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Realpolitik in the pipeline

Vested interests sour plans for regional gas networks

by Executive Staff

Egypt and Syria need gas to meet burgeoning domestic consumption and to increase their hard currency reserves. Jordan and Lebanon need it to fuel their electricity plants.

Europe also needs more gas, and from new sources. Reliance on Russia for 40 percent of Europe’s natural gas left thousands in the cold early this year when Moscow stopped the flow of gas westwards, after a spat with Ukraine over gas prices.

Both regions are now hedging on two pipeline projects that center around the Eastern Mediterranean, what is being dubbed the “Southern Corridor,” to meet demand.

The lynch pin of this “new Silk Road” is Turkey, the conduit for gas to flow through pipelines from Central Asia and the Middle East to Europe. The $10.6 billion Nabucco pipeline is the centerpiece, drawing gas from the Caspian region — Azerbaijan, Turkmenistan and Kazakhstan — as well as Georgia and Iraq. From the point where it plugs into Turkey’s pipeline network, the Nabucco pipeline will run 3,300 kilometers to a distribution hub in Baumgarten, Austria, potentially delivering up to 31 billion cubic meters (BCM) of natural gas a year to Europe.

Tying into the Nabucco project is the Euro-Arab Mashreq gas pipeline (EAM). Once completed, the 1,200 km pipeline will transport Egyptian gas through Jordan and Syria to Turkey. Lebanon will also tap into the network, having signed an agreement with Egypt for 600 million cubic meters (MCM) per year, while Iraq will be pivotal in keeping supplies of gas flowing into the network whenever a pipeline comes online.

That, at least, is the plan. Currently, the EAM pipeline is just beyond Homs in western Syria, awaiting a new tender to complete the final leg to Turkey, while Nabucco’s future remains uncertain. As always with such grandiose plans that span borders, jurisdictions and the interests of multiple energy players, the pipelines’ futures are hinged on political relations, finances and, crucially, gas supplies.

“Neither the Mashreq pipeline or the Nabucco pipeline are in a position to be realized, and neither has received enough financial backing,” said Graham Coop, general counsel at the Energy Charter Secretariat in Brussels.

The path of the Euro-Arab Mashreq gas pipeline

Source: Euro-Arab Mashreq Gas Co-operation Centre

Pipe dreams

Plans to develop the Southern Corridor began in 2002, after talks between Austrian energy company OMV, Turkey’s BOTAS, Hungary’s MOL and Romania’s TRANSGAZ. After the initial meeting, board members spent a night at the opera listening to Verdi’s Nabucco.

While the opera provided the name for the project, the signatories must be hoping that the pipeline won’t reflect the opera’s tragic plot, which recounts the plight and subsequent expulsion of the Jews under King Nebuchadnezzar. Yet the Nabucco project has faced numerous obstacles from the onset, with costs doubling and countries using the proposed pipeline for political leverage.

Last year, Georgia’s ill-advised move into Ossetia brought on the wrath of Russia. But with Georgia to be linked into Nabucco, the conflict provoked concerns over regional security risks and further shook the already fragile financial confidence in the project. The United States also threw a wrench in the works when it pressured the European Union to focus on Central Asia as a gas supplier for Nabucco rather than Iran due to the US-Iran standoff over Tehran’s nuclear aspirations.

Then this January, the country where half the pipeline is located, Turkey, said it may withdraw from the project if the country’s EU accession remains blocked. Coming at the same time as the Kiev-Moscow spat and the EU desperate to wean itself off Russian gas, Prime Minister Recep Erdogan’s comments did not go down well in Brussels.

Such incidents did, however, spark renewed interest in the project after a year of deadlock, and by the end of January the European Investment Bank and the European Bank for Reconstruction and Development said they were prepared to bankroll the pipeline. By May, Turkey caved in, dropping its demands for a “transit tax” and 15 percent of the gas at discount prices at a summit in Prague. The final agreement between the EU, six gas companies and Turkey is expected to be signed in early July.

But while the agreement is expected to finally see pipes being laid, question marks still hang over the project. Gas rich Turkmenistan — which exports 68 BCM of gas per year — attended the Prague summit but declined to comment, seemingly to play the Russians against the Europeans. Meanwhile, Azerbaijan has stated that it does not have enough gas to be the sole provider for Nabucco, while Russia has offered to buy all Azeri gas at market prices — an offer apparently still on the table.

Iran wants to build a ‘Persian pipeline’ to connect to Nabucco, but the EU has not figured Iran into its plans. Even if Tehran did get the green light from the EU, Iran lacks the infrastructure to export gas, last year importing 6.1 BCM from Turkmenistan.

Further adding to Nabucco being a literal ‘pipe dream’ is Moscow’s attempts to dominate all supply routes to the west by pressuring Central Asian states to side with the Kremlin. Additionally, there is a joint project between Russia’s Gazprom and Italy’s Eni, inked in 2007, to develop a rival pipeline to Nabucco. Called South Stream, gas would be piped from Russia via Bulgaria to Italy and Austria.

Adding insult to injury, Gazprom in May urged the EU to embrace South Stream and warned that if Europe does not want Russian gas, Gazprom will turn to the energy hungry Asian markets instead. Bulgaria however has backed both pipelines, saying the projects are necessary to meet European demand. And while the Europeans  seem wary of Russia, some analysts think such concerns are unjustified, with imports of Russian gas having halved from the 80 percent they were in 1980s.

Syria’s estimated gas supply and demand

Source: EAMGCC

The success of the E.A.M pipeline hinges on Egypt being able to ramp up gas output to meet demand

Is there enough gas?

It is not just Europe that is keen to see Nabucco get underway. The finalization of the Nabucco pipeline would have added value for the Levant. With Nabucco in place, gas from the Euro Arab Mashreq pipeline could feed into the Nabucco network, and vice versa. “The link up would have added value for both projects,” said Coop.

The EAM is not dependent on Nabucco to start pumping into Turkey, as once the final stage is complete, the pipeline will connect to the current Turkish grid. But down the line as demand spikes and the supply gap widens, the Levant will need more gas.

“Nabucco is not a must have, at least initially,” said Richard Kupisz, team leader of the Euro-Arab Mashreq Gas Co-operation Centre (EAMGCC) in Damascus.

For Syria and Jordan, being linked to Nabucco would have added value sooner rather than later.

The importance of the extra gas flowing into Turkey, and from there south, is that Egypt may be unable to provide adequate supplies of gas to the Levant through the EAM pipeline.

“There is enough gas [for Egypt] to meet current commitments, but for the major projects, these need to be underpinned by further discoveries,” said Craig McMahon, a North Africa analyst at energy consultants Wood Mackenzie.

Nabucco could also be a lifeline for Syria if there are potential spats with Amman or Cairo, either of which could easily stop the flow of gas. After all, Jordan and Syria have had their falling outs, at one point leaving the completion of a tiny 200 meters section of the pipeline in limbo until an unrelated political issue was resolved.

Furthermore, Jordan’s demand is spiking, and there is the very real possibility that by the time the EAM pipeline reaches Syria there will be insufficient supplies to meet the country’s needs. At present, Egypt exports 2.5 million cubic meters per day (MCM/D) through the EAM, with 2 million MCM/D to Jordan and 0.5 MCM/D to Syria.

“Officially this should be increased to 6 MCM/D and afterwards to 9 MCM/D, but nobody knows [if this will happen],” said Kupisz.

While Syria produces 21 to 22 MCM/D of gas, some 4 to 5 MCM/D is used for gas injection into fields or as burn off, leaving around 16 MCM/D for electricity generation and industrial use. At present this is sufficient, but with power plants to come online in the next few years and electricity demand growing by 10 percent per year, Syria will need to offset the supply gap (see chart). Syria could therefore easily consume more than it receives from Egypt.

“Syria can consume 3 MCM/D, but Egypt is not exporting more,” said Ziad Ayoub Arbahe, an energy consultant in Damascus.

For Turkey and Europe to access gas from EAM, the Egyptian gas Syria uses would have to be topped up with Syrian gas.

“For the pipeline to be viable, Syria would need to export 3 MCM/D to Turkey,” added Arbahe.

The success of the EAM hinges on Egypt being able to ramp up gas output to meet rising domestic demand, other export commitments, and provide to the EAM. It is currently a matter of what Cairo considers more of a priority: using energy as a political tool within the Levant, or exporting liquefied natural gas (LNG) to Europe according to seasonal demand and for higher prices.

“For Egypt the pipeline is one option, but could equally expand LNG infrastructure, so there are a number of competing actors,” said McMahon.

Cost preferential agreements have been signed between Egypt and Jordan, Syria and Israel. But with Cairo keen to access hard currency, such markets might not be always economically preferential. Adding to this is the geological complexity and depth of Egypt’s gas fields, which seriously raise extraction costs.

“If Egypt has the potential to sell gas through LNG and at international gas prices, why not do it?” said McMahon.

Jordan’s gas network structure

Source: IPA Energy Economics

Untapped supplies

While the success of the EAM is in doubt, certain developments could secure gas volumes, namely ramped up production from Egypt’s gas fields, and if the countries involved become full members of the Energy Charter Secretariat. The Energy Charter administers the treaty ratified by all 27 EU states, Russia, Central Asian states and Turkey. The charter treaty promotes four main areas: trade on World Trade Organization principles, freedom of transit, energy efficiency and investment protection. If countries violate the treaty, sanctions can be imposed. Asked what it would mean if current observers Jordan and Egypt signed up as full members of the Euro-Arab Mashreq pipline, Coop said: “it would certainly add security to the project and for the EU.”

While some analysts question Egypt’s ability to extract enough gas, McMahon is upbeat.

“There is every reason to be optimistic, although we need further exploration success and to see those wells drilled,” he said. “But it is hard to imagine increases from Egypt in the shorter term.”

All may not be lost, however, if Egypt is neither legally required to pump gas via the pipeline nor able to meet demand. Syria could come to the rescue, with an estimated 40 percent of the country not drilled or prospected for gas.

“Potentially we could find huge reserves,” said Arbahe.

The only other options are to transport gas from Qatar and Iraq, or Iran via the Nabucco network.

“If a pipeline comes from Iraq or Qatar, there would be a principle pipeline, and a viable network,” said Arbahe. “But for Iran to join the network, [they] would need to solve political problems and technical issues first.”

Iraq is considered the most viable option, with the Akss field in the west of the country only 50 kilometers from the Syrian network.

“They have spare capacity, and the Akss region is not a big market, so it is logical to go to Syria,” said Kupisz. “A contract has been done for 1.5 MCM/D to be processed in Syria and exported or used here, but it is under a new licensing round in Iraq.”

Longer term, the pipeline could also connect central Iraq to the Euro-Arab Mashreq pipeline, potentially able to provide 30 MCM/D over time.

“International oil companies are looking at it, and attracting great interest, although Iraq’s infrastructure is not developed,” said Naeem Danhash, project director of the EAMG CC. “But the medium to long term prospects for Syria to become a gas hub are excellent.”

Whether Syria and Turkey will attain the coveted positions of regional gas hubs is still up in the air, given the questionable viability of either the Euro-Arab Mashreq pipeline or Nabucco.

McMahon, however, has his own thoughts: “The Iraqi supply could ultimately be the answer.”

“The medium to long term prospects for Syria to become a gas hub are excellent”

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