The Caspian and European Energy Security

2. The Caspian and European Energy Security. By John Roberts Energy Security Specialist, Platts Institute of International and European Affairs, Dublin 4 February 2010

3. A Tough Environment There are hard energy security issues out there: • Oil and Gas: Recession and a lack of investment • Oil Price volatility • Gas demand uncertainty

4. Timetable Issues The long-term picture: Conventional Energy: Investment needed now for fossil fuel infrastructure to avert prospective problems in next 5-10 years. Climate Change: Investment needed now for gains to be seen in next 10 to 40 years.

5. New Peaks or Old Thinking? What kind of ‘Peaks’ do we face? • Peak Oil? • Peak Gas? • Peak Water? • Peak Investment? • Peak Patience? • Or is the problem the prospect of no peak for CO2?

6. Hard Security Issues: The Price of Oil • 1. Fully burdened cost of fuel (i.e. total cost of carrying fuel to a Forward Operating Base and protecting convoys) for the US Marine Corps: Up to $400 a barrel for both power and energy for an expeditionary force. • 2. Cost of delivery: An estimated 160 British military personnel have died delivering fuel in the last two years. • 3. Military protection accounts for more than half the cost of oil transported from the Gulf. UK Minister Peter Hain, September 2002. • Traditional views: • 4. Cost of Oil early 2010: $78-79. • 5. Cost to consumer (UK) £1.06 per litre. BUT IN $/bl??????? Source for 1. & 2: Royal United Services Institute. Brochure for “International Initiatives in Alternative Energy and Sustainability for the Military” conference scheduled for London, 16-17 February 2009. Source for 3. RUSI Conference, September 2002.

7. Gas not Oil Oil is an essentially fungible commodity. Gas, particularly pipeline gas, is still largely a bilateral issue in which long-term agreements and non-interruptability of supply are crucial. If oil from one source is reduced or halted for any reason, the impact is much less significant than if a similar amount of gas were to be cut off for all sorts of reasons, including multiplicity of supply, storage, flexibility of delivery mechanisms and flexibility of usage. Gas is thus an issue that concerns both the terms and conditions of actual supply arrangements and the terms and conditions of third country transit for some current or prospective suppliers to the EU.

8. Hard Security Issues: Gas Demand UncertaintyThe European Gas Balance 2005-2020

9. The EU Conundrum • New sources via transit lines vs. old sources from supplier lines; • Export availabilities – global supply and competition for global supply; • Export availabilities – regional supply and competition for regional supply; • Financing and political will; the need for consumer governments to consider commitments on volumes, delivery system construction costs and pipeline security.

10. Europe: Reliable Gas Supply Increases The EU import issue: Looking for an extra 70-80 bcm 2005-20 Should be possible from three predictable suppliers: • Norway • North Africa • Qatari LNG BUT this is predicated on a sustained level of Gas imports from Russia

11. Russia’s Dilemma What Russia expects: European imports to rise by 195 bcm between 2005 and 2025. Projection cited by Nordstream in October 2009, based on scenario developed by European Commission, DG-TREN, in 2007. What the EU expects: The contrast between old and new estimates/projections for EU gas imports amounts to 168 bcm/y by 2020. That’s a range that is as almost as big as Russia’s TOTAL indigenous gas export availability in 2008. • Russian production in 2008: 601.7 bcm. • Russian consumption in 2008: 420.2 bcm,. • Net export availability in 2008: 181.5 bcm. • Net export availability in 2007: 166.3 bcm Source, BP Statistical Review of World Energy,June 2009.

12. Russian Gas: Reduced Demand and Russia’s Response European gas demand 2007-2010 • 2007 506.4 bcm • 2008 516.9 bcm • 2009 c. 480.5 bcm • 2010 c. 485 bcm Source: Eurogas. Eurogas stats for 2007 & 2008, Eurogas estimates in Oct. 2009 for 2009 and 2010 Gazprom Output – Actual • 2008 550 bcm • 2009 462.16 bcm Source: Nefte Compass, 14 January 2010 Gazprom Output – Expectations • 2009 450-510 bcm (former expectation: 510-560 bcm) • 2012 523 bcm Source: Alexander Ananenkov, Gazprom Deputy Chief Executive, June 2009.

13. Russia: Two views of natural gas output 2007 - 2030 Gas production in 2007: 646 bcm (IEA, WEO 2009) Gas production in 2030: 760 bcm Up 114 bcm. • Source: IEA. WE0 2009 Reference Scenario: Gas Table 12.1 (Page 429) Gas production in 2030: 885-940 Up 239-294 bcm • Source: Energy Minister Sergei Shmatko 26 Nov 2009

14. Outlook for Russian Production(Source: Gazprom, from Jonathan Stern)

15. Russian Gas Development. It’s NOT a Resource Problem • The core issue concerns the speed with which Russia can develop new fields to replace declines at four supergiant fields: the original big three -- Medvezhye, Yamburg and Urengoi, and the latest supergiant Zapoliarnoye. • All are located in Western Siberia’s Nadym-Pur-Taz region, just across the Ob Bay from the gigantic resources in the Yamal peninsula, which is believed to contain more than 10 tcm in resources and from which Gazprom eventually intends to produce some 250-300 bcm/y. • Energy Minister Sergei Shmatko has said Yamal could yield 360 billion cubic meters a year.

16. The Overall Problem • “Russia cannot develop a successful 21st century economy with capital stock, more than 70% of which still dates from the Soviet era. Large scale capital stock replacement will dramatically reduce both overall energy and gas demand.” Source: Future Gas Production in Russia, Jonathan Stern, Oxford Institute for Energy Studies, October 2009.

17. Russia - Projections for Gas Output 2008-2012 Gazprom and Ministry of Economic Development Production 2009-12 (Bcm) • 2008 Actual 2009 2010 2011 2012 • GAZPROM* 549.7 450-510 507.5 510.6 532.8 • RUSSIA (9/09 total)** 663.6 580 623 630 649 • RUSSIA (7/09 total)** 663.6 580 596 610 623 • RESIDUAL*** 113.9 70-130 115.5 123.4 116.2 • Sources: • * Gazprom Press Conference 2009; • ** Ministry of Economic Development September 2009 and July 2009. • *** Residual assumed to be non-Gazprom producers Adapted from: Table 3, in Jonathan Stern’s Future Gas Production in Russia, OIES October 2009.

18. An EU-Russia Gas Partnership? Logically undeniable. Implementation a very different matter. • The EU wants – and needs – to develop a partnership with Russia concerning energy supplies. • The EU is the world’s biggest gas importer and Russia is the world’s biggest gas exporter. Problem: Their current asymmetrical relationship. • This asymmetry goes to the heart of the problem, both in terms of Russia’s own energy supplies to the EU and in terms of its role as a transit country for Central Asian energy producers. The most obvious asymmetry is that while the EU is endeavouring to create a single open-access market in energy, Russia can scarcely be said to operate any kind of internal market. • At least four key factors differentiate Russia from the EU in this regard (there may well be more): • Integration of state and company. • Attitude to monopolies. • Attitudes to prices, profits and investment. • Transparency.

19. Warnings from Moscow (1) • “It is highly probable that in a not-so-distant future Russia will not be able to offer gas to the European Union in the quantities the EU will be ready to buy.” Alexander Golovin, Ambassador-at-large, Russian Foreign Ministry; speech in Vienna, 28 January 2009. • “Europe should decide how to handle this situation… and if Europe doesn't need our gas, then we will find a way of selling it differently.” Alexander Medvedev, Deputy Chairman, Gazprom. BBC Newsnight c. 8 or 9 June 2009. BBC citation.

20. Russia & the Caspian: Natural Gas Balance 2008 - 9 2008 2009 2010 • Total production 664.5 582.4 643.0 • -- Gazprom 550.6 462.2 n/a • Imports from Central Asia 60.4 35.8 n/a • Exports 183.7 167.1 n/a -- Exports to Europe 158.2 119.5 n/a -- Exports to Asia (LNG) 0.0 7.2 n/a Source: Nefte Compass, 14 Jan 2010.

21. Russia & Energy Security – Explosions: • 23 January, 2006. Explosions in the Russian Caucasus province of North Ossetia briefly sever the TransCaucasus Pipeline, Russia’s main gas artery to Georgia and Armenia, and simultaneously halt Russian electricity deliveries to central Georgia during the coldest winter in 20 years. • 5-6 August 2008. Block Valve station 30 on BTC, near Erzincan, Turkey. Valve on fire until 11 August. 20 August, line flow restarts. 26 August, export liftings resume at Ceyhan. • 1 April 2009. Southern Moldova, 0530. Explosion in main transit gasline blasts 100-metre wide crater. Exports to Bulgaria fall 70%. • 9 April 2009. Km 487 on the Central Asia-Center pipeline in Turkmenistan near the Uzbek border. Pressure blast damages one of the main pipes. Lineflow interrupted. Turkmens turn off 195 gas production fields as 92 percent of Turkmen gas exports to Russia are suspended.

22. Russia and the Caspian: Warnings from Moscow • “Only three countries can be suppliers of pipeline gas in the long-term - Russia, Iran and Qatar. So there is no other choice than to deal with these suppliers.” Alexander Medvedev, Deputy Chairman, Gazprom. BBC Newsnight c. 8 or 9 June 2009. BBC citation. • “We find it unreasonable to convene conferences on European energy security without Russia’s participation to consider energy routes bypassing Russia.” Alexander Golovin, Ambassador-at-large, Russian Foreign Ministry; speech in Vienna, 28 January 2009. • "Attempts to exclude Russia from the process of decision making in the energy sphere, ignoring its legitimate interests, are counterproductive." Putin: Address to the lower house of parliament, 6 April 2009.

23. The Urge for Bypass Pipelines Russia • Nordstream • South Stream The European Union • Nabucco • ITGI • White Stream

24. Caspian Gas: The desire to access European markets directly Azerbaijan: • Shakh Deniz and beyond • A 30 bcm gas exporter? • And when? Turkmenistan: • A genuine exporter • South Yoloten/Osman • Trans-Caspian aspirations Kazakhstan: • “If the Nabucco project gets real, Kazakh gas will be one of the main sources of the project along with the Azeri and Turkmen gases.” Hulusi Kilic, Turkish Ambassador to Baku, Azerbaijan Today, May/June 2009.

25. The Middle East – Reserves & Export Prospects • The Persian Gulf holds 40% of the world’s gas reserves – but where’s the next generation of gas exports? • -- Qatar: Moratorium • -- Saudi Arabia: Exports rejected. • -- UAE: Domestic preference: Sour gas delays. Now a net importer. • -- Iran: The great conundrum.

26. Turkmenistan: The Timetable Issue The immediate picture: Investment in infrastructure vs investment in output The short-term cash crisis facing Turkmenistan vs the long-term prospect of multiple export options The long-term picture: Conventional Energy: Investment needed now for fossil fuel infrastructure to avert prospective problems in next 5-10 years. Climate Change: Investment needed now for gains to be seen in next 10 to 40 years.

27. Eurasia: Gas Pipeline Systems, January 2010

28. Caspian and Central Asia – Pipeline Overview - IFRI

29. Nordstream and South Stream

30. Delivering pipe for the CAGP

31. The Central Asia Gas Pipeline • 27 December 2009. First gas entered China at Khorgos • 5.5-6.5 bcm due for delivery in 2010. • Eventual Capacity: 40 bcm • Two feeder lines: Bagtyyarlik and Malai • Turkmenistan‘s gas balance for 2010

32. A Trans Caspian Gas Pipeline • “Obviously, we are ready to supply gas for Nabucco when it reaches us,” said a Turkmen government official who asked not to be named. • “As early as next year, 10 bcm can be exported from the Turkmen Caspian shelf where Petronas is working.” • Reuters – Ashgabat 19 November 2009

33. Nabucco

34. Nabucco as Key to Unblocking the Caspian Log Jam Nabucco constitutes the missing link, since it is the most developed project to carry Caspian gas to a major European hub. But Nabucco’s start-up requirements has to be placed within a broader context. Gas to Turkey needs to be considered in tandem with gas transitting through Turkey. Other pipelines need to be taken into consideration, notably a connection between Greece and Italy.

35. Northern Iraq – gasfield development

36. Genel Enerji’s Kurdish assets Field Stake (%) Holding partners oil in place (barrels) • Taq Taq 44% Addax 36% 2 billion Expected recovery rate: 37.5-50% • Tawke 25% DNO 55% 1.9 billion Estimated 400-800 million barrels recoverable • Miran West 25% Heritage 75% 2.3-4.2 billion Recovery factor: 50-70% • Miran East 25% Heritage 75% 2.3-4.2 billion • Dohuk 40% DNO 40% 2.2 billion • Ber Behar 40% 40% open 1.9 billion • Kewa Chirmila 44% Addax 36% 300 million • Chia Surkh 20% Longford Energy (Canada) 20% plus 3.1 billion option for further 20% • Source: Genel Enerji

37. Conclusion: Vastly Different Relationships Conundrum: The EU’s 2005-to-2020 import increase: plus 154 or minus 14 bcm? Or anything in between? Supplier & transit relationships: • North Africa: Partner as supplier (& maybe in transit). Relations defined commercially; relatively predictable – or acceptably unpredictable. • Russia: Partner as supplier; Competitor in transit; Competitor as market. Unacceptably unpredictable? • A change in Russian attitudes to contract enforcement: A realism that benefits Ukraine – and damages Turkmenistan. • Ukraine: Partner in transit; at issue as market. • Caspian: Partner as supplier, Partner as transit – where transit can be organised. Political commitments required at both ends. • Turkey: Partner in transit; Competitor as market?

38. Game changer: A Russian Policy Rethink • "We want you to feel part of the team." Putin to senior officials from E.On, Royal Dutch Shell, and Eni, Salekhard. 24 September 2009. • “We will try to liberalise access to pipelines.” Putin. 29 Sept 2009.

39. Game Changer: Military Competition for Resources Wars: Chechnya & Georgia • Future wars "In a competition for resources, problems that involve the use of military force cannot be excluded that would destroy the balance of forces close to the borders of the Russian Federation and her allies…. The attention of international politics in the long-term perspective will be concentrated on the acquisition of energy resources." Regions potentially impacted: Middle East, the Barents Sea, the Arctic, the Caspian Sea & Central Asia. Source: Strategy Document of Russian Security Council, 13 May 2009.

40. Game Changer: Unconventional Gas European Conventional Gas Reserves: 14 tcm Unconventional reserves: 34.7 tcm (US NPC 2007) • 3-12 tcm (CERA) Types: • Coal-bed methane: NPC 7.8 tcm (1.6 tcm – Woodmac) • Tight Gas • Shale Gas • Poland: The coal mines are not yet shut in

41. Questions? John_Roberts@platts.com Tel: +44-1835-863-725