Baku-Tbilisi-Ceyhan’s gas legacy

JOHN ROBERTS

A decade or so ago, the question of how to get the bulk of Azerbaijan’s oil and gas to Western markets led to the historic decision to build the Baku-Tbilisi-Ceyhan (BTC) and the Baku-Tbilisi-Erzurum (BTE) export pipelines.

While the BTC oil pipeline is already one of the world’s biggest and most successful mega-pipeline projects, constructed at a cost of some $3.9 billion and routinely carrying close to 800,000 barrels of oil a day (or 40 million tons a year) for 1,768 kilometers from the Caspian Sea to the Mediterranean, the BTE gas line remains its smaller brother. At present, BTE carries just over 5 to 6 billion cubic meters of gas a year (5-6 bcm/y) along its 918 km system. That represents the equivalent of around 4.5 to 5.4 million tons of oil a year, or roughly one-eighth of the energy carried by BTC.

In sum, BTE, also known as the South Caucasus Pipeline (SCP), is a line that has yet to fulfill its potential. But that is about to change. Now that the partners developing Azerbaijan’s giant Shah Deniz gas field are moving toward implementation of the massive 20 billion-euro “Stage Two” project (SD2), intended to take production at the field to around 25 bcm/y, there’s a new need for export pipelines. That means the BTE system will be expanded and extended across Turkey and into southern Europe with the goal of transporting Azerbaijani gas to either Baumgarten in Austria or to Italy by 2018.

It seems that whatever expansions or replacements are made to the BTE system will now be largely financed from the proceeds of revenues made available to Azerbaijan and the Shah Deniz companies as a result of the success achieved by BTC in carrying Azerbaijani oil to market.

The first BTC oil reached Ceyhan on May 28, 2006. It was the start of what would become an extraordinary explosion in revenue flows for Azerbaijan’s oil producers. Not only did Azerbaijani production and exports rise rapidly with the opening of the line and the attendant development of the giant ACG oil field, but also this coincided with rising oil prices.

Quite literally, billions of dollars began to flow into Azerbaijan’s coffers. By July 1, 2012, the State Oil Fund of Azerbaijan (SOFAZ) had handled no less than $52.8 billion in energy revenues, although it was only in the last couple of years that it was able to hold on to most of these revenues, with its earlier receipts essentially going straight to the government to fund the national budget.

Due to the massive success of BTC, the State Oil Company of the Azerbaijani Republic, (SOCAR) now has access to prospective investment capital that would have been almost unimaginable just a few years earlier.

Azerbaijan can now afford to take a substantial stake in the actual pipeline to carry the gas both to the new petrochemical complex and, equally importantly, to the new European export markets that Baku and the Shah Deniz partners are seeking to access.

It is not simply that BTC has supplied BTE with a path to extend deep into Turkey; it is also that BTC has given Azerbaijan the ability to develop its own gas export pipelines. This means that while the Trans-Anatolian gas pipeline (TANAP) project alone may cost anything up to $10 billion, it will be SOCAR, or SOCAR and its fellow producers in the Shah Deniz consortium, who are in control of the line.

What all this means is that Azerbaijan may enable TANAP to achieve what previous projects like Nabucco, Interconnector Turkey-Greece-Italy (ITGI) and Trans-Adriatic Pipeline (TAP) could not. No longer will these projects, designed to extend the reach of the BTE pipeline, have to be built as merchants’ pipelines or by middlemen because upstream partners wanted to limit their exposure to risk. Instead, they will be developed in a far more classic manner. Upstream partners, namely SOCAR, will almost certainly work in partnership with downstream off takers. In effect, by building TANAP and by taking stakes in either TAP or Nabucco West, the producers at Shah Deniz will ensure that their ability to operate an effective export system for Azerbaijan extends all the way to the heart of Europe.

*John Roberts is an energy security specialist at Platts. This abridged article was originally published in the Summer 2012 issue of Turkish Policy Quarterly (TPQ), www.turkishpolicy.com.