Major difficulties in marketing Caspian Sea’s huge gas reserves

LONDON – Global oil majors who have rushed to grab chunks of the remote Caspian Sea’s mineral riches, are scratching their heads over one question: What to do with the gas? Vast amounts of gas are believed to lie under the landlocked Caspian Sea, a resource that would be valuable elsewhere but worth nothing in a region surrounded by gas producers and located thousands of miles from any hard-currency markets. «Caspian gas is like the kiss of death,» said one senior executive with a US oil firm. «We are very keen to go in for more offshore exploration tenders, but the problem is you risk striking gas… you can’t abandon it, you can’t use it and you can’t export it.» British energy giant BP fell victim to that kiss of death in 1999 when it hit the Shakh Deniz gas field, which has a cool trillion cubic meters of reserves. Three years on, the major is still sitting on the field. Its oil pipeline, the 1,760-kilometer (1,094-mile) Baku-Tbilisi-Ceyhan, long written off as uneconomic, now appears to be streaming ahead and is expected to be ready by 2006. But plans for a link to export Shakh Deniz gas are still stalled. «Gas contracts are much tougher to get than oil ones. You can’t just put gas on a ship and sell it,» BTC regional head Barry Halton told Reuters. «That’s one reason why it’s taking a lot longer than anticipated to get Shakh Deniz moving, but it will move eventually.» Gloomy prospects? BP still hopes to exploit the field one day, but has postponed development, citing escalating costs and the lack of buyers. It now sees a pipeline ready by 2006, at a cost of $3.2 billion. Analysts are not too sure. «It’s all looking substantially more gloomy even though everyone is being very brave about the Turkish market,» said Jonathan Stern, a fellow at London’s Royal Institute of International Affairs. «Demand is down and project costs are up. It’s going to be a very long time before Caspian gas reaches Europe.» The Caspian is surrounded by five states – Russia, Azerbaijan, Turkmenistan, Kazakhstan and Iran – which together contain most of the world’s natural gas. Realization has set in that Turkey, initially targeted by these countries, is unlikely to see its economy recover in time to absorb this fuel. Ankara recently renegotiated gas prices downward with Iran and Russia. «When the Shakh Deniz project was first talked of, the Turkish market was on the up, but that has slowed down in the last few years,» BP’s Halton said. Investors hope Turkey and its neighbor Greece will emerge not only as markets but also as hubs, reselling volumes into the European Union where utilities’ demand for cleaner fuel than oil or coal is expected to grow. The two countries have already agreed to build a $300 million link to carry 500 million cubic meters a year. Stern threw cold water on the idea, saying all the gas needed in the next decade was contracted for already. «Even if you leave Turkey aside, Europe has way too much immediate gas and no one is going to need more until 2010 at the earliest, unless there is booming economic growth,» he said. «The EU wants to diversify supplies but it isn’t keen to pay more and Caspian gas will be expensive. You have to argue hard to say the Caspian is a more secure source than Russia.» Russia waits in the wings The Caspian’s remoteness benefits Russia, which is keen to continue buying Central Asian gas instead of developing its costly Arctic fields. It is buying large volumes from Turkmenistan and Kazakhstan and said this week it would seek to expand this arrangement. Low-paying Russian markets may be the only outlet for Kazakh and Turkmen gas, but the low rates will not justify developing BP’s Shakh Deniz field in neighboring Azerbaijan. «The east Caspian states are in an unfortunate position as the countries on the route to markets are also potential producers,» said Julian Lee at London’s Center for Global Economic Studies. «The Eastern markets of China and India are too far away and so are the Western markets in Europe.» Azeri oil firm holds talks with DEPA The State Oil Company of the Azeri Republic (SOCAR) yesterday began talks in Athens yesterday with Greece’s state-owned Public Gas Corporation (DEPA) on exports of gas from the Shakh Deniz field to Europe through Turkey and Greece, the Russian agency Interfax reported, quoting a SOCAR source. SOCAR President Natik Aliyev and First Vice President Ilkham Aliyev are taking part in the talks on the Azeri side. Greek sources mentioned last Friday that the talks will be concluded tomorrow. According to SOCAR information, during the talks the sides will discuss routes for the export of Azeri gas to Europe proposed by the Greek side, in addition to volumes and tariffs. Earlier, the SOCAR president announced that «the Turkish market is not able to take all the gas that will be produced at Shakh Deniz. Therefore, SOCAR and management from BP (the operator of the project) are interested in finding new gas markets.» The cost of the Shakh Deniz project (including the construction of the Baku-Tbilisi-Erzurum pipeline) amounts to $3.2 billion. Phase one of the project involves annual production of 8.1 billion cubic meters of gas from 2006. The Shakh-Deniz field is located 100 kilometers southeast of Azerbaijan’s capital Baku. The contract for the development of the field was signed in June 1996 and ratified in October 1996. Forecast reserves at the field amount to about 1 trillion cubic meters of gas and 400 million tons of gas condensate. Participants in the project include SOCAR (10 percent), British Petroleum (25.5 percent), Norway’s Statoil (25.5 percent), Russian-Italian joint venture LUKAgip (10 percent), France’s TotalFinaElf (10 percent), Iran’s OIEC (10 percent) and Turkey’s TPAO (9 percent).

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