Recent changes in European gas markets have thrown into doubt the importance of Caspian and Middle East pipelines for European energy security. At a 7 January 2010 Kennan Institute lecture, Jennifer Coolidge, Executive Director, CMX Caspian and Gulf Consultants Limited, and former Title VIII-Supported Research Scholar, Kennan Institute, discussed current global gas market trends, the status of different supplier states in the Caspian region, and the commercial and political viability of Caspian and Middle East pipelines to Europe in the future.
The global economic crisis has had an enormous impact on gas pricing, said Coolidge, most notably causing the decoupling of oil and gas prices in European markets. It has also dented European demand for natural gas. Coupled with the expansion of unconventional gas – particularly shale gas – in North America and the ongoing glut of liquefied natural gas (LNG) supply, Coolidge posited that regional gas swaps would increase in importance in the long term while transnational gas pipelines would decrease in importance. She added that the growing energy demand in India and China would divert the attention of Caspian gas producers away from the European market.
The Nabucco project is the major gas pipeline project between the Caspian region and Central Europe, originating in Turkey and transiting Bulgaria, Romania, and Hungary before terminating in Austria. Coolidge discussed the difficulty of the project in terms of the four major potential supplier states for this pipeline: Azerbaijan, Turkmenistan, Iran, and Iraq.
The greatest impediment to Azerbaijan's participation in the project is its sales and transit tariff dispute with Turkey, compounded by Turkey's slow-motion reconciliation with Armenia – Azerbaijan's adversary. Coolidge explained that if there is no resolution to the frozen Nagorno-Karabakh conflict between Azerbaijan and Armenia while Turkey renews relations with Armenia, it could compromise Nabucco and other southern corridor projects unless Turkey is bypassed entirely.
Turkmenistan, which used to supply the majority of its gas to Russia before April 2009, is now developing a more balanced gas export policy. Russia is no longer the country's main partner and, since the April 2009 Central Asia-Center 4 gas pipeline explosion, has been receiving only 8 percent of previous deliveries (Turkmen gas supplies resumed to Russia in earnest on January 9). Indeed, Turkmenistan has recently opened a pipeline to China and a second line to Iran – both of which pose challenges to Nabucco. Meanwhile, Turkmenistan limits foreign investment in its energy sector, which weakens the country's ability to meet its export commitments – a production-investment disjoint that the government does not yet seem to appreciate.
The third possible southern corridor gas exporter that Coolidge discussed was Iran, which possesses the second largest gas reserves in the world. However, Iran is a net gas importer since it cannot attract adequate levels of foreign expertise and investment (due to sanctions) and consumes gas in an inefficient manner. Coolidge predicted that in the future Iran will become a major competitor to Russia, Azerbaijan, Turkmenistan, and Iraq on the European market. However this cannot occur until Iran and the international community overcome the nuclear impasse and Iran's adversarial relations with the West.
Finally, Iraq faces problems related to export revenue sharing between the Iraqi central government and the Kurdish Regional Government (KRG). Iraq must also pass hydrocarbon legislation and synchronize this policy with the KRG. "Iraq must make strategic decisions based on the timing of European gas demand and the phasing of other Southern Corridor supplier sources," advised Coolidge.
Indeed, the issues that must be resolved before the Nabucco pipeline can become a reality – the sales and transit tariff dispute between Turkey and Azerbaijan, the revenue-sharing dispute between Baghdad and the KRG, Turkmenistan's production and investment disjoint, and the impasse over Iran's nuclear ambitions – make Coolidge wary of the pipeline's prospects. But more importantly, she concluded, it is unclear whether Europe's gas needs will coincide with the geopolitical realities of the supplier countries, especially in light of changing European gas market conditions and the potential permanent decoupling of oil and gas prices into the future.
Blair Ruble, Director, Kennan Institute