Interest Growing All-Round in Trans-Anatolia Pipeline Project

Interest is growing among Western gas producers in Azerbaijan, transit companies, and European importers in the Trans-Anatolia project for Caspian gas to Europe. Initiated by Baku as an Azerbaijani-Turkish project, the Trans-Anatolia Gas Pipeline (Turkic acronym: TANAP) is planned to run from the Georgian-Turkish border to the Turkish-Bulgarian border, there to link up with a continuation pipeline heading either to Central Europe or to Italy (see accompanying article).

All-round interest in the Trans-Anatolia project reflects the range of motivating factors. First, there is commercial demand in certain European countries for Azerbaijani gas, potentially to be supplemented by Turkmen gas via Azerbaijan and Turkey. Second, there is an energy-security imperative of connecting Europe directly with the Caspian basin. Third is Azerbaijan’s national interest as a rising gas exporter to open direct access to Europe on a long-term basis. And fourth, there is Azerbaijan’s capacity to take charge of the project as the main investor, thus ensuring the project’s financial viability.
 
The first and second factors had existed for nearly a decade, but proved insufficient for turning the Nabucco project into an actual pipeline. The third and fourth factors, both linked to Azerbaijan, are the probable game-changers. Azerbaijan is poised for a new role as gas exporter, comparable in significance with its oil producer’s role. Baku is prepared to re-invest a portion of Azeri oil revenues into its own future as a gas-exporting nation through the Trans-Anatolia pipeline. Following a similar strategic logic, Azerbaijan re-invests early revenue from oil into financing the Kars-Akhalkalaki-Tbilisi-Baku railroad, which can turn Azerbaijan (along with Georgia and Turkey) into an inter-continental transport link between Central Asia and Europe.

On April 9, Azerbaijan’s State Oil Company announced the first steps for the Trans-Anatolia pipeline’s implementation schedule. The company has started work on the technical-economic feasibility study. It expects to place orders for steel pipes and construction equipment by autumn 2012, and in late 2012-early 2013 to start construction work. The TANAP consortium will undertake these steps collectively, but Azerbaijan’s State Oil Company is primarily responsible as project operator and majority owner (Anatolia news agency, Trend, April 9).
 
Under the project’s founding document (Azerbaijan-Turkey inter-governmental memorandum of understanding, December 26, 2011), Azerbaijan’s State Oil Company will be the Trans-Anatolia pipeline’s majority owner, investor, and pipeline operator. It currently holds 80 percent of TANAP’s shares, with Turkey’s state pipeline company Botas holding 10 percent, and Turkish Petroleum another 10 percent. Turkish Petroleum concurrently holds 9 percent in Azerbaijan’s Shah Deniz gas extraction project, the main source for TANAP’s first stage.

Under the same agreement, Azerbaijan will have the right to sell some of its shares to one or more minority partners, after the final Azerbaijani-Turkish inter-governmental agreement is bindingly signed. Azerbaijan’s State Oil Company has the right to retain a controlling stake and the operating rights in the Trans-Anatolia project. Baku plans to offer portions from its 80 percent stake to European companies already involved in gas extraction in Azerbaijan, or able to contribute Caspian gas volumes to the Trans-Anatolia project. Turkish companies may also be considered for minority shares, in return for proportionate investments in the project, and provided that Baku remains the majority owner.

British Petroleum (BP), Norway’s Statoil, Total of France (all major producers in Azerbaijan) as well as Turkey have all indicated an interest in considering acquisition of TANAP minority shares (News.1Az, Trend, April 4, 5, 9).
 
Drawing on oil revenues, Azerbaijan plans to cover the bulk of TANAP’s $5 billion to $6 billion estimated construction costs. With an initial capacity of 16 billion cubic meters (bcm) annually dedicated to Azerbaijani gas, the line is planned to be scalable to up to 30 bcm per year (equivalent to Nabucco’s unrealized design capacity) for accommodating Turkmen gas volumes in a follow-up stage.
 
The Azerbaijan-Turkey tandem ensures that TANAP will be the pipeline of first choice (possibly exclusive choice for the first 16 bcm per year) for Azerbaijani gas en route to Turkey and Europe. The 16 bcm annual volume corresponds with Baku’s and the Shah Deniz consortium’s export plans: 6 bcm to Turkey and a further 10 bcm to Europe from Phase Two of the Shah Deniz project.

Since Turkey and Azerbaijan joined forces on the Trans-Anatolia project, other companies must reckon with the probability of having to reach Europe via TANAP. Dedicated and scalable, this line opens the way for a strategic solution. It ensures an outlet for the short-, medium- and long-term phases of gas export from Azerbaijan. TANAP potentially accommodates additional volumes from Turkmenistan, and would in that case turn Azerbaijan into a gas transit country of European significance, as well as significant gas exporter in its own right from Shah Deniz and follow-up projects.
 
Azerbaijani officials recently expressed hopes for Turkey to sign the bilateral inter-governmental agreement in May (Trend, Platts, March 30). Once the binding agreement is signed, and construction work starts, a strong incentive will develop for Turkmenistan to join the project of a trans-Caspian pipeline, connecting with Azerbaijan and the TANAP project. Turkmenistan is currently holding negotiations with the European Commission and Azerbaijan on a possible trans-Caspian pipeline. The prospect of capacities available in the Trans-Anatolia pipeline to Europe should additionally motivate Turkmenistan to finalize the agreement with the EU and Azerbaijan.