Shah Deniz II Final Investment Decision Announced in Baku
By Edward C. Chow, Prof. Brenda ShafferDec 17, 2013
President Ilham Aliyev of Azerbaijan and a number of Western leaders witnessed December 17 in Baku the signing of documents for the final investment decision (FID) on the Shah Deniz phase II development. Shah Deniz gas exports from Azerbaijan will bring new volumes of natural gas to Europe. The consortium aims for the first gas deliveries from the project to reach Turkey in 2018 and Europe in 2019.
Q1: The Shah Deniz gas and condensate field was discovered in 1999, why did it take so long to get to this stage? Numerous declarations and agreements were signed in the past, what makes this announcement different?
A1: Mega petroleum projects such as Shah Deniz, which contains 1.2 trillion cubic meters of natural gas (40 trillion cubic feet), take significant time to develop and to finalize the necessary commercial agreements before large investments can begin. This is particularly true for major gas developments that involve multiple countries. The agreements signed today allow the partners in Shah Deniz, which include the State Oil Company of Azerbaijan Republic (SOCAR), BP, Statoil, Total, the Turkish national oil and gas company TPAO, LUKoil and NICO, to proceed with investments of around $28 billion for the second stage of Shah Deniz gas field development and the expansion of the South Caucasus Gas Pipeline to Turkey. It triggers plans for building the Trans Anatolian Gas Pipeline (TANAP) across Turkey and the Trans Adriatic Pipeline (TAP) across Greece, Albania and into Italy, bringing the total value chain to around $40 billion. In order to allow such large investments to go forward, Azerbaijan extended the term of the production sharing agreement for Shah Deniz to 2048.
Q2: Is this important? Why?
A2: Shah Deniz II will supply 16 billion cubic meters (bcm) of natural gas annually (additional 6 bcm to Turkey and 10 bcm to consumers in Europe). It will also increase condensate production from 55 thousand barrels per day currently to 120 thousand. The project and associated pipelines will link the gas markets of southeastern Europe and provide an additional source of gas to markets that previously relied primarily on a single source, leading to supply vulnerability and high import prices. Development of this so-called Southern Corridor for European gas imports comes at a critical time for Europe as it struggles to balance its climate change policy objectives with renewable energy subsidies, economic competiveness, and the role for natural gas while coal consumption and associated greenhouse gas emissions in Europe increase (at a recent presentation at CSIS, Dr. Fatih Birol, IEA Chief Economist, noted that in 2014, the EU will need to set a new energy policy.) Shah Deniz/TANAP/TAP will bring Caspian gas for the first time into a major European gas market and can demonstrate the economic viability of the Southern Corridor, which could lead to additional pipeline gas supply to Europe from the Middle East, Central Asia, and Eastern Mediterranean.
Q3: What is U.S. interest?
A3: For all of the post-Soviet period, American policy has encouraged countries in the Caspian to diversify energy export routes in order to secure new markets for their oil and gas, achieve greater economic autonomy and strengthen their newly found political independence. Diversity of supply routes benefits both energy exporting and importing countries. In recent years, America’s attention, including in this region, has been preoccupied elsewhere. Today’s announcement is a reminder that important objectives can still be accomplished by a policy that started twenty years ago and America’s support can play a useful role. The countries in the region certainly believe this. There are lessons to be learned by American policymakers from the long journey of Shah Deniz development on the importance of steadfastness in policy attention and sustained well-coordinated effort needed to achieve significant objectives in energy diplomacy, while working in concert with commercial realities.
Edward C. Chow is a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington D.C. Professor Brenda Shaffer is a visiting professor at Georgetown University’s Center for Eurasian, Russian and East European Studies (CERES) from Haifa University in Israel.
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