The South Caucasus and Central Asia: Diversifying the EU Gas Market

In early April, high-level Italian and French delegations traveled separately to Azerbaijan to discuss cooperation in the energy sector, including natural gas exports and “green” electricity generated from Caspian-basin wind (Minenergy.gov.az, April 2, 8). The twin visits occurred against the background of mounting anxieties about the reliability of Russia as a source of natural gas as well as growing political pressure for the European Union to embargo energy purchases from Moscow to undermine the latter’s ability to finance its war of aggression against Ukraine. Such fears came true last week (April 27), when Russian Gazprom cut off Poland and Bulgaria from all gas purchases (see EDM, May 2). The EU bloc is heavily reliant on Russian gas volumes (45 percent in 2021—Iea.org, March 3), with some eastern members even more fully dependent (see EDM, February 7). Consequently, the European Commission has long sought to accelerate the diversification of the gas sources and routes to the EU in order to decrease this energy dependency ratio. The South Caucasus and Central Asia provide one such hope.

Building new energy transit routes can take years or decades, though efforts are underway across the European continent to construct additional pipelines, interconnectors and liquefied natural gas (LNG) terminals (see EDM, March 28, April 26). Meanwhile, energy security can also be improved by seeking out additional gas partners. As such, the EU has been holding talks with major potential foreign energy suppliers, such as Algeria, Qatar, Azerbaijan, Congo, Mozambique and Angola, to increase their share of overall European gas imports (EurActiv—Polish service, March 9). EU member Italy has also been particularly active in this direction (Italian Insider, April 13).

Gas imports from the Caspian region—namely, Azerbaijan and several of the Central Asian countries—has been a topic of discussion in Europe for a long time as well, and its importance has grown in light of the deteriorating security situation in Europe’s East. In terms of total gas reserves, Kazakhstan, Uzbekistan, Turkmenistan and Azerbaijan are in the top 25 countries in the world (Indexmundi.com, January 1, 2020). However, tapping those sources has and will continue to require building completely a new gas infrastructure (which involves high construction costs and lengthy project timetables), agreeing on long-term bureaucratic procedures amongst the stakeholders, and overcoming further economic, political and other types of challenges.

The first crucial outcome of those efforts has been the completion of the 3,500-kilometer-long Southern Gas Corridor (SGC), stretching from Azerbaijan via Georgia and Turkey to Southeastern Europe (see EDM, January 19, 2021). The share of gas traveling along this route in Europe’s overall energy consumption is not particularly large, only 10 billion cubic meters (bcm) annually, but it has special symbolic importance and potential. Thus, starting from December 31, 2020, European consumers began receiving Caspian-origin gas through the Trans-Adriatic Pipeline (TAP) segment of the SGC (Bp.com, December 31, 2020)—a historic event that created a completely new geo-economic reality for European gas markets. The SGC already delivers gas to Greece, Albania, Italy and other countries, from the Shah Deniz-2 gas condensate field in the Azerbaijani sector of the Caspian Sea. According to the some estimates, the capacity of TAP could be doubled to about 20 bcm per year (Apa.az, April 18). Indeed, earlier this year, top EU officials traveled to Baku specifically to discuss ways to more quickly expand Azerbaijani exports to Europe (see EDM, February 23). Moreover once the linked Interconnector Greece–Bulgaria (IGB) pipeline is completed this summer, some of the Azerbaijani gas transiting via the SGC will begin arriving in Bulgaria (see EDM, May 2).

Additionally, it should be noted that late last year, Azerbaijan, Turkmenistan and Iran signed an agreement on swapping Turkmenistani gas. The size of the gas swap deal is up to 2 bcm per year (Anadolu Agency, November 29, 2021). And it can provide for one of the possible mechanisms to increase regionally produced gas exports to the EU market in the future. A final international agreement on Iran’s nuclear program would strengthen the potential in this direction, as well.

Meanwhile, opportunities for Turkmenistani gas exports to Europe via Azerbaijan are seen as increasingly possible, following decades of dashed hopes and plans (Kaspi.az, April 9). In 2021, Turkmenistan importantly launched a new booster gas compressor station with a capacity of 30 bcm per year at the Malay field. This project was implemented by the State Concern “Turkmengas,” together with Petro Gas LLP from the United Kingdom (Turkmenportal.com, April 19, 2022). Until now, gas from this field was being delivered mainly to China, but Turkmenistan is looking to diversify its export directions. In late March, Turkmenistan officially stated that it is boosting cooperation in the energy sphere with the countries of “Europe, Asia, the Far East and the Southeast, and is intensifying partnerships with the world’s leading oil and gas companies and authoritative financial institutions” (Newscentralasia.net, March 30).

Some international companies are presently also raising the prospects of building new gas routes within and out of the region. For instance, Natalie Costello, the director of the advisory committee of Trans Caspian Resources, stated earlier this spring that building a gas pipeline from Turkmenistan to Azerbaijan to allow for exports to the European continent, according to the preliminary estimates, requires an investment of $400 million and could take about four months to complete. The proposed pipeline would carry 10–12 bcm of Turkmenistani natural gas per year (Turkmenportal.com, March 30). The total reserves of gas in Turkmenistan are estimated at 50 trillion cubic meters (Silkroadbriefing.com, March 31).

Diversifying energy routes is not solely an issue of political concern; it requires economic considerations as well. As such, to truly improve the energy security of the European continent, the International Energy Agency has recommended developing alternative energy transit routes in conjunction with accelerating the deployment of new wind and solar projects and maximizing electricity generation from biofuels and nuclear power (Iea.org, March 3). But in the meantime, closer cooperation with the South Caucasus and Central Asia will be crucial if the European bloc hopes to secure additional non-Russian energy sources and routes.