The Caspian’s New Energy Role

The European Union, and Europe more broadly, is currently facing another energy crisis—its third in row—in the wake of Russia’s invasion of Ukraine in February 2022. The characteristics of the current crisis are, nevertheless, qualitatively different compared with the two previous one (in 2006 and 2009), due to inherently different reasons animating them.

First, the route through the Ukrainian gas network has been partially replaced by the TurkStream pipeline. The first section of TurkStream, to Türkiye, was inaugurated in 2020 and the second, to Southeast Europe, with Bulgaria as its entry point, in 2021. TurkStream has been extended to the Republic of North Macedonia, and further extensions to Serbia and Bosnia and Herzegovina are also foreseen. As a result, the old Trans‑Balkan Gas Pipeline through Ukraine, Romania, and Bulgaria has been replaced by TurkStream.

Second, the likelihood of a total long‑term disruption through Nord Stream 1, coupled with ongoing efforts for storage, has exacerbated the fears of a potentially severe economic crisis and the onset of a recession in the EU this winter. To replace the volumes of Russian gas in EU storage facilities, significant gas volumes will have to be procured—more than ever before—which will bear a substantial effect on gas prices in Europe.

Third, in 2006 and particularly in 2009, Gazprom cut off gas supplies through Ukraine due to pricing disputes with Naftogaz, which, in turn, prompted a discussion in Brussels on finding alternatives to Russia gas supply sources for the EU, and especially for the countries of Central and Southeast Europe. In the current juncture, Gazprom cut off entirely gas supplies through Nord Stream 1—Nord Stream 2 never become operational—evoking EU sanctions imposed due to Russia’s invasion of Ukraine.

It is evident that the qualitative differences can be explained entirely by political reasons, since Russia, in essence, is blackmailing the European Union. There also appears to be a personal reason: the vindictive attitude of Russia’s President Vladimir Putin towards the EU and its member states.

The geostrategic importance of Azerbaijan as a supply source for Europe has increased in light of current geopolitical developments in Ukraine.

EU Energy Security

In the last two decades, the EU’s excessive dependence on Russian gas was thoroughly discussed, as some countries, like Hungary, are almost utterly dependent on Gazprom for their domestic energy requirements. In Southern Europe, Portugal and Spain rely almost exclusively on LNG from North Africa, Italy depends on Russian gas for about 40 percent of its domestic consumption, whereas Greece has already diversified its energy market by increasing the share of LNG from Algeria, on the basis of long‑term contracts with Sonatrach, and from the U.S. in the spot market (in January 2009, when Bulgaria’s supply of gas through the Trans‑Balkan Gas Pipeline was cut, Athens sent natural gas to Sofia in a reverse flow along the pipeline). Italy and Greece also receive Azerbaijani gas from the Shah Deniz field in the Caspian Sea, as part of the Southern Gas Corridor (SGC). Poland, on the other hand, has diversified its energy mix by adding American LNG through the “Swinouszcie” terminal in the Baltic Sea, and Norwegian gas through the Baltic Pipeline that connects Poland and Denmark with Norway.

Through these three crises, the term ‘diversification’ was introduced into the EU’s energy vocabulary, with reference both to sources and routes, while the SGC program was proposed, with Southeast Europe placed at the epicenter of the EU’s new energy architecture. As a result, by dint of Decision No 1364/2006/EC, the EU officially established Natural Gas Route 3 (NG 3). Known as the Southern Gas Corridor within the framework of the EU’s new energy security strategy, the SGC would, for the first time, connect European markets with the Caspian Sea and the Middle East. The next step was the Third Energy Package, the new anti‑monopoly legislative framework in the EU energy sector, in accordance with which all EU member states should have access to gas from at least three different supply sources, either directly or through other member states, via pipelines or LNG terminals.

In the north, Norway has announced it will boost its natural gas output in the coming months, keeping production higher than normal through the summer and delivering bigger volumes to the EU as another means to partially replace Russian quantities. Moreover, Equinor announced it will allow the Oseberg field to increase gas exports by about 1 bcm/y, while the Heidrun field can also increase output by 0.4 bcm this year. Equinor has said that 1.4 bcm of gas is enough to satisfy gas demand from about 1.4 million homes in the EU for a year. “Troll,” the largest gas field in the North Sea, can also increase output in the event that other fields face outages, thus improving the overall robustness of supply. In 2021, Norway’s gas production amounted to 113 bcm, supplying close to one‑quarter of the EU’s gas demands via an extensive subsea pipeline network linking it to terminals in Germany, France, and Belgium. 

In addition to the existing network, the Baltic pipeline is a new supply corridor for the EU, namely for Poland, as, through Denmark, Norwegian gas from the above‑mentioned fields will be channeled to Poland and neighboring countries, thus enhancing their energy security. It is expected that the pipeline will become operational in January 2023 and that the flow capacity will amount to 1.1 mcm/d, with a forecast to increase up to 5 bcm/y. 

On 5 May 2022, Poland and the Baltic countries inaugurated a new gas interconnector intended to integrate their gas markets and thus reduce dependence on Russian gas. The GIPL‑Gas Interconnector between Poland and Lithuania is 508 kilometers in length and will eventually be able to transport, in both directions, approximately 2 bcm/y and, thanks to existing gas pipelines, also to connect Latvia, Estonia, and Finland. 

For Lithuania, in particular, the opening of the interconnector represents a second source of gas supply (aside from Russia), with the country having had an LNG terminal in Klaipeda port since 2014. The three Baltic states announced in early April 2022 that they had stopped importing Russian gas, relying at this stage on their current gas reserves, which are stored underground. As far as Poland is concerned, and given the announcement of the EU plan to reduce Russian imports by two‑thirds by the end of 2022, the commissioning of this pipeline is estimated to contribute significantly to strengthening the EU’s coveted energy independence. Thus, Poland will be able to shut down and thus disengage from all Russian flows without having to limit the quantities it supplies.

Apart from Azerbaijan, Turkmenistan has also been considered by the EU as an alternative source of gas.

In the south, the countries of Southeast Europe have different degrees of dependence on Russian gas, as stated above, due mainly to geography and sea access. The option of increasing the share of LNG in the EU’s energy mix, as well as strengthening bilateral energy cooperation with Azerbaijan, has been put on center stage, with the Caspian Sea being the first real alternative source for the countries of Southeast Europe. Bulgaria, in particular, is facing a serious problem in its energy supplies since Gazprom decided in April 2022 to completely cease its exports to Sofia in a sign of discontent with domestic political developments in Bulgaria.

SGC’s Resource Base

As far as Southeast Europe is concerned, the concept behind the establishment of the Southern Gas Corridor over the past decade has been to reduce gas dependence on Russia. Caspian oil and natural gas resources attracted international attention after the dissolution of the Soviet Union in 1991, when Western investments in the energy sectors of the newly independent littoral states became possible for the first time.

Three major field discoveries signaled an increase in the economic importance of the Caspian globally: Shah Deniz in Azerbaijan, Kashagan in Kazakhstan, and Galkynysh in Turkmenistan.

Kazakhstan’s oil exports are headed primarily towards the United States through the Caspian Pipeline Consortium (CPS) route and the Novorossisk port in the Black Sea, while Kazakh gas exports supply mainly the vast Chinese market through the Central Asian Gas Pipeline. Turkmen gas exports supply neighboring countries in Central Asia, like Uzbekistan, and also China, on the basis of a long‑term bilateral agreement. Turkmenistan could potentially supply Europe with gas in the future through the construction of the Trans Caspian Gas Pipeline (TCGP). Like the Trans Adriatic Pipeline (TAP)—the third and final leg of the Southern Gas Corridor—a part of TCGP would be a subsea pipeline. More analysis on Turkmenistan’s potential will be provided below.

Azerbaijan seems far better placed from the point of view geography and available volumes to supply Southeast Europe with gas. In addition to Shah Deniz (1.3 tcm in place), the offshore gas discoveries of the last decade are bound to increase production and exports to Europe in the next decade, given that foreign capital investment continues regardless of the fluctuations in global oil and gas prices. Fields like Umid (200 bcm and 40 million tons of condensate), Bebek (400 bcm and 80 million tons of condensate), Shafag‑Asiman (300 bcm), and Nakhchivan (300 bcm in place) in the Azerbaijani offshore sector will require substantial foreign investment, if they are going to be in a position to feed an expanded Southern Gas Corridor and its future interconnectors in Southeast and Central Europe.

The most promising discovery, however, has been the Absheron offshore gas field, with estimated reserves of 350 bcm and 45 million tons of condensate. SOCAR, the state energy company of Azerbaijan, plans to combine production from Shah Deniz and Absheron in order to reach 40 bcm/y and increase gas exports to Europe after 2022, when the new gas infrastructure in Southeast Europe will be in place and operational. Already, discussions are taking place between Brussels and Baku in order to expedite the increase of the handling capacity of TAP from 10 to 20 bcm/y as soon as possible.

Azerbaijan and the Shah Deniz field in particular have been identified by Brussels as the main resource base for the Southern Gas Corridor, and in particular for its second phase. The total length of SGC is 3,500 kilometers, which is divided into three sections: the South Caucasus Pipeline (SCP) from Baku to Erzurum in Türkiye, the Trans‑Anatolian Pipeline (TANAP) crossing Turkish territory up to the Greek border at Kipoi‑Evros, and TAP through Greece, Albania, and under the Adriatic Sea to Italy.

TAP’s purchase contracts, signed between SOCAR and the gas trading companies of Greece (DEPA), Albania (Albgaz), and Italy (Snam Rete), provide for an initial volume of 10 bcm/y, with a provision to double the volume after 2025. Everyone understands that these volumes of Azerbaijani gas represent a minor diversification away from Russian gas for Europe, but it is a start.

On 17 March 2022, the consortium announced that the initial capacity of 10 bcm/y has been attained, out of which 8.5 bcm have been delivered to Italy. According to the official statement,

TAP can double its capacity and expand in stages, up to 20 bcm within 45‑65 months, as a result of requests to be received during the binding phase of a market test and the accumulated requests resulting in an economically viable outcome. The next binding phase is currently scheduled for July 2023. However, TAP can accelerate this timeline and launch the binding phase of the market test during 2022, provided that TAP receives interest for an earlier start in the ongoing public consultation.

The geostrategic importance of Azerbaijan as a supply source for Europe has increased in light of current geopolitical developments in Ukraine, and the next generation of Azerbaijani offshore fields are considered of vital importance as a first diversification source for the second phase of the Southern Gas Corridor and the future interconnections in Southeast Europe. The EU, in light of the potential complete disruption of Russian gas supplies, proceeded to sign a new Memorandum of Understanding (MoU) with Azerbaijan in Baku on 19 July 2022, whereby SGC capacity will double to reach 20 bcm/y by 2027—earlier than scheduled. Azerbaijan’s president, Ilham Aliyev, committed Baku to provide Europe with regular energy supplies, together with joint investments in offshore wind energy and transport of electricity produced by Renewable Energy Sources (RES).

Apart from Azerbaijan, Turkmenistan has also been considered by the EU as an alternative source of gas. 

Apart from Azerbaijan, Turkmenistan has also been considered by the EU as an alternative source of gas. The EU strongly supports the TCGP project, for it would connect with an expanded Southern Gas Corridor and thus supply markets in Europe not only with Azerbaijani but also with Turkmen natural gas.

The project was first proposed in 1996 by the United States. In February 1999, the Turkmen government agreed with General Electric and Bechtel Group to conduct a feasibility study on the pipeline. In November 1999, at the OSCE Summit in Istanbul, Türkiye, Georgia, Azerbaijan, and Turkmenistan together with the United States signed a number of agreements concerning the construction of several pipeline projects, like the Baku‑Tbilisi‑Ceyhan (BTC) pipeline and also the TCGP. However, strong Russian and Iranian opposition as well as the major gas discovery of Shah Deniz in Azerbaijan have stalled the project until now. The second obstacle was related to the legal status of the Caspian Sea, as Russia claimed that there can be no subsea pipelines in the Caspian Sea, unless all five littoral states give their consent or unless there is an agreement on the overall legal status. The signature of the Aqtau Convention, however, in August 2018, eliminated this obstacle. The projected capacity of TCGP would be 30 bcm/y, at an estimated construction cost of $5 billion.

The construction of the TCGP is contingent on several conditions, such as the development of natural gas production to justify in commercial terms the construction and operation of the pipeline, the existence of sufficient demand, and interest by major companies in developing infrastructure to deliver the Turkmen gas to Europe. Moreover, the construction of the TCGP seems to run counter to the Turkmen internal energy market regulations, which provide that the natural gas produced in Turkmenistan must be processed within the country. In order to feed SGC with Turkmen gas, the most obvious option would be to inject gas from Turkmenistan’s Block 1 to TCGP and then to Sangachal Terminal in Baku for processing, before it enters the pipeline. The problem, however, is that Turkmenistan has in the past insisted that natural gas from Block 1 must be processed onshore in Turkmenbashi facilities and then enter TCGP. As a result, the conclusion of any agreement between Baku and Ashghabad requires Turkmenistan to change its domestic legal framework.

The old Soviet pipeline route from Turkmenistan through Russia to Europe is shorter than the route via the Caspian Sea, Azerbaijan, and Türkiye. Gazprom could either buy the natural gas at the Turkmen border at a premium or transit it to Europe on much more favorable terms than the Southern Gas Corridor. As a result, there is a risk that Russia could become a potential rival to the realization of the TCGP, despite the elimination of the legal objections after the signing of the Convention on the Legal Status of the Caspian Sea.

As far as oil is concerned, the current geopolitical situation exacerbated by the war in Ukraine and sanctions imposed on Russia has led Kazakhstan to find alternate routes to transport its oil to global markets.As of recently, Kazakhstan exported 80 percent of its oil through the CPC. For reasons having to do with geopolitics, Astana needs to diversify its transportation options, with Azerbaijan being the first and most obvious solution.

As CPC activities risk possible further suspensions in Russian ports, particularly in Novorossisk, in July 2022 Kazakh president Kassym‑Jomart Tokayev instructed KazMunaiGaz to work out the best options for using the Trans‑Caspian International Transport Route (TITR), also known as the Middle Corridor, to diversify supplies of Kazakh oil. Given the risk posed to Kazakhstan’s economic security, it has become necessary to review the contract with Russia and divert at least 10 million tons of oil toward China, with Azerbaijan and the port of Baku being the second alternative to ship oil from the Kazakh port of Kuryk across the Caspian to Baku and on to the BTC pipeline through the Caucasus and into Türkiye. To that end, Tokayev visited Baku on 24 August 2022 and discussed this potential with Aliyev.

Gas Interconnectors

The second phase of the SGC foresees future TAP interconnections in Greece, with Bulgaria first through the 182‑kilometer‑long Interconnector Greece‑Bulgaria (IGB), running from Komotini in Greece to Stara Zagora in Bulgaria. Construction work on the IGB began in late 2018, while its inauguration took place on 8 July 2022 in Komotini. The actual operation of the interconnector began in early October 2022.

SOCAR and Bulgargaz have already signed a gas purchase agreement for 3 bcm/y, with a potential expansion to 5 bcm/y in the years to come. The IGB connects with TAP in Komotini, while the project is being implemented by “International Company Greece Italy,” a joint venture company in which Bulgargaz and IGI Poseidon (Interconnector Greece‑Italy) each own a 50 percent share.

The IGB is the first project to be realized within the Southern Gas Corridor framework, but also on the North‑South axis, as further expansion to Romania, Serbia, and Hungary is foreseen, with Greece serving as the transit hub for increased amounts of Azerbaijani natural gas going to Southeast Europe. In this respect, several other interconnectors are mapped out for the region: Interconnector Bulgaria‑Serbia (IBS), Interconnector Bulgaria‑Romania (IBR), and, beyond that, Interconnector Romania‑Hungary (IRH), which will be able to function in reverse flow, as well.

At the EU‑Western Balkans Summit in Sofia in May 2018, Bulgaria and Serbia signed a Joint Declaration on the construction of IBS, which is supposed to begin at Dimitrovgrad and end at the Serbian city of Niš, with the aim of connecting to TAP. The Serbian section of this pipeline has already been included on the EU’s list of Projects of Common Interest (PCIs), with €49.6 million already approved. Construction work started in February 2022, with the IBS scheduled to become operational in 2023. This will bring Azerbaijani gas to Serbia for the first time. Similar Joint Declarations have also been signed for IBR and IRH, and both are also included on the EU list of PCIs. As a result, all these projects will be realized by the regional energy companies together with co‑financing from the EU and financing institutions, namely the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).

Given the ongoing crisis with Russian gas supplies through Ukraine and the gas disruption to Bulgaria, on 5 May 2022 Sofia hosted a regional ministerial meeting with representatives of the EU Commission and eight governments from Southeast Europe. They discussed energy security, diversification of energy supply sources and routes, and the Green Transition. As an important development, a regional taskforce was established, which will eventually lead to a greater level of autonomy from Russian gas. Also, an announcement was made that DEPA Commercial S.A. and Bulgargaz had agreed to proceed with joint gas purchases, in order to strengthen their bargaining power vis‑à‑vis third countries and utilize their gas infrastructure to the best interests of their markets and peoples. Particular emphasis on LNG infrastructure was attributed as another means to bypass Russian supplies, with the port of Alexandroupolis in northern Greece put in the epicenter of current and future plans for diversification through American or other LNG sources.

The second project to be realized within the Southern Gas Corridor framework is the Thessaloniki‑Gevgelija interconnector, running between Greece and North Macedonia, a country that is almost entirely dependent on Russian gas. The 120‑kilometer‑long route will run from the TAP compression station in Nea Mesimvria, on the outskirts of Thessaloniki, to Gevgelija and Stip, while there is also a projected expansion of the interconnector to the disputed territory of Kosovo. In 2018, the state gas grid companies of the two countries, DESFA and Ner, signed a memorandum of understanding in Skopje on promoting the construction of this gas interconnector.

At present, discussions are ongoing regarding the implementation of the market test and the issuing of the project’s Final Investment Decision, after which the actual construction of the pipeline can begin (either in late 2022 or early 2023). At this point, it is worth noting that no gas purchase agreement has yet been signed between North Macedonia and Azerbaijan, although the project has been included in the Southern Gas Corridor framework.

The LNG Dimension

The United States became a net natural gas exporter in 2017, with its LNG exports rising by 58 percent during the first half of 2018 (in comparison with the same period in 2017). According to preliminary data, U.S. LNG exports also increased by over 50 percent this compared with the previous year. The expected commissioning of more LNG terminals this year is bound to make the United States the world’s second largest LNG exporter, taking the place of Qatar.

The Sabine Pass LNG terminal was inaugurated in Louisiana in 2016. In 2020, Cheniere commissioned for the first time the Corpus Christi LNG plant, while the Calcassieu Pass Train 6‑10, also in Louisiana, came into operation in September 2022. Most of the LNG volumes are destined for Asian markets, primarily China, which is currently the first and largest customer of American LNG. In the short term, however, and in view of the war in Ukraine, the EU is one of the main destinations for American LNG exports, due both to its established LNG infrastructure and growing market demand, and to its goal of reducing dependence on Russian gas.

In light of the ongoing energy crisis and the EU’s more coordinated efforts to distance further from Russian gas, the EU Commission expects American LNG imports to rise significantly, and is therefore promoting the construction of LNG terminals across the EU, from the Baltic to the Aegean.

The American LNG strategy for the EU seems to be oriented along the North‑South axis in four key countries, all of them EU and NATO member states: Poland, Lithuania, Croatia, and Greece. Lithuania and Poland have built LNG terminals in the Baltic Sea in recent years, with the goal of reducing their dependence on Russia, while in the South, the Revythoussa LNG terminal in Greece is one of the biggest in the Mediterranean. At present, this terminal primarily serves Algerian LNG on the basis of the long‑term contract between DEPA and Sonatrach, but also receives spot LNG cargoes from the United States.

The ultimate aim of America’s energy strategy towards the EU is for the United States to acquire a larger share in the EU energy mix by exporting LNG to key EU member states along the North‑South axis. 

The ultimate aim of America’s energy strategy towards the EU is for the United States to acquire a larger share in the EU energy mix by exporting LNG to key EU member states along the North‑South axis. This will allow the American LNG to be re‑gasified and gain access in this form to the grids of Central and Southeast Europe, supplying countries like North Macedonia and Hungary with non‑Russian gas. For that reason, in addition to the Revythoussa terminal, a second LNG facility is currently being touted for the port of Alexandroupolis, in northern Greece. Once built, the planned Floating Storage Re‑gasification Unit (FSRU) will supply gas to the Greek, Bulgarian, Romanian, and Serbian markets, after the gasification of the LNG in Alexandroupolis.

The FSRU will be connected to TAP and three interconnectors (IGB, IBS, and IBR). It is worth noting that the Thessaloniki‑Gevgelija Interconnector may also be connected with the FSRU, through TAP, allowing North Macedonia to be supplied not only with Azerbaijani gas but also with re‑gasified American LNG. Construction work has been initiated in Alexandroupolis already, while the commercial operation of the FSRU is foreseen for late 2023. Furthermore, due to the disruption of gas supply to Bulgaria, it is expected that the FSRU will supply the Bulgarian market as well, in the framework of the EU solidarity principle.

What’s Next?

Despite all these diversification efforts, it will be difficult for the EU to phase‑out Russian gas entirely, despite disruptions of the flow on the Russian side towards Poland and Bulgaria. This assessment is driven also by the fact that companies based in the EU abided—in the end—with Putin presidential decree no. 172, whereby Moscow requested the opening of a second bank account in Gazprombank in order to proceed with payments in Russian rubles. It remains to be seen whether Putin will opt for a total phase‑out of the European market, however it should be stressed that China and India cannot entirely substitute Gazprom’s European customers—and Moscow is in urgent need of currency flows to its budget, due to the severity of the sanctions imposed by the EU and the United States.

As far as Southeast Europe is concerned, should all the above‑mentioned SGC interconnectors be realized, a new holistic gas distribution system will supply Azerbaijani gas, as well as LNG, to the whole Southeast Europe area, thus reducing Russian dominance.

As far as Southeast Europe is concerned, should all the above‑mentioned SGC interconnectors be realized, a new holistic gas distribution system will supply Azerbaijani gas, as well as LNG, to the whole Southeast Europe area, thus reducing Russian dominance. In light of the above, it is evident that the EU is seeking to create a network of gas pipelines and interconnectors across Southeast and Central Europe, with northern Greece serving as the main transit hub for Caspian natural gas and American LNG—and, potentially, for other sources in the future like those from the Eastern Mediterranean. Finally, it appears that the prospects for LNG in Southeast Europe are far better than they were a few years ago. With all the new projects under development, LNG is clearly emerging as a serious alternative to Russian gas, alongside gas from Azerbaijan and perhaps points further east feeding into the Southern Gas Corridor.