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American expert: At present Azerbaijan is the only Caspian supplier available to furnish the European market with alternative gas â€“ INTERVIEW

American expert: At present Azerbaijan is the only Caspian supplier available to furnish the European market with alternative gas â€“ <font color=red> INTERVIEW </font>

27 October 2010 13:36 (UTC +04:00)

Washington. Isabel Levine â€“ APA. APAâ€™s Washington DC correspondentâ€™s interview with Kevin Rosner, Senior Fellow at the Institute for the Analysis of Global Security in Washington DC and editor of the Journal of Energy Security. Mr. Rosner is also a Director on Energy & Environment, at the Atlantic Council.

- You are planning to visit to Azerbaijan very soon. What is the purpose of the visit?

- Iâ€™ll be travelling to Baku in November. On the 15th, the Center for Strategic Studies under the auspices of the President of Azerbaijan has organized a program on, â€œHow to Functionally and Reliably Develop the European-Caspian Energy Link.â€ It should be an interesting discussion and it will be good to get my feet back on the ground in-country and to catch up with my colleagues both old and new.

- Truly, how to reliably develop the European-Caspian Energy Link? What are your long-term expectations on demand and prices for gas in Europe? And what is the role of the Caspian region, especially Azerbaijan, in terms of diversification of energy supply sources and providing energy security for Europe?

- First, the long-term forecast (to 2035) for natural gas demand in Europe is higher according to both the IEA and US Energy Information Administrationsâ€™ energy outlooks. In 2009 European gas demand dropped some 5 percent or 27 bcm according to a recent Bank of America report (and by 6.4% according to Eurogas). Clearly European gas demand has suffered in response to ongoing recessionary effects unleashed largely at the end of 2007 and which gained momentum in 2008 concurrent with the peak in global oil prices. According to a Merrill Lynch report, gas demand is not expected to reach pre-crisis 2008 levels until the end of 2011 at the earliest.
As Western European economies recover however demand growth rate increases from both the industrial and utilities sectors will be closely watched as barometers for sustainable higher prices over the longer term.

There are of course other major factors of future European gas demand that have to be taken into account as well. The ongoing deindustrialization of the European economy is one trend that appears irreversible under present circumstances. Another is the EUâ€™s focus on demand management through energy efficiency measures. A third is to see how the European spot-market for gas develops over time. If Europe moves off its traditional gas pricing structure, one tied to oil prices, and is bolstered by a more vigorous gas spot market, gas-index or another pricing formula then competition has a better chance to weigh in and put downward pressure on gas prices provided alternative gas supplies are available on world markets.

On the upside from a producerâ€™s standpoint, the prospect for future European gas prices is largely higher due to the large projected increase in natural gas demand of some 100-150 bcm in European markets by 2030-2035. Europeâ€™s choice of gas as the fuel of choice for power production is important here given gasâ€™ lower emissions advantage over traditional coal-fired power. The share of natural gas in European primary energy demand is set to increase based on these assumptions. The uncertainty is of course by how much.

Another more ambiguous determinant of future gas pricing is the role that oil prices play in determining the price for natural gas. As the price of liquid fuels move higher, and they are already doing so, the oil-gas pricing nexus should drag natural gas prices higher with a lag of six-to-nine months. Without getting into a prolonged discussion here, it is interesting to point out that there appears to have been an unofficial decoupling of oil prices from gas prices over the past twenty-four months.

While both sectors experienced significant price decreases in the latter half of 2008, oil prices have since been driven artificially higher largely by the OPEC cartelâ€™s unwillingness to more sufficiently supply global oil markets and in particular the transportation sector where oil dominates. Gas price increases have lagged however. Interesting, some analysts accuse the high price of gas in 2008 and continuing into the first quarter of 2009 of depressing demand for gas due to incongruities between demand and supply. A final price disclaimer here is also the future role that European LNG infrastructure development will play in providing even more diversified access to gas producers, alter the present Russian dominated European import equation, and in doing so provide additional market share to others. LNG imports into Europe have already softened the market due in part to the US trend of supplying its domestic market with an increasing share of shale gas thus diverting US bound LNG freighters to other markets including Europe.

On the energy supply security front, there is no argument that Caspian gas is important for Europeâ€™s ability to diversify import gas dependency away from the Russian Federation. At present Azerbaijan is the only Caspian supplier available to furnish the European market with alternative gas. It is also vastly important for Azerbaijan itself to develop its European gas market as its diversifies its access to alternative suppliers. One realization lacking in this amenable relationship is the security-premium Azerbaijan offers to downstream European gas consumers. I donâ€™t think this has been effectively appreciated by prospective downstream European gas end-users. Energy security, in all its permutations, carries with it a financial cost. My feeling is however if more rigor was brought to calculating the past economic and societal costs of gas disruptions to European economic activity a more vigorous and positive understanding could be brought to Azerbaijanâ€™s contribution to European energy security. It is incumbent of course not only on end-users but also on the part of Azeri authorities to make conclusive economic arguments that would demonstrate the marginal cost of providing this security and the benefits of whatever measures taken to both Azerbaijan and its prospective European customer base.

- There are some concerns that the gas supply project from the Caspian region to Europe via Nabucco is losing its relevance. Also, there are some doubts that, Azerbaijan itself doesnâ€™t have enough resources for Nabucco. What do you think about the project’s future? Do you believe in Nabuccoâ€™s future if Central Asian partners refuse to join the project?

- The test of any transit project to Europe for gas diversification purposes is measured by two things. First, is there sufficient product available to fill the pipeline-any pipeline? Second, does the proposed transit infrastructure (either improvements to existing pipeline systems and capacities or new pipelines) make economic sense? On this second point, I refer back to my previous statement on the derived benefit of energy supply security (independently calculated by both a producer and consumer) if the netback + cost basis of rendering benefit to both producers and consumers can be demonstrated then the project has legs even if the delivered price of gas is higher than from a monopoly supplier. If due diligence along these lines is pursued, and if Nabucco or another transit project for diversification exists that can pass this netback+ litmus test then Nabucco is no less relevant today than it was years ago when first proposed.

Second, on a very simple level if Azerbaijan were a direct investor in Nabucco this would quickly determine whether there is sufficient present or future gas from Azerbaijan to fill the pipe. This should answer the capacity question.

Third, if Nabucco hopes to achieve its ultimate capacity objective it will obviously need additional suppliers. I donâ€™t think that given its previous commitment of 10 bcm to Europe Turkmenistan is not interested in supplying piped gas. In 2009, the Iraqi Prime Minister has also voiced his interest in supplying gas to Europe to the tune of some 15 bcm (whether this would be Nabucco destined gas or not remains an open question). Taken together, and obviating the political difficulties of engaging these two partners, it would appear Nabucco can be made viable if product is forthcoming.

- Azerbaijan has an agreement with Russia about gas export. Is this agreement harmful for the Nabucco project, as well as Azerbaijanâ€™s energy cooperation with Europe?

- Given all the activity surrounding Azeri gas e.g. Nabucco, AGRI, ITGI, etc., the ongoing development of Shah Deniz (SD-2) I donâ€™t think that 0.5 bcm is an inordinate amount of Azeri gas to be sent to Russia. More interesting, but off-point perhaps, is the fundament as to why Gazprom took this initiative. This may tell us more about the present state of Russiaâ€™s gas industry writ large or simply be the manifestation of a straight-forward commercial need on Russiaâ€™s part to purchase Azeri gas for delivery to a Russian region in need.

In answer to your question(s) regarding this deal and the future gas cooperation between Europe and Azerbaijan, at first glance anyway I donâ€™t think this threatens gas cooperation between Azerbaijan and Europe. More importantly the recent Turkish-Azerbaijani cooperation agreement which allows Azerbaijan to sell small amounts of gas on Turkeyâ€™s internal market also bodes well for the transit of Azeri gas ultimately onto Europe (which if land based) depends on Turkey.

Clearly, intensified commercial engagement with European partners, regardless of which transit project is determined to be of greatest utility to both parties, bodes well for the future of Azerbaijan-EU relations.