece,<br />
Albania and the Adriatic Sea.<br />
This paper reviews Romania’s prospective<br />
new sources of primary energy,<br />
both internal and external.<br />
The year 2020 stands out as a deadline<br />
of sorts for achieving Romania’s<br />
strategic objectives. However, as argued,<br />
each of these is shadowed by<br />
considerable uncertainty. Geology<br />
and geopolitics are the main factors<br />
in shaping national and regional<br />
strategic options, though domestic<br />
policy elements also come into<br />
play. Before turning to an analysis of<br />
those determinants, it will be useful<br />
to have a brief overview of the Romanian<br />
oil and gas sector.<br />
According to BP’s Statistical Review<br />
of World Energy (2013), in 2012 Romania’s<br />
proven reserves amounted<br />
to 100 billion cubic meters (bcm)<br />
of natural gas (a fifth of the 1992<br />
level) and 100 million tons (mt) of<br />
oil (half the 1992 level). 2 Romania<br />
produces 10.9 bcm of natural gas<br />
annually and consumes 13.5 bcm.<br />
The yearly crude oil production<br />
is 4.1 mt against a consumption of<br />
8.8 mt. The aggregated depletion<br />
rate of hydrocarbon reserves is<br />
10% per year, meaning that without<br />
supplementary sources, Romania’s<br />
import dependence will grow from<br />
less than 20% at present to 50% in<br />
about ten years.<br />
The East European gas market is<br />
quasi-monopolistic, dominated by<br />
Gazprom’s supply and infrastructure.<br />
The prices that East European<br />
93<br />
CASPIAN REPORT, sprıng <strong>2014</strong><br />
1.<br />
The present paper is an expanded and updated version of an article published in Romanian in the 7 Jan. <strong>2014</strong> issue of 22.<br />
2.<br />
BP’s Statistical Review of World Energy (2013), pp. 6, 20. BP’s data squares relatively well with that of Romania’s Agency for<br />
Natural Resources (ANRM), quoted in Gândul (30 Dec. 2013)
Radu Dudau<br />
94<br />
countries pay for Russian gas are,<br />
on average, 15% higher than those<br />
charged to Western European consumers.<br />
According to Izvestia (Jan.<br />
2013), the average price of Russian<br />
gas as sold to Romania during the<br />
first half of 2012 was $431.8/thousand<br />
cubic meters (tcm), compared<br />
with $379.3/tcm in Germany.<br />
The East European gas market is quasimonopolistic,<br />
dominated by Gazprom’s<br />
supply and infrastructure. The prices<br />
that East European countries pay for<br />
Russian gas are, on average, 15% higher<br />
than those charged to Western European<br />
consumers.<br />
From a geological viewpoint, natural<br />
gas is the main potential line of<br />
development in the Black Sea Basin.<br />
To maximise this potential, Romania<br />
has three strategic options:<br />
(a) to increase the productivity of<br />
mature conventional wells through<br />
new extraction technologies; (b) to<br />
develop new finds in the continental<br />
Black Sea shelf; (c) to explore<br />
and develop the country’s shale gas<br />
reserves.<br />
Let us examine them in turn.<br />
Domestic strategic options<br />
Enhanced Productivity of Mature<br />
Wells<br />
Romania’s hydrocarbon reserves<br />
are fragmented and “old,” and well<br />
productivity is among the lowest in<br />
Europe. In order to halt productivity<br />
decline, massive investments are<br />
needed to improve extraction technologies<br />
(increase of reservoir pressure,<br />
stimulation, deep drilling, etc).<br />
OMV Petrom has undertaken an extensive<br />
investment program of this<br />
kind, and managed in 2013 to halt<br />
production decline and even obtain<br />
a slight increase in crude oil production<br />
as compared to 2012. It has begun<br />
the extensive redevelopment of<br />
seven onshore oil fields, including<br />
drilling new wells and modernising<br />
production facilities. To explore<br />
new fields deep underground, the<br />
company has partnered with Hunt<br />
Oil and Repsol.<br />
Similarly, in 2012, the country’s<br />
largest natural gas producer, stateowned<br />
Romgaz, recorded a marginal<br />
production increase compared<br />
with the previous year. Nevertheless,<br />
there remains an urgent need for<br />
human and financial capital in this<br />
field, and the results of this can only<br />
be gradual and long-term.<br />
Offshore reserves<br />
In February 2012, Exxon Mobil &<br />
OMV Petrom’s Domino-1 well discovered<br />
a deepwater gas deposit of<br />
up to 100 bcm in the Neptun block<br />
of Romania’s Exclusive Economic<br />
Zone (EEZ). After several “dry” exploratory<br />
drillings in Turkish waters,<br />
this discovery was a remarkable<br />
success.<br />
But despite all of its promise, the<br />
Romanian offshore area is still filled<br />
with uncertainty and difficulties.<br />
First, the discovery of additional reserves<br />
is needed in order to justify<br />
production investment decisions.<br />
A couple of new exploratory deep-
water wells in <strong>2014</strong> followed by another<br />
dozen by 2018 will be key.<br />
Furthermore, deepwater drilling is<br />
much more expensive than onshore<br />
operations. In addition, costs are<br />
generally higher in the Black Sea region<br />
than in other parts of the world<br />
due to a scarcity of offshore drilling<br />
equipment and deepwater service<br />
providers. Lastly, issues related to<br />
necessary new onshore infrastructure<br />
and to a lack of clarity around<br />
legislative and procedural require<br />
timely attention to decision-making<br />
and adequate investments.<br />
If a final investment decision to<br />
commercially develop new offshore<br />
fields is reached by the end of <strong>2014</strong>,<br />
it is not until 2020 that new volumes<br />
of natural gas will hit the market.<br />
Shale Gas<br />
The third strategic direction is shale<br />
gas. According to EIA’s 2013 geological<br />
estimate, Romania holds technically<br />
recoverable reserves of 1,610<br />
bcm. 3 Even if only a fraction of this<br />
amount turns out to be commercially<br />
viable, Romania will not only be able<br />
to cover its internal gas consumption,<br />
but also become a natural gas<br />
exporter.<br />
Several international companies are<br />
involved at various stages in Romanian<br />
shale gas activities. Among them,<br />
Chevron’s operations are most advanced,<br />
although the American IOC<br />
has not yet started exploratory drilling.<br />
At the time of writing, Chevron’s<br />
first exploratory well in the Vaslui<br />
county was due to start in a couple of<br />
weeks’ time.<br />
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CASPIAN REPORT, sprıng <strong>2014</strong><br />
Anti fracking<br />
activists in<br />
Romania.<br />
3.<br />
U.S. Energy Information Agency (EIA) (2013), Technically Recoverable Shale Oil and Shale Gas<br />
Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States,<br />
Washington D.C.: Department of Energy, June 2013, p. 348.
Radu Dudau<br />
96<br />
This industry, however, faces fierce<br />
public opposition fuelled by emotion<br />
and fear, largely induced by manipulation<br />
and disinformation - and<br />
very little by way of scientific reasoning.<br />
Indeed, mistrust and even<br />
hostility on the part of the public is<br />
a serious hurdle for shale gas development<br />
in Romania – notwithstanding<br />
the uncertain results of the exploration<br />
itself.<br />
Currently, there is a disproportionate<br />
and inflated perception of the<br />
environmental and public health<br />
risks associated with shale gas<br />
development activity. A natural<br />
concern over the direct effects of<br />
industry’s operations has been exacerbated<br />
by a mixed campaign of<br />
media manipulation, political populism,<br />
narrow-minded economic<br />
nationalism and militant wishful<br />
thinking. This has given rise to an<br />
emotionally charged atmosphere,<br />
which prevents the clear presentation<br />
of arguments for public interest<br />
based on factual, costs-benefit<br />
analyses.<br />
The backdrop to this situation is a<br />
relatively widespread social mistrust<br />
in the competence and integrity<br />
of state institutions. Indeed,<br />
Romania lacks a culture of transparency<br />
and public consultation in<br />
relation to major extractive industry<br />
projects. As such, positions are<br />
radicalised and the odds of social<br />
consensus are poor.<br />
Nonetheless, public debate must be<br />
informed by scientific knowledge<br />
and the state must regain its credibility<br />
as the foremost promoter<br />
of public interest. A good starting<br />
point would be to turn the regulatory<br />
state agencies into truly politi-
cally independent entities, properly<br />
equipped with human and financial<br />
resources.<br />
The European Commission’s (EC)<br />
recent Recommendation “on the<br />
exploration and production of hydrocarbons<br />
(such as shale gas)<br />
using high volume hydraulic fracturing<br />
in the EU” 4 has put forward<br />
a unified framework for shale gas<br />
activities EU-wide. Building on the<br />
IEA’s (2012) golden rules for natural<br />
gas production, the Recommendation<br />
offers conceptual clarifications<br />
and urges strict operational<br />
safeguards to ensure environmental<br />
protection and adequate public<br />
involvement.<br />
In a scenario of increasing social<br />
acceptance and confirmed commercially<br />
exploitable reserves, Romanian<br />
shale gas could enter the<br />
market towards 2020. By then, hydraulic<br />
fracturing technology will<br />
probably be better understood in<br />
the public sphere, and hence a less<br />
frightening prospect.<br />
Transforming trends in<br />
the European natural gas<br />
markets<br />
In each of these domestic directions<br />
of new gas sources development, an<br />
additional element of unpredictability<br />
has to do with potential competition<br />
from pipeline imports. Several<br />
recent developments in the region<br />
are for the first time creating the<br />
likelihood of a liquid energy market<br />
in Central and Eastern Europe by<br />
the end of the current decade:<br />
(a) The growing interconnectivity<br />
of Eastern Europe’s national natural<br />
gas grids, which will allow for new<br />
trading relations, are superimposed<br />
on the East-West geographical setting<br />
of the large Soviet-era pipelines.<br />
Romania is already interconnected<br />
with Hungary (albeit only west-toeast)<br />
while reverse flow interconnections<br />
with Bulgaria and Moldova<br />
are to be completed in <strong>2014</strong>.<br />
(b) The EU competition and market<br />
liberalisation policies passed<br />
at the beginning of the 1990s have<br />
become genuinely effective over the<br />
last few years, significantly limiting<br />
monopolistic practices within the<br />
European energy markets.<br />
(c) A global trend that has supported<br />
and stimulated gas-to-gas<br />
trade in Western Europe adds to<br />
the dynamic: the North American<br />
“shale gas revolution.” This made<br />
large quantities of Qatari LNG originally<br />
prepared for the American regasification<br />
terminals in the Gulf of<br />
Mexico available to Europe and Asia.<br />
Consequently, natural gas traded on<br />
the British, Belgian, Dutch and German<br />
hubs has become cheaper than<br />
the gas piped from Gazprom, Statoil<br />
or Sonatrach, and has led to increased<br />
contractual flexibility with<br />
these traditional suppliers.<br />
The long-term contracts (LTCs) concluded<br />
between large utility companies<br />
from Germany, Italy and France<br />
– Eni, E.On Ruhrgas, RWE, Wintershall,<br />
GDF Suez – and Gazprom were<br />
for decades solid and lucrative, enabling<br />
these companies to operate<br />
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CASPIAN REPORT, sprıng <strong>2014</strong><br />
4.<br />
European Commission (<strong>2014</strong>), COM(<strong>2014</strong>) 23 final, January 22.
Radu Dudau<br />
98<br />
de facto monopolies inside their national<br />
markets. Their terms of delivery<br />
(usually 20-25 years) included<br />
clauses that suddenly became<br />
highly problematic: oil- indexed gas<br />
prices, “take-or-pay” (obligation to<br />
pay at least 85% of annually contracted<br />
volumes regardless of actual<br />
physical delivery), and “destination<br />
clauses” (under which imported gas<br />
cannot be re-exported).<br />
From 2009, the situation for Western<br />
European utility companies was<br />
unsustainable: under pressure from<br />
local distributors securing cheaper<br />
gas from trading hubs, the obligation<br />
to acquire minimal gas volumes<br />
at oil-indexed prices became<br />
unmanageable. As a consequence,<br />
utility companies required and obtained<br />
gradual price reductions and<br />
more flexible contractual clauses<br />
from international suppliers. Some<br />
concessions were reached through<br />
amicable renegotiations, others<br />
through decisions by international<br />
arbitration tribunals.<br />
Taken together, these three tendencies<br />
of the EU natural gas markets<br />
may well be sufficiently transformative<br />
to allow Romania to enjoy diversified<br />
import sources and better<br />
contractual terms.<br />
Import diversification<br />
prospects<br />
99% of Romania’s gas imports come<br />
from the Russian Federation, equal<br />
to about 20% of current total gas<br />
consumption. Nevertheless, these<br />
developing trends offer for the first<br />
time serious prospects for diversified<br />
import sources.<br />
Russian gas from the West<br />
Following the elimination of destination<br />
clauses and the construction<br />
of the Hungarian interconnection,<br />
Romania could import Russian gas<br />
from West to East; in the short to<br />
medium term, the most feasible<br />
options are imports from Austria’s<br />
Central European Gas Hub (CEEGH)<br />
in Baumgarten and der March.<br />
To illustrate the feasibility of this option,<br />
the case of Ukraine case is helpful.<br />
Since 2012, Kiev has been importing<br />
Russian gas from Germany’s<br />
RWE through Poland and Hungary.<br />
To enable larger scale imports, in<br />
December 2013 Eustream (the Slovak<br />
natural gas TSO) agreed to make<br />
arrangements for reverse-flow into<br />
Ukraine via one of its four major<br />
transit pipelines, allowing Kiev to<br />
import up to 10 bcm/year from Germany<br />
– equivalent to more than a<br />
third of the volumes imported from<br />
Russia in 2013. But back then this<br />
arrangement did not come to fruition,<br />
since Russia rewarded ex-president<br />
Yanukovych for turning away<br />
from the EU Association Agreement<br />
with a massive discount on gas<br />
prices, from approximately $400 to<br />
$268.5.<br />
As it is turned out, those improved<br />
price terms were short-lived: the<br />
success of the Euromaidan movement<br />
was followed by the Russian<br />
annexation of Crimea and the onset<br />
of an extremely tense political<br />
standoff between Moscow and Kiev.<br />
Not only was the gas price discount<br />
revoked, but the new price was set<br />
to $480/tcm, one of Europe’s highest.<br />
Under these circumstances, the
Eastern<br />
Mediterranean.<br />
new Ukrainian authorities have<br />
once again become keenly interested<br />
in gas imports from the EU, as<br />
well as in European financial support<br />
in order for Kiev to be able to<br />
service its debt to Gazprom.<br />
However, in the meantime, Gazprom<br />
gave Slovakia a discount, and no<br />
new talks have yet been set about<br />
installing reverse-flow capacity on<br />
Slovakia’s gas transport system. Besides,<br />
knowing Kiev’s dismal track<br />
record on debt, it is doubtful that<br />
European gas traders will take the<br />
risk on arbitrage into the pricier<br />
Ukrainian market, unless a financial<br />
back-up arrangement from the EU,<br />
Washington and the IMF are established<br />
first.<br />
The Levantine Basin<br />
An emerging gas-producing region<br />
closer to European markets other<br />
than the <strong>Caspian</strong> Basin is the Levantine<br />
Basin in the Eastern Mediterranean.<br />
Offshore discoveries since<br />
2009 – mostly in deep and ultradeep<br />
water – in Israel, Cyprus and Lebanon<br />
are estimated by the EIA (2013)<br />
to hold 1,170 bcm of technically recoverable<br />
gas. The Israeli Leviathan<br />
field, with an estimated 535 bcm of<br />
gas and 31.1 million barrels of liquid<br />
condensate is scheduled to start<br />
production in 2017. 5<br />
99<br />
CASPIAN REPORT, sprıng <strong>2014</strong><br />
5.<br />
There may well be delays, though, as the expected entrance of Australia’s Woodside Energy into<br />
the Leviathan consortium – a 25% acquisition worth $2.71 billion – has not come to fruition by the<br />
end of March, as previously agreed. Woodside, which is to become the project’s LNG operator,<br />
has requested that the Finance Ministry recognizes return on capital of between 17 and 19% for<br />
floating LNG production, yet not such clause has been included in the taxation principles’ outline<br />
(Jerusalem Post, “Woodside Entrance into Leviathan Gas Field Consortium Still Uncertain,” 27<br />
March <strong>2014</strong>).
Radu Dudau<br />
100<br />
In October 2013, the Israeli High<br />
Court of Justice decided to uphold a<br />
previous Government’s decision to<br />
cap exports at 40% of the total offshore<br />
reserves. Under current estimates,<br />
volumes available for export<br />
amount to 450 bcm. The more likely<br />
export schemes are the following: a<br />
150 km pipeline from Leviathan to<br />
the Israeli coast and a liquefaction<br />
plant onshore; a 200 km pipeline to<br />
Cyprus and a liquefaction plant at<br />
Vasilikos; floating LNG facilities at<br />
the largest offshore fields; a 400 km<br />
pipeline from Leviathan-Tamar to<br />
Turkey; a 1,200-1,500 km pipeline<br />
to Greece via Cyprus and Crete. 6<br />
However, the region is riven by multiple<br />
political and military conflicts:<br />
Israel and Lebanon are disputing<br />
the delimitation of part of their maritime<br />
frontier; Cyprus and Turkey<br />
are involved in a larger political conflict<br />
surrounding Northern Cyprus<br />
and demands by Ankara over hydrocarbon<br />
reserves rights in the Levantine<br />
Basin on behalf of Turkish<br />
Cypriots; Israel and Turkey are still<br />
on tense, though slowly improving,<br />
political terms following the Mavi<br />
Marmara incident in 2010, while<br />
the Syrian civil war looms large as<br />
the present source of instability in<br />
the Near and Middle East.<br />
In spite of the lingering mistrust<br />
between Ankara and Israel, a pipeline<br />
connection from the Levantine<br />
Basin to Turkey seems to make<br />
most commercial sense, given Turkey’s<br />
enormous gas demand and<br />
its aspirations to become the Black<br />
Sea region’s transit hub. Turkey is<br />
also highly dependent on Russian<br />
gas imports (67%), so it is keen to<br />
establish significant new diversification<br />
routes. Besides, the heightened<br />
security risk of the region in the aftermath<br />
of the Russian annexation<br />
of Crimea makes it important for the<br />
Southern Gas Corridor to reduce its<br />
geographical dependence on the vulnerable<br />
Georgian link.<br />
The terms of the lease for the Leviathan<br />
field released by the Israeli<br />
national infrastructures, Energy and<br />
Water Ministry at the end of March<br />
<strong>2014</strong>, demand that a gas pipeline be<br />
first constructed from the field to the<br />
coast, and that at least 9.2 bcm/year<br />
be supplied to the domestic market. 7<br />
The consortium will thus be left with<br />
only 7 bcm/year to export. Such conditions<br />
translate into constraints<br />
upon when the Levant gas’s exports<br />
will begin (with a probable delay of<br />
a couple of years), and how it will be<br />
marketed (under the likely assumption<br />
that a long-term contract with<br />
an anchor customer will have to be<br />
found).<br />
Regional regasification<br />
terminals<br />
Among the easily reachable European<br />
destinations for Levantine LNG,<br />
there are two entry- points that are<br />
particularly relevant for Romania:<br />
the Revithoussa regasification ter-<br />
6.<br />
Bob Tippee (<strong>2014</strong>), “E. Mediterranean Gas Work Faces Geopolitical Hurdles,” in Oil & Gas Journal, 7<br />
April <strong>2014</strong>.<br />
7.<br />
Jerusalem Post, idem.
minal in Greece and the one to be<br />
built at Omisalj (Croatia) until 2017.<br />
Theoretically, the Greek option<br />
could be implemented more quickly,<br />
so that by 2019-2020 Romania<br />
could import Levantine gas via<br />
Greece and Bulgaria.<br />
As for the Croatian option, delays<br />
may well occur in the terminal’s<br />
construction. Besides, the whole<br />
concept of transporting gas from<br />
Croatia to Eastern Europe via Hungary<br />
depends on the resolution of<br />
the current commercial dispute –<br />
with obvious political undertones –<br />
between Croatian company INA and<br />
Hungarian group MOL. MOL owns<br />
49.1% of INA and wishes to gain full<br />
operational control. The Croatian<br />
government, with a 44% stake in<br />
INA, staunchly refuses. The dispute<br />
is under arbitration at the International<br />
Center for Settlement of<br />
Investment Disputes (Washington,<br />
D.C.). In any event, Hungary’s interests<br />
can decisively influence the timing<br />
of the opening of a new energy<br />
corridor between the <strong>Caspian</strong> and<br />
the Adriatic Seas.<br />
Another LNG regasification terminal<br />
relevant to Eastern Europe is<br />
under construction at Swinoujscie<br />
(Poland). As of February <strong>2014</strong>, the<br />
terminal was about 75% complete,<br />
according to a statement by the<br />
Chancellery of Poland’s PM. 8<br />
With an initial planned capacity of<br />
5 bcm/year, the terminal is meant<br />
to reduce Poland’s dependency on<br />
Russian gas. Poland has an annual<br />
consumption of some 16.5 bcm, of<br />
which 70% is imported from Russia.<br />
After 2022, when a two-fold increase<br />
in capacity is planned, Swinoujscie<br />
may contribute to the supply<br />
of the North-South gas corridor connecting<br />
the Polish, Baltic, Slovak and<br />
Hungarian gas grids. This means<br />
that, within the next decade, the<br />
Black Sea, the Baltic and the Adriatic<br />
basins may be connected through<br />
energy corridors.<br />
South Stream<br />
Designed in 20<strong>07</strong> as a reaction to<br />
the Nabucco project, South Stream<br />
is planned to transport Russian gas<br />
to Austria and Italy via the Black<br />
Sea, through a high-capacity pipeline<br />
crossing South Eastern Europe.<br />
After the “gas wars” between Russia<br />
and Ukraine in 2006 and 2009,<br />
South Stream also became a tool of<br />
political and diplomatic pressure<br />
against Kiev, threatening the usefulness<br />
of Ukraine’s enormous transportation<br />
and gas storage systems.<br />
Following the completion of the<br />
North Stream pipeline via the Baltic<br />
Sea, South Stream has been ascribed<br />
a similar role as the Ukrainian bypass<br />
via the Black Sea. This latter<br />
function has never seemed more urgent<br />
to Moscow, in the heated conflict<br />
that has followed the Crimean<br />
annexation.<br />
South Stream has never made much<br />
economic sense, given its enormous<br />
projected costs. Its defining nature<br />
has always been political, and<br />
presently politics trumps virtually<br />
anything else in Russia’s foreign re-<br />
101<br />
CASPIAN REPORT, sprıng <strong>2014</strong><br />
8.<br />
LNG World News (<strong>2014</strong>), “Poland: Swinoujscie LNG Terminal 75 Pct Complete,” 14 Feb. <strong>2014</strong>.
Radu Dudau<br />
102<br />
In spite of the lingering mistrust between<br />
Ankara and Israel, a pipeline connection<br />
from the Levantine Basin to Turkey seems<br />
to make most commercial sense.<br />
lations. Its construction, either completely<br />
or in part – that is, at least<br />
one of the four parallel 15.75 bcm/<br />
year pipelines – hinges first of all on<br />
Moscow-Kiev political relations.<br />
The two countries could, at least in<br />
theory, find a compromise based on<br />
self-interest and allow natural gas<br />
flows to Europe to continue. Yet no<br />
stable regime of the Ukrainian gas<br />
transit and storage can be guaranteed<br />
absent affordable and sustainable<br />
gas prices for Ukraine, and the<br />
latter is highly unlikely as long as<br />
the political standoff remains in play.<br />
The situation can only reinforce Moscow’s<br />
resolve to build the pipeline.<br />
Moscow has for years used the South<br />
Stream concept as leverage in its<br />
frequent gas pricing disputes with<br />
Kiev. And Gazprom has surely found<br />
partners – governmental and corporate<br />
alike – in the EU and its southeastern<br />
vicinity willing to join the<br />
project.<br />
Nonetheless, in recent months,<br />
Brussels’s attitude toward South<br />
Stream has evolved from cold to<br />
glacial. In December 2013 the<br />
EC required that the six bilateral<br />
agreements 9 concluded between<br />
Russia and EU member states regarding<br />
the pipeline’s construction<br />
be renegotiated and aligned<br />
to the demands of Third Energy<br />
Package – price liberalisation and<br />
transparency of tariffs, ownership<br />
unbundling (i.e., companies cannot<br />
simultaneously hold production<br />
capacities and transmission lines),<br />
and non- discriminatory third party<br />
access to transport infrastructure.<br />
More recently, as an element of<br />
political retaliation against Russia’s<br />
conduct in Ukraine, the EC announced<br />
that construction of South<br />
Stream was not a priority for the EU<br />
and that political level negotiations<br />
to that effect have been frozen. 10 At<br />
the same time, some EU countries<br />
(most vocally, Bulgaria) and corporations<br />
(especially South Stream<br />
stakeholders) have defended the<br />
project’s importance to the EU’s<br />
supply security.<br />
For Romania, South Stream could<br />
become yet another external source<br />
of natural gas. The project’s first<br />
line could be finished as soon as<br />
2015, so that new natural gas volumes<br />
could be imported in a couple<br />
of years through the Bulgaria-Romania<br />
interconnector.<br />
If several years ago, South Stream<br />
risked increasing Central and South<br />
Eastern European energy dependence<br />
on Russia, the changes outlined<br />
above demonstrate how it<br />
could offer a new and significant<br />
supply source in a competitive<br />
market environment –provided the<br />
9.<br />
The six intergovernmental agreements were concluded between the governments of Russia and,<br />
respectively, Bulgaria, Hungary, Greece, Slovenia, Croatia, and Austria. Although not an EU member<br />
state, Serbia is also involved, as a member of the Energy Community.<br />
10.<br />
novinite.com (<strong>2014</strong>), “EU Does Not Consider South Stream Priority – Official,” 19 April.
Russian<br />
President<br />
Vladimir Putin<br />
and Gazprom<br />
CEO Alexei<br />
Miller.<br />
103<br />
situation in Ukraine does not escalate<br />
and no “third round” of Western<br />
economic sanctions is applied.<br />
However, it remains of paramount<br />
importance that the EU energy market<br />
and competition legislation be<br />
scrupulously monitored and that<br />
the energy market liberalisation<br />
process be completed as planned,<br />
for only this can ensure that Russian<br />
natural gas will be perceived as<br />
a commercially valuable commodity,<br />
rather than as an instrument of political<br />
coercion.<br />
CASPIAN REPORT, sprıng <strong>2014</strong>
caspian
ESSAYS
Why World Oil Prices<br />
Should Be High and<br />
Stable<br />
Luay Al-Khatteeb<br />
EXECUTIVE DIRECTOR, IRAQ ENERGY INSTITUTE<br />
Luay Al-Khatteeb<br />
106
After a decade of volatile prices, the past<br />
three years saw an unusual period of<br />
stability in the oil market, with a barrel of<br />
crude oil averaging $110 each year.<br />
After a decade of volatile prices, the<br />
past three years saw an unusual<br />
period of stability in the oil market,<br />
with a barrel of crude oil averaging<br />
$110 each year. However, forecasts<br />
for <strong>2014</strong> predict a decline to an average<br />
of $105, on the basis of expanding<br />
supply and a weaker-thanexpected<br />
demand. A combination of<br />
geopolitical events in Syria, Libya<br />
and Nigeria have prevented oversupply<br />
despite the expanding entry of US<br />
shale oil into the market. The price<br />
has remained high thus far, but how<br />
long can prices stay above $100<br />
This coming price drop arrives at a<br />
time when the world’s largest consumer<br />
is nearing its long-held goal of<br />
energy self-sufficiency. The United<br />
States embarked on this quest in the<br />
aftermath of the 1973 oil crisis, and<br />
in recent years has seen the country<br />
develop a comprehensive nuclear<br />
program, develop biofuels and<br />
seek oil from ever-more-expensive<br />
sources: the tar sands of Canada, the<br />
depths of the Gulf of Mexico and even<br />
the wilds of Alaska. Further afield, it<br />
drew on oil from Brazil’s deep-water<br />
wells and West Africa’s low-sulphur<br />
oil deposits, all of which contributes<br />
to a reduced dependency on oil from<br />
the Middle East.<br />
More recently, the development of<br />
unconventional sources of oil and<br />
gas back in the United States has led<br />
to a revolution in energy flows and<br />
policies, as the country stands on<br />
the verge of becoming a gas exporter.<br />
The rapid development of shale oil<br />
and gas fields has seemed miraculous<br />
at times, but like many of the<br />
conventional sources the US relies<br />
upon the production is more expensive<br />
(costing $60-80 per barrel) and<br />
more risky, as output and depletion<br />
rates seem less predictable than conventional<br />
sources. As a result US domestic<br />
and regional supply is quite<br />
vulnerable to price fluctuations, as<br />
witnessed when work at the tar<br />
sands of Canada came to a standstill<br />
in 2008 following a price drop.<br />
Analysts have claimed that the age of<br />
“easy oil” is over, and we are entering<br />
a period of expensive extraction and<br />
capital-intensive processing. With<br />
the shale oil and gas sector currently<br />
requiring $1.5 in capital investment<br />
1<strong>07</strong><br />
CASPIAN REPORT, SPRING <strong>2014</strong>
Luay Al-Khatteeb<br />
108<br />
for $1 of revenue, several major oil<br />
companies have turned their backs<br />
on shale in favor of expanding their<br />
operations in the “easy” oil fields of<br />
the Middle East. Despite the risks involved,<br />
Iraqi oil pumped up at $20 a<br />
barrel seems like an attractive prospect,<br />
as do sources in Libya and Iran<br />
when politics and security permit.<br />
Still, will dumping more “easy” oil on<br />
the market lower prices to the point<br />
where shale oil production grinds to<br />
a halt<br />
Given the slow world economic recovery<br />
and unexpectedly low growth<br />
rates in India and China, lower oil<br />
prices would seem a certainty. With<br />
growth in demand lagging behind expanding<br />
supplies, can the U.S. petroleum<br />
industry weather the resulting<br />
price fluctuations as it becomes increasingly<br />
dependent on high prices<br />
to stay profitable<br />
Despite the low cost of Middle East<br />
oil production, only a few of the<br />
region’s smaller states could cope<br />
Given the slow world economic recovery and<br />
unexpectedly low growth rates in India and<br />
China, lower oil prices would seem a certainty.<br />
with an extended price drop below<br />
$100. Most need an oil price of $90<br />
or greater to cover current government<br />
spending, with the IMF forecasting<br />
fiscal deficits in nearly all of<br />
the region’s oil-exporters by 2015 in<br />
the event of a major price drop. Even<br />
at $100 per barrel, public spending<br />
is expected to slow down in the region.<br />
These countries have grown<br />
dependent on their high oil rents,<br />
spending huge sums on unrealistic<br />
energy subsidies to domestic consumers<br />
and failing to invest in future<br />
generations. Even Iraq, despite<br />
experiencing the region’s largest<br />
spike in domestic production, is running<br />
up an ever-mounting deficit as<br />
government spending outstrips expanded<br />
revenues. Last year’s budget<br />
reached $119 billion, a whopping<br />
six-fold increase on 2004 spending<br />
levels, while the government is<br />
expected to spend upwards of $150<br />
billion this year. While oil production<br />
in Iraq is at its highest level in<br />
decades (3.5 million barrels a day<br />
in February, with some 2.8 million<br />
destined for export ), increased revenues<br />
are entirely dependent on<br />
high oil prices. Any drop in prices<br />
means that Iraq’s deficit - perpetually<br />
hovering at around 17% would<br />
spiral out of control. Worse, operating<br />
costs for Iraq’s oil industry are<br />
rising faster than its oil income, leaving<br />
fewer and fewer funds for capital<br />
investment, desperately needed<br />
for true economic development. A<br />
sharp drop in prices threatens political<br />
stability in much of the Middle<br />
East while potentially undercutting<br />
the growing petroleum industry in<br />
the United States. Yet higher prices<br />
are also a threat to world economic<br />
stability. In 10 out of the 11 US recessions<br />
since World War II, according<br />
to a study by economist James Hamilton,<br />
economic downturns were<br />
preceded by oil price hikes. Above all,<br />
excessive price fluctuations interfere<br />
with consumer’s spending plans and<br />
producer’s business strategies alike.<br />
Currently, OPEC is attempting serve<br />
its economic interests by regulating<br />
the market with its combined 30<br />
million barrels per day in produc-
tion, with Saudi Arabia taking on the<br />
role of swing producer. The question<br />
is how long the Kingdom can sustain<br />
this role when faced with increasing<br />
demand at home and potential budget<br />
deficits. While Iraq has the potential<br />
to be a swing producer of the future,<br />
for the time being it seems the<br />
best course of action would be for<br />
both the major producers and consumers<br />
to come together to regulate<br />
supply and price.<br />
To protect themselves from fluctuating<br />
prices, members of the International<br />
Energy Agency and many<br />
other non-OPEC producers have<br />
been stockpiling energy reserves.<br />
Given the increased volatility in<br />
price witnessed between 2000 and<br />
2010 and the subsequent turmoil in<br />
Middle Eastern geopolitics, it seems<br />
sensible to call for market intervention<br />
with the goal of price stability.<br />
Working in concert, OPEC, the most<br />
powerful oil producers’ association,<br />
and the IEA, the largest energy consumers’<br />
organization, could achieve<br />
this. In June 2011, for example, the<br />
IEA released 60 million barrels of<br />
energy reserves in response to the<br />
disruption of oil supplies from Libya.<br />
However, greater cooperation is<br />
needed between the two organizations<br />
- together. Together, IEA and<br />
the OPEC have the capacity to devise<br />
a suitable intervention model in the<br />
common interest of price stability.<br />
Price stability would benefit the<br />
oil-dependent economies of OPEC<br />
and major African producers, stabilizing<br />
national incomes, supporting<br />
current government spending<br />
plans, and allowing states to plan<br />
for the future via the creation and<br />
expansion of wealth funds. International<br />
oil companies would be able<br />
to take a more secure view of their<br />
investments, supporting longerterm<br />
projects in infrastructure development<br />
and energy production. It<br />
would remove speculation from the<br />
market. A stable price of $100 per<br />
barrel would give certainty to the<br />
market and to world energy policies.<br />
Prices at this level would also have<br />
positive side-effects for the global<br />
energy regime: they would encourage<br />
the development of alternative<br />
energy sources such as wind and solar<br />
power, promote increased energy<br />
efficiency, and encourage major oil<br />
companies to invest in more efficient<br />
technologies and remoter locations.<br />
Contrary to popular wisdom, a lower<br />
oil price would only damage the economic<br />
prosperity of the U.S. and the<br />
major oil-producing nations, most<br />
of whom are developing nations<br />
acutely vulnerable to the damaging<br />
aspects of oil price volatility, which<br />
slowed their economic development<br />
to date. Critics might argue that such<br />
a high, stable price would slow down<br />
economic growth and recovery but<br />
in the long run it would do much to<br />
moderate the boom and bust aspects<br />
of the economic cycle, and reducing<br />
the risk to future, necessary capital<br />
investment. Building economic<br />
recovery on unrealistically cheap<br />
energy sets the system up for even<br />
greater failure when inevitable price<br />
shocks occur. What the global economy<br />
needs are stable, sustainable<br />
prices that can provide the basis for<br />
effective planning.<br />
109<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
emın akhundzada<br />
110<br />
Turkey as an Energy<br />
Hub: Opportunities<br />
and Challenges<br />
EMIN AKHUNDZADA<br />
ACADEMICS AND RESEARCH COORDINATOR, HASEN
Natural gas dependency in Europe is<br />
increasing rapidly. According to current<br />
estimates, the natural gas dependency of<br />
the EU and Turkey is expected to increase<br />
significantly over the coming years.<br />
Turkey is located between the Middle<br />
East and the <strong>Caspian</strong> Region<br />
on the East, which hold 75% of the<br />
world oil and natural gas resources,<br />
and the European Union on the West,<br />
which is the largest consumer of<br />
these reserves. This strategic location<br />
provides crucial advantages to<br />
Turkey. Ankara is building on this<br />
natural advantage by bringing supply<br />
and demand together through its<br />
unique geostrategic location.<br />
Natural gas dependency in Europe is<br />
increasing rapidly. According to current<br />
estimates, the natural gas dependency<br />
of the EU and Turkey is expected<br />
to increase significantly over<br />
the coming years. Given the increasing<br />
demand for natural gas together<br />
with decreasing domestic production,<br />
experts predict that Europe will<br />
need to import 80% of its natural<br />
gas by 2030, compared to 64% today.<br />
Europe urgently needs to locate alternative<br />
sources and suppliers, and<br />
it is here that Turkey can take on a<br />
key role. If Turkey can effectively utilize<br />
its position, it stands to become<br />
a major European energy hub. One<br />
component of being an energy hub<br />
is having a sufficient energy supply.<br />
Turkey is lucky in this regard. If it implements<br />
the right energy policies, it<br />
can ensure around 100 billion cubic<br />
meters of natural gas inflow within<br />
ten years, which would transform<br />
Turkey into an energy hub.<br />
So, where can Turkey obtain this volume<br />
of natural gas<br />
Azerbaijan: Azerbaijan holds<br />
around 3.2 trillion cubic meters of<br />
proven natural gas reserves, and<br />
7 trillion cubic meters of potential<br />
reserves. Azerbaijan is one of Turkey’s<br />
main political and economic<br />
partners in the region, and Baku’s investments<br />
in Turkey are expected to<br />
reach 20 billion USD by 2019. Azerbaijan<br />
has been exporting 6.6 billion<br />
cubic metres per annum (bcm/a)<br />
from Phase I of its giant Shah Deniz<br />
gas field through the Baku-Tbilisi-<br />
Erzurum pipeline since 20<strong>07</strong>.<br />
As part of the Shah Deniz Phase II<br />
Project, 16 bcm/a natural gas will be<br />
exported through TANAP, of which<br />
6 bcm/a will remain in Turkey and<br />
the rest will be sold to European<br />
111<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
emın akhundzada<br />
112<br />
markets. Given that additional natural<br />
gas will be produced from other<br />
proven fields owned by Azerbaijan,<br />
production is estimated to increase<br />
to approximately 55-60 bcm/a by<br />
2025. Thus Azerbaijan will have<br />
more natural gas to sell in the future.<br />
Israel: There is huge natural gas<br />
reserves in the offshore area of the<br />
Eastern Mediterranean - almost 1<br />
trillion cubic meters of natural gas<br />
reserves in Israel’s Leviathan and<br />
Tamar fields, as well as a likelihood<br />
of additional reserves to be discovered<br />
in the near future. Experts have<br />
pointed out that there are 10 trillion<br />
cubic meters of potential natural gas<br />
reserves in the Eastern Mediterranean.<br />
This provides a further major<br />
advantage for Turkey: the most economical<br />
export route from Israel to<br />
Europe is by pipeline through Turkey.<br />
However, along with the economic<br />
feasibility of any project, the prevailing<br />
political conditions must also be<br />
evaluated.<br />
Political tensions between Turkey<br />
and Israel have remained an issue<br />
since the 2010 Mavi Marmara crisis.<br />
Though these tensions have dissipated<br />
following apologies and Israel’s<br />
provision of compensation to the<br />
Mavi Marmara victims, there are still<br />
significant problems to be addressed.<br />
One of Turkey’s three conditions is<br />
that Israel must remove the Gaza<br />
blockade; this has not been resolved<br />
and remains a source of disagreement.<br />
It is expected that the parties<br />
will come together in the near future<br />
and solve this problem through diplomatic<br />
negotiation. Thus, it is likely<br />
that Israel can supply 10 bcm/a natural<br />
gas to Turkey in the short term.<br />
Iraq: According to the International<br />
Energy Agency (IEA), Iraq has the<br />
13 th largest natural gas reserves in<br />
the world, with 3,4 trillion cubic<br />
meters of proven reserves. However,<br />
according to energy experts,<br />
Iraq’s potential natural gas reserves<br />
are even higher, and so its reserves<br />
could easily double once it begins<br />
the exploitation process. Iraq has<br />
Experts have pointed out that there are<br />
10 trillion cubic meters of potential<br />
natural gas reserves in the Eastern<br />
Mediterranean.<br />
the potential to export around 20<br />
bcm/a to Turkey by 2020. If political<br />
stability achieved, Iraq’s natural gas<br />
production is expected to reach to 90<br />
bcm/a. But internal political instability<br />
prevents Iraq from achieving its<br />
potential vis-à-vis its natural gas<br />
production. The dispute between<br />
Baghdad and Arbil concerning revenue<br />
sharing is fairly entrenched. In<br />
this context, Turkey should undertake<br />
a constructive mediation role<br />
to help resolve the internal political<br />
issues between Baghdad and Arbil<br />
to overcome this problem as soon as<br />
possible. Otherwise, given that the<br />
internal instability in Iraq benefits<br />
no one, production will decline and<br />
the exploitation of new fields will be<br />
delayed. If political conditions improve,<br />
20bcm/a natural gas can be<br />
exported from Iraq to Turkey.<br />
Turkmenistan: Turkmenistan has<br />
the world’s fourth largest natural<br />
gas reserves, with approximately<br />
20 trillion cubic meters. Currently it<br />
exports natural gas to Russia, China,<br />
Kazakhstan and Iran. With the con-
Prime Minister<br />
of Turkey Recep<br />
Tayyip Erdogan<br />
and President of<br />
Azerbaijan Ilham<br />
Aliyev after a<br />
meeting during<br />
Aliyev’s official visit<br />
to Turkey in 2013.<br />
struction of the Trans <strong>Caspian</strong> Pipeline<br />
(TCP) it can join the Southern<br />
Gas Corridor and sell its natural<br />
gas directly to Europe and Turkey.<br />
Currently, Iran buys Turkmen gas<br />
fairly cheaply, and then sells it on<br />
at a more expensive price to Turkey,<br />
which is damaging to Turkey’s<br />
energy bill. Through the TCP, more<br />
than 30 bcm/a natural gas can be<br />
transported to Europe and Turkey,<br />
of which 16 bcm/a would remain in<br />
Turkey. But there have been no tangible<br />
steps toward the realisation of<br />
this project. Though it is associated<br />
directly with the legal status of the<br />
<strong>Caspian</strong> Sea, the pipeline can be realised<br />
if it becomes political feasible<br />
and the parties can reach agreement.<br />
gas to Turkey and Europe through<br />
Azerbaijan. To do this, Kazakhstan<br />
has numerous options. First, it can<br />
lay pipeline from Aktau port to Baku<br />
beneath the sea and join the South<br />
Caucasus Pipeline in Baku. Or, it can<br />
construct overland pipeline from Kazakhstan<br />
to the Turkmenbashi port<br />
and join the planned Trans <strong>Caspian</strong><br />
Pipeline. Third, it could export its<br />
reserves as Liquefied Natural Gas<br />
(LNG) and Compressed Natural Gas<br />
(CNG).<br />
Kazakhstan holds 3 trillion cubic meters<br />
of proven and 5-6 trillion cubic metres of<br />
potential natural gas reserves.<br />
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CASPIAN REPORT, SPRING <strong>2014</strong><br />
Kazakhstan: Kazakhstan holds 3<br />
trillion cubic meters of proven and<br />
5-6 trillion cubic metres of potential<br />
natural gas reserves. It is estimated<br />
that Kazakhstan can produce 75<br />
bcm/a natural gas in the midterm,<br />
of which 40 bcm/a can be exported.<br />
Thus, Kazakhstan can sell its natural<br />
In addition to the above mentioned<br />
resources, natural gas flow can also<br />
be imported from Uzbekistan and<br />
Iran if political conditions improve<br />
in both countries. However, in order<br />
to utilize its geostrategic advantage<br />
and become an energy hub, Turkey<br />
needs to take several steps.
emın akhundzada<br />
114<br />
First, it should speed up reforms<br />
in the energy market and invest in<br />
natural gas infrastructure. The market<br />
was controlled entirely by the<br />
state-owned company BOTAS until<br />
2001. With the enactment of Law<br />
No. 4646 in 2001, four more companies<br />
entered the market, leading<br />
to a degree of market liberalisation.<br />
However, the contract transfers have<br />
not reached the target anticipated<br />
by the Law no. 4646. In fact, 80% of<br />
the market is still being controlled<br />
by BOTAS and the rest is not fully<br />
independent. The fact that BOTAS<br />
determines the prices prevents the<br />
creation of a competitive environment<br />
and creates a monopolistic<br />
structure. At this point, it is crucial to<br />
reduce BOTAS’s share in the market<br />
through various methods, to liberalise<br />
imports and to evaluate the developments<br />
related to LNG activities<br />
in the transition to a more competitive<br />
structure. Reforms to be made<br />
in liberalisation period will not only<br />
create competition in the domestic<br />
market, but also strengthen Turkey’s<br />
position in terms of international<br />
natural gas markets.<br />
Second, one of the necessary conditions<br />
of becoming an energy hub is<br />
constructing large natural gas pipeline<br />
networks. Currently Turkey has<br />
a high pressure natural gas transmission<br />
network of around 15,000<br />
km, and the household penetration<br />
rate is approximately 50-55%. Furthermore,<br />
pipelines in Turkey are<br />
only laid down in one direction, and<br />
it is not possible to reverse the flow<br />
of natural gas when the need arises.<br />
For comparison, the state of Texas<br />
has a 50,000 km pipeline network.<br />
The US as a whole has 850.000 km.<br />
In this regard, Turkey should build<br />
interconnected pipelines in different<br />
directions and spread this pipeline<br />
network across all of its territory.<br />
At the same time, there should<br />
be a single pipeline regulatory system<br />
that should be administrated<br />
transparently.<br />
Third, Turkey’s underground natural<br />
gas storage facilities are still insufficient.<br />
Although Turkey’s growth rate<br />
of natural gas consumption is the second<br />
highest in the world after China,<br />
in terms of natural gas storage capacity<br />
against consumption volume<br />
it lags far behind other countries in<br />
Europe. Natural gas storage facilities<br />
are critically important. Buying and<br />
storing surplus natural gas enables<br />
countries to continue uninterrupted<br />
natural gas transmission when the<br />
demand is high and supply is problematic.<br />
Although Turkey ensures<br />
44% of its electricity generation by<br />
natural gas and imports 98% of its<br />
natural gas consumption, natural gas<br />
storage capacity only meets 5% of<br />
annual consumption, risking the interruption<br />
of electricity supply during<br />
the cold winter months where<br />
demand is higher. At the moment,<br />
Turkey has 2.6 bcm usable storage<br />
capacity and 1 bcm is in the process<br />
of construction. This capacity should<br />
be increased to 10 billion cubic meters<br />
in the short term and 20 billion<br />
cubic meters in the midterm. In addition,<br />
storage facilities should not be<br />
constructed only in certain regions;<br />
they should be built across multiple<br />
locations parallel to the pipelines,<br />
both large and small. This will enable<br />
natural gas flow from the places<br />
where demand is low to the places<br />
where the demand is high.
Fourth, the private sector should be<br />
encouraged to build storage facilities.<br />
Currently, storage facilities in Turkey<br />
belong to the government and therefore<br />
there is a capacity shortage.<br />
Fifth, the country should establish<br />
an Energy Stock Exchange. The Stock<br />
Exchange will liberalise the pricing<br />
structure, and pave the way for a<br />
supply and demand balance.<br />
To sum up, if Turkey makes effective<br />
use its geopolitical position, it can realise<br />
its vision of becoming an energy<br />
hub. To achieve this aim, it must:<br />
hasten its energy market reforms;<br />
pave the way for the development of<br />
a liberal market structure; enlarge<br />
pipeline network system; and invest<br />
more in natural gas infrastructure.<br />
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FatIh Ozbay<br />
116<br />
Discussions<br />
about Violation<br />
of the Montreux<br />
Convention and the<br />
Future of Turkish-<br />
Russian Relations<br />
Fatih Ozbay<br />
SENIOR FELLOW, CENTER ON FOREIGN POLICY AND SECURITY,<br />
HASEN
Today, the Black Sea basin experiences its<br />
fourth and the most important transformation<br />
with the alterations and developments<br />
which are shaped around Ukraine and<br />
Crimea.<br />
The developments occurred after<br />
the Cold War brought the Black Sea<br />
and the associated extensive basin<br />
to the center of geopolitical discussions.<br />
After the end of the Cold War<br />
and dissolution of the Soviet Union,<br />
geopolitical and geostrategic balances<br />
changed to a great extent with<br />
the emergence of new independent<br />
states in the region. As a result of the<br />
changes in the international system<br />
after the Cold War, the Black Sea was<br />
no longer a sea in the sphere of interest<br />
of only the regional countries, it<br />
turned into a sea that is important to<br />
international actors and open to international<br />
interactions. Now, it does<br />
not only appeal to a single power, but<br />
also to Turkey, Russia, NATO, EU, and<br />
USA.<br />
The Black Sea basin constitutes the<br />
energy and transit corridor which<br />
links the Euro-Atlantic system to<br />
Eurasia, <strong>Caspian</strong> energy resources,<br />
and Central Asia states. The proximity<br />
of the Black Sea basin to areas<br />
with rich energy resources, and its<br />
strategic location for the transportation<br />
of these resources to the West<br />
increase the importance of region.<br />
All of these factors increased the<br />
geopolitical importance of the Black<br />
Sea basin and turned it into a key geography<br />
which international actors<br />
consider to restructure.<br />
But, all these developments made<br />
the Black Sea basin a sensitive and<br />
fragile region. After the Cold War, the<br />
basin entered into a fast transformation<br />
process which occurred one<br />
after another. It experienced its first<br />
transformation after the dissolution<br />
of the Soviet Union in 1991, and the<br />
second transformation happened<br />
due to the Euro-Atlantic world’s efforts<br />
to penetrate into the region<br />
after September 11, 2001. The third<br />
transformation started with the Russian-Georgian<br />
War in August 2008.<br />
Today, the Black Sea basin experiences<br />
its fourth and the most important<br />
transformation with the alterations<br />
and developments which are<br />
shaped around Ukraine and Crimea.<br />
With these events, the region became<br />
the center of the most serious<br />
crisis between the West and Russia<br />
after the Cold War period.<br />
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FatIh Ozbay<br />
118<br />
The Black Sea is a significant factor<br />
for the development of relations between<br />
Turkey and Russia after the<br />
Cold War. Turkey and Russia are no<br />
doubt the most important powers of<br />
the Black Sea region. Success of regional<br />
cooperation policies depends<br />
on two major countries in the Black<br />
Sea region; Turkey and Russia. Both<br />
of these countries regard the Black<br />
Sea as a region of vital importance,<br />
and the relations based on mutual<br />
respect and trust between these<br />
countries are very important. After<br />
the collapse of the Soviet Union, USA<br />
claimed that there is a security gap<br />
in the Black Sea basin, and American<br />
military should exist in this region<br />
in order to eliminate this security<br />
gap as in other regions of the world.<br />
When USA brought forward this<br />
discussion, both Turkey and Russia<br />
felt a need to take some steps in the<br />
Black Sea. One of the most strongly<br />
agreed item in the relations between<br />
Turkey and Russia is the need to protect<br />
the Black Sea from turning into a<br />
new area of struggle for global powers.<br />
Firstly, this approach brought<br />
Russia and Turkey together in the<br />
context of defending the Black Sea’s<br />
current status and the Montreux<br />
Convention. Both countries frequently<br />
express that the Montreux<br />
Convention should not be changed,<br />
the issues related to the Black Sea<br />
should be resolved by coastal states<br />
in cooperation, and foreign powers<br />
should not be involved.<br />
With the changing international<br />
system after the Cold War, we see<br />
that two more major powers want<br />
to enter the Black Sea basin. One of<br />
them is the European Union which is<br />
now a coastal state to the Black Sea<br />
with the enlargement, and the other<br />
one is the USA which wants to be a<br />
permanent power in Black Sea in<br />
the perspective of its global policies.<br />
Black Sea is one of the limited open<br />
seas that USA cannot sail freely because<br />
of the 1936 Montreux Convention.<br />
The Convention limited number<br />
One of the most strongly agreed item in the<br />
relations between Turkey and Russia is the need<br />
to protect the Black Sea from turning into a new<br />
area of struggle for global powers.<br />
of non-regional countries’ warships<br />
allowed in the Black Sea with a total<br />
of 45.000 tonnages and for 21 days.<br />
But USA still wants to exist in the<br />
Black Sea despite it regards the Black<br />
Sea as international water and complies<br />
with the Montreux Convention.<br />
USA’s geopolitical plans toward the<br />
Black Sea disturb Russia to a great<br />
extent. Against the restrictions of<br />
Montreux, USA has developed a<br />
strategy to constantly keep a striking<br />
naval force in the Black Sea to<br />
balance Russia’s Black Sea fleet by<br />
sticking to the 21-day rule. USA’s desire<br />
to be a permanent power in the<br />
Black Sea by asserting that there is a<br />
power gap in terms of security and<br />
military power is needed to fill this<br />
gap within the frame of NATO, have<br />
been a concern for Russia from the<br />
very beginning, which already believes<br />
that it is being surrounded by<br />
the USA. The possibilities such as<br />
supporting anti-Russian movements<br />
in Ukraine, Georgia, and Moldavia<br />
together with US ships, encouraging<br />
the opposition, further integrating<br />
the countries in the region which is<br />
traditionally regarded as its sphere
Georgians<br />
protesting a<br />
Russian army<br />
encampment in<br />
western Georgia.<br />
of influence and ‘backyard’, deployment<br />
of the US military at the heart<br />
of the region where energy and<br />
transportation lines pass through<br />
and new lines are being planned,<br />
and the presence of NATO warships<br />
in the Black Sea are among the greatest<br />
concerns for Moscow.<br />
Russia which regards these developments<br />
as a threat against its interests,<br />
have preferred to use the Black Sea<br />
and Montreux factors as important<br />
components in its relations with Turkey<br />
after the end of the Cold War due<br />
to some objective reasons. Following<br />
the collapse of the USSR, Russia’s military<br />
power decreased in the Black<br />
Sea because of financial difficulties,<br />
sharing of the Russian fleet, and<br />
disabling a great amount of Russian<br />
ships in the Black Sea fleet. However,<br />
Turkey became the most powerful<br />
naval force in the Black Sea region.<br />
As a result, Turkish fleet became<br />
the most powerful fleet in the Black<br />
Sea region. In a sense, Turkey filled<br />
the naval power gap emerged in the<br />
Black Sea after these developments.<br />
Russia, unavoidably, had to admit<br />
this in the first years. On the other<br />
hand, it was a wise choice for Russia<br />
to cooperate with Turkey because<br />
it was not sure what would happen<br />
if the Montreux Convention is abolished<br />
or amended and which new<br />
conditions would it bring. Turkey’s<br />
firm attitude during the Russian-<br />
Georgian War in August 2008 about<br />
the US warships’ strict compliance to<br />
the Montreux Convention prevented<br />
any change in the balances related to<br />
the Black Sea and the Straits which<br />
Russia was highly sensitive about.<br />
Turkey’s policies and attentiveness<br />
about the Montreux Convention in<br />
the 2008 War considerably pleased<br />
Moscow.<br />
Russia has been frequently making<br />
official declarations that Montreux<br />
Convention is being violated. In the<br />
declarations, Turkey was accused<br />
of not implementing the Montreux<br />
Convention properly. At this point,<br />
some questions emerge: How did<br />
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FatIh Ozbay<br />
120<br />
these two countries become the parties<br />
of an intense discussion about<br />
Montreux while they were definitely<br />
on good terms in this regard until<br />
five years ago We can find the answer<br />
in the traditional attitude of<br />
Russia; it prefers to achieve its interests<br />
with bilateral or multilateral<br />
relations when it feels weak, and it<br />
prefers unilateral policies when it<br />
feels strong. Russia, which gained<br />
its self-confidence with economic<br />
and political steps taken by the Putin<br />
government in domestic and foreign<br />
policy, pushed its limited for the first<br />
time in the 2008 War and became<br />
stronger with the policies it adopted<br />
about Syria. Then, it has become<br />
even tougher and stronger both on<br />
the basis of action and discourse by<br />
annexing Crimea from Ukraine. Besides,<br />
Russia renewed and strengthened<br />
its Black Sea fleet in this period.<br />
Ukraine-centered developments in<br />
the region have brought the world<br />
to the brink of a huge crisis for the<br />
first time in the post-Cold War era.<br />
Moscow believed that its red lines<br />
were violated when the government<br />
fell with pro-EU protests began in<br />
Kiev streets after the suspension<br />
of Ukraine-EU negotiations by pro-<br />
Russian Yanukovych administration.<br />
After that, Moscow’s Ukraine<br />
policy unexpectedly changed. The<br />
existence of Russian military in the<br />
Ukraine border, then Ukrainian autonomous<br />
republic Crimea’s joining<br />
Russia via independence and referendum,<br />
and now the turmoil caused<br />
by pro-Russians living in the Eastern<br />
part of Ukraine have raised the temperature<br />
in Black Sea waters.<br />
In this process, the presence of US<br />
ships in the Black Sea has started<br />
to disturb Moscow to a great extent.<br />
Russia claimed that US warships extended<br />
their duration of stay in the<br />
Black Sea by violating the Montreux<br />
clauses two times on April 3, <strong>2014</strong>.<br />
In the last declaration made by the<br />
Russian Ministry of Foreign Affairs<br />
on April 10, it was indicated that<br />
Ukraine-centered developments in the<br />
region have brought the world to the brink<br />
of a huge crisis for the first time in the post-<br />
Cold War era.<br />
“USS Taylor” named warship of the<br />
USA stayed in the Black Sea for more<br />
than 21 days. In the declaration, it<br />
was noted that “USS Taylor” sailed<br />
into the Black Sea on February 5,<br />
but left on March 9. Thus, US warship<br />
had stayed in the Black Sea for<br />
11 days more than allowed in the<br />
Montreux Convention. USS Taylor<br />
warship entered the Black Sea for<br />
ensuring security during the Sochi<br />
Olympics, but then its propeller<br />
broke when it came into the Samsun<br />
Harbor for refueling. In other words,<br />
USS Taylor warship came to ensure<br />
the security of the Olympics, not to<br />
help Ukraine, and Russia did not object<br />
to the entry of the ship. Russia<br />
must be definitely informed about<br />
the ship’s 11-day late exit because<br />
of the accident. However, Russia<br />
claimed that they were not informed<br />
about this event. Turkish Ministry of<br />
Foreign Affairs made a declaration<br />
on April 12 as an answer to Russia,<br />
stated that the Russian Federation<br />
and other parties of the Montreux<br />
Convention were all informed, and<br />
determinately refused the claims<br />
about violation of Montreux.
Black Sea.<br />
The situation got really strange.<br />
Firstly, Russia gave a reaction after<br />
one month on April 10 for US warship’s<br />
11-day late checkout on March<br />
9. On the top of it, if the 11-day late<br />
exit is also taken into consideration,<br />
Russia felt a need to react with a<br />
considerable delay, 41 days later in<br />
total! As it will be logical to say that<br />
Russia made a miscalculation or was<br />
late to give a reaction, the only logical<br />
explanation could be: Moscow<br />
approached the announced accident<br />
with suspicion. All of the USA ships<br />
went in and out of the Black Sea on<br />
time except for USS Taylor warship<br />
which had an accident and had to<br />
be pulled by the a towboat as the efforts<br />
to repair the ship failed. Russia,<br />
which wants to put Turkey in a difficult<br />
position by bringing the violation<br />
claim to the agenda for no reason,<br />
is actually turning the Montreux<br />
Convention into a discussion topic.<br />
This is a development which neither<br />
Turkey nor Russia wants. So, why is<br />
Russia doing this We can briefly and<br />
clearly say that Russia is disturbed<br />
by the entry of the US ships to the<br />
Black Sea although it is in compliance<br />
with the Montreux clauses, and<br />
it uses the stay of USS Taylor warship<br />
as an excuse. Russia is sending<br />
implicit warnings primarily to Turkey<br />
and then to the USA with these<br />
statements.<br />
The changing balances in the Black<br />
Sea are the basis of Russia’s intention<br />
to bring Montreux to the agenda.<br />
The 2008 War proved that it was a<br />
right decision to limit the entrance<br />
of non-regional actors to the Black<br />
Sea. Turkey’s Montreux policy was<br />
appreciated particularly by Russia.<br />
Russia’s annexation of Crimea and<br />
its Ukraine policy have changed not<br />
only the balances but also the discussions<br />
in the Black Sea. Russia, in<br />
a sense, announced its dominance<br />
in the Black Sea with the Crimea<br />
move. However, we can say that in<br />
the view of Russia which is now face<br />
to face with economic and political<br />
sanctions due to this move, the possibility<br />
of changing the policies about<br />
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FatIh Ozbay<br />
122<br />
Montreux is quite stressful in an environment<br />
where close combats are<br />
seen probable between the parties.<br />
If the parties decide to change their<br />
position about Montreux, the Black<br />
Sea will undoubtedly turn into an<br />
area of struggle for global powers.<br />
Such a situation could turn upsidedown<br />
Moscow’s post-Cold War plans<br />
for the Black Sea. In consideration of<br />
this case, Russia gives warning to the<br />
USA and Turkey as an early precaution<br />
by using USS Taylor warship as<br />
an excuse. Moreover, the reconnaissance<br />
flights of Russia’s military aircrafts<br />
parallel to Turkish coasts over<br />
the Black Sea since last October are<br />
also quite remarkable in this regard.<br />
If any tension in the Black Sea turns<br />
into a close combat, it will potentially<br />
have a negative and direct effect on<br />
the relations between Turkey and<br />
Russia. During the 2008 War, Turkey<br />
managed to get out of the tension between<br />
Russia and the West with the<br />
least damage. This current crisis is<br />
much more serious and significant<br />
between the parties. If the crisis<br />
which has emerged between Russia<br />
and the West as a result of the developments<br />
about Ukraine and Crimea,<br />
start to pressure the Montreux Convention<br />
which is in effect since 1936<br />
without any amendment, Turkey<br />
may have to make a tough choice. At<br />
this point, Russia takes the biggest<br />
part. If Russia’s policy goes beyond<br />
Turkey’s red lines, it may force Ankara<br />
to take the Black Sea in a different<br />
format between two countries<br />
but this time at a global level rather<br />
than regional. If Russia chooses to<br />
follow a policy deepening the crisis<br />
in Ukraine, and if this policy leads<br />
to war between the West and Russia,<br />
which is the worst-case scenario,<br />
Turkey will have no alternatives. In<br />
this case, some serious difficulties<br />
may come up in the bilateral relations<br />
between Russia and NATO<br />
member Turkey. If a mutual decision<br />
is made, acting in collaboration<br />
with NATO will become a vital issue<br />
If the crisis which has emerged between<br />
Russia and the West as a result of the<br />
developments about Ukraine and Crimea,<br />
start to pressure the Montreux Convention<br />
which is in effect since 1936 without any<br />
amendment, Turkey may have to make a tough<br />
choice.<br />
for Turkey. As a result, two countries’<br />
policy to keep foreign powers out of<br />
the Black Sea and resolve problems<br />
among coastal states will inevitably<br />
fail, and even they may get up<br />
against each other. The first negative<br />
consequence for Turkey will be<br />
the irrecoverable damage to the relations<br />
that were developed in the<br />
post-Cold War era. It will also allow<br />
non-coastal states to take initiatives<br />
on the grounds of ensuring security,<br />
which will almost inevitable lead to a<br />
new alignment in the Black Sea.<br />
The Black Sea has been an area of<br />
competition between Turkey and<br />
Russia and the source of bloody<br />
wars for hundreds of years. Maybe<br />
for the first time in history after the<br />
Cold War, two countries have found<br />
a chance to establish close relations<br />
in the Black Sea. Any step taken by<br />
Russia, Turkey or any other state,<br />
which may damage these relations,<br />
will launch the worst-case scenario<br />
for both countries. Thus, attitudes<br />
or policies which may open the
Pro-Russian<br />
Ukrainian activists<br />
holding anti-NATO<br />
placards.<br />
123<br />
Montreux Convention to discussion<br />
are for the interest of neither Russia<br />
nor Turkey. Turkey should continue<br />
to pursue its policy for sticking<br />
to the Convention and avoid any<br />
amendment under all circumstances.<br />
And Russia should not pave the way<br />
for opening Montreux to discussion<br />
with accusatory discourses which<br />
arise from the tension arose due to<br />
its aggressive policies.<br />
CASPIAN REPORT, SPRING <strong>2014</strong>
MUbarIz Hasanov<br />
124<br />
Some Remarks on<br />
Economic Benefits of<br />
TANAP for Turkey<br />
MUbariz Hasanov<br />
SENIOR FELLOW, CENTER ON ENERGY AND ECONOMY, HASEN
Projected investment cost of TANAP is<br />
around USD 12 billion. Turkish companies<br />
are expected to be granted works worth<br />
some USD 5-6 billion for supply of pipes and<br />
construction works.<br />
May 30, <strong>2014</strong> was remarked as an<br />
important date in the Turkish energy<br />
sector. Turkish national petroleum<br />
company TPAO took over Total’s<br />
10% stake in the Shah Deniz Consortium<br />
and thus increased total share<br />
to 19%. On the same day, Turkey’s<br />
national pipeline operator BOTAŞ increased<br />
her share in TANAP to 30%.<br />
These developments will certainly<br />
contribute to Turkey’s long-standing<br />
quest to become a regional energy<br />
hub and bring significant economic<br />
gains. In this note we focus on importance<br />
of the TANAP for Turkish energy<br />
market and economic benefits<br />
of the project for Turkey.<br />
Income and Employment<br />
Effects of TANAP<br />
Projected investment cost of TANAP<br />
is around USD 12 billion. Naturally,<br />
domestic companies will be involved<br />
in implementation of works under<br />
this project. Turkish companies are<br />
expected to be granted works worth<br />
some USD 5-6 billion for supply of<br />
pipes and construction works. In addition,<br />
according to some estimates<br />
about 15.000 direct and tens of thousands<br />
of indirect jobs will be created<br />
during the construction phase. Furthermore,<br />
the project will create permanent<br />
direct jobs throughout life of<br />
the pipeline.<br />
Turkey will also have permanent<br />
steam of income from operation of<br />
the pipeline as state-owned BOTAŞ<br />
holds 30% share in TANAP. Assuming<br />
that transmission capacity of<br />
TANAP reaches to 31 bcm/year by<br />
2026, total net income of BOTAŞ<br />
from operation of the pipeline may<br />
reach to USD 17 billion in real terms<br />
till the period 2045.<br />
These are direct and observable<br />
benefits of the project for the Turkish<br />
economy. Such a huge infrastructure<br />
investment will definitely generate<br />
enormous economic activity<br />
throughout construction phase and<br />
will contribute to permanent economic<br />
growth of Turkey in the long<br />
run through the multiplier effect. According<br />
to our preliminary estimates,<br />
the TANAP project may increase<br />
gross domestic product (GDP) of<br />
Turkey by approximately USD 37 billion<br />
by 2029. This implies that GDP of<br />
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Turkey will be USD 37 billion higher<br />
each year starting from 2029 when<br />
compared to levels which would be<br />
attained without implementation of<br />
the project. Naturally, this increase<br />
in GDP will also contribute to employment<br />
as well. Our calculations<br />
suggest that the TANAP project may<br />
create up to additional 279.914 permanent<br />
jobs in Turkey in the long<br />
run.<br />
Effects of TANAP on Turkish<br />
Natural Gas Market<br />
Opening of TANAP will increase supplies of<br />
natural gas to Turkey and hence increase<br />
competition in the market.<br />
MUbarIz Hasanov<br />
126<br />
Turkey will purchase additional 6<br />
bcm of natural gas per year from<br />
Azerbaijan via TANAP. Currently, Turkey<br />
imports natural gas from Russia,<br />
Iran and Azerbaijan via pipes and in<br />
the form of LNG from various countries.<br />
Although import prices are<br />
not disclosed officially, according to<br />
some estimates import prices are<br />
around USD 480 per tcm for Iranian<br />
gas, USD 400/tcm for Russian gas<br />
and USD 340/tcm for gas from Azerbaijan.<br />
Therefore, by importing more<br />
natural gas from Azerbaijan, Turkey<br />
will be able to reduce total gas import<br />
bill.<br />
However, the difference between<br />
import prices does not provide the<br />
full picture of total economic benefits<br />
of Turkey from importing more<br />
natural gas from Azerbaijan. Opening<br />
of TANAP will increase supplies<br />
of natural gas to Turkey and hence<br />
increase competition in the market.<br />
Once TANAP becomes operational,<br />
Turkey will increase her bargaining<br />
power against other suppliers as the<br />
Turkish natural gas market will become<br />
more competitive. Therefore,<br />
other suppliers will be forced to cut<br />
their prices when TANAP opens. Our<br />
calculations suggest that even if all<br />
suppliers charged the same price for<br />
natural gas, extra supply of 6 bcm<br />
per year via TANAP would reduce<br />
total import prices by around USD<br />
38-57 per 1 thousand cubic meter.<br />
This implies around USD 1.6-3.3 billion<br />
reduction in total expenses on<br />
imports of natural gas per year starting<br />
from 2018. Reduction in import<br />
bill will depend on actual import volumes.<br />
Gains of Turkey will be much<br />
higher in the following years as it is<br />
expected that import of natural gas<br />
will increase continually. Total gains<br />
of Turkey during the period till 2045<br />
may reach to USD 94.8 billion in real<br />
terms.<br />
In addition, unlike other gas-import<br />
agreements, Turkey will have the<br />
right to re-export natural gas imported<br />
via TANAP. Therefore, Turkey<br />
will have the opportunity to earn<br />
extra income by re-exporting this<br />
volume of natural gas to European<br />
countries.<br />
Importance of TANAP for<br />
Turkey’s Ambition to Become<br />
an Energy Hub<br />
Turkey has a long-standing ambition<br />
to become a regional energy<br />
hub. TANAP represents opening of<br />
the Southern Gas Corridor (SGC)<br />
that will deliver natural gas from<br />
the <strong>Caspian</strong> Basin and Middle East
Signing ceremony<br />
of TANAP project.<br />
to European Countries. Although<br />
only Azerbaijan has committed to<br />
supply natural gas through TANAP<br />
at the present time, this route provides<br />
the most cost-efficient way of<br />
delivering natural gas from this region<br />
to Europe. Therefore, it can reasonable<br />
be expected that other gasrich<br />
countries in the region, namely<br />
Turkmenistan, Iran, Iraq and Israel<br />
will consider to use this corridor for<br />
transmitting natural gas to Europe.<br />
As the European Commissioner<br />
for Energy Gunther Oettinger once<br />
stated, total transmission capacity<br />
of the SGC may reach to 100 bcm per<br />
year in the future. Thus, TANAP may<br />
transform Turkey to main transit<br />
country.<br />
As we mentioned above, Turkish<br />
state-owned oil company TPAO increased<br />
its stake in the Shah Deniz<br />
Consortium to 19%. In addition,<br />
considering the fact that Turkey<br />
will have the right to re-export the<br />
volume of natural gas supplied under<br />
TANAP, total volume of natural<br />
gas that Turkey can export will rich<br />
to 10.75 bcm by 2026. Therefore,<br />
TANAP gives Turkey not only the opportunity<br />
to become a major transit<br />
country, but a major player in the big<br />
energy game in the European market.<br />
Conclusions<br />
In this note we briefly discussed<br />
importance and economic benefits<br />
of TANAP for Turkey. TANAP opens<br />
the SGC which will be a major transit<br />
corridor for delivering natural gas<br />
from the <strong>Caspian</strong> Basin and Middle<br />
East to Europe. Thus Turkey will<br />
have the opportunity to become a<br />
major transit country as well as a significant<br />
player in the European energy<br />
markets. Our analysis suggests<br />
that TANAP will not only increase<br />
strategic importance of Turkey but<br />
will also bring enormous economic<br />
benefits for Turkey. Therefore Turkey<br />
must give full support, i.e., political,<br />
economic and public support to<br />
implementation of the project.<br />
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