Issue 3, 2014. June-July



With the Ukraine crisis threatening the supply of energy to Europe, analysts say that there has been renewed focus on the so-called Southern Energy Corridor — an alternative route with Georgia at its center that carries as much promise as it does political complications.

Nicholas Clayton

Turkey has long been a wildcard in the negotiations to bring European consumers an alternative to Russian gas because the most bankable pipeline projects would run through its territory, but its own regional ambitions have slowed the process. That may be beginning to change.

Michael Cecire, an associate scholar at the Foreign Policy Research Institute, said that earlier negotiations over the past 10 years stalled as a result of a Turkish policy of "convergence" with Russia. Earlier, Ankara and Moscow held foreign policies that were "strongly complementary" and fit with both countries' ambitions to be regional powers outside of the European fold, he said.

Today, he said, there is "a much stronger realization that Russia is less of a partner and more of a geopolitical competitor to Turkey."

In June 2012, Turkey and Azerbaijan signed an agreement to build the TANAP pipeline, which will connect to the South Caucasus Pipeline at the Turkish-Georgian border and will run the length of the Anatolian peninsula. Although it will primarily serve Azeri gas to Turkish customers in the beginning, its capacity can be increased to up to 23 billion cubic meters (bcm) per year by 2023, providing a large supply at the doorsteps of Europe.

Vugar Bayramov, chairman of the Center for Economic and Social Development in Baku, said that in light of the Ukraine crisis, work is already being done to accelerate the development of the Trans Adriatic Pipeline (TAP), which would connect to TANAP and transit gas further to Italy via Greece and Albania.

Nonetheless, recent events haven't removed all stumbling blocks in future negotiations with Ankara, said EmreIseri, an associate professor of international relations at Yasar University in Izmir, Turkey.

"Turkey would like to dictate the terms of the energy trade and receive a better share out of its critical energy geopolitical position," he said.

Getting the best deal from Turkey's perspective means getting to keep as much of the gas that it will be transiting as possible.

Although the Southern Energy Corridor is widely seen as a project to reduce Western Europe's dependency on Russian gas, it is often forgotten that Turkey also relies on Russian natural gas imports for more than 50 percent of its own domestic consumption, Iseri said. And, unlike Europe, where overall energy consumption is dropping, Turkey has a fast-developing economy with energy demands that are skyrocketing 7-8 percent annually.

Turkey is particularly dependent on natural gas because it produces very little of its own and uses about 48 percent of its overall supply to power electrical grids in the country. Globally, the average usage of natural gas for electricity is about 21 percent, Iseri said.

With demand outpacing new supplies for Turkey, the cost of energy has become a growing threat to its economy. In the first quarter of 2014, Turkey had the highest consumer energy prices among the 34 countries of the Organization for Economic Co-operation and Development (OECD), with an index of prices 16% higher than the OECD average.

Despite the seriousness of its energy situation, Iseri said that the country has continued to bargain hard in the ongoing pipeline negotiations as it "aims to upgrade its status from a sole transit route to a regional energy center," he said.

Bayramov said that the main players in the Southern Energy Corridor discussion — Baku, Brussels and Ankara — are now nearing an agreement that would give Turkey the right to keep about one-third of all gas that would pass through its territory en route to Europe.

However, the Southern Energy Corridor's hurdles don't stop at Turkey.

The second stage of development of Azerbaijan's Shah Deniz energy field is expected to provide about 16 bcm of natural gas for export, most of which is expected to be sent westward through the TANAP pipeline. But, this supply alone will not be enough to make a significant impact in the European energy market. In order for the Southern Energy Corridor to become "active," its backers will need to find significant additional supplies upstream from the Middle East or Caspian regions, Bayramov said.

Beyond Turkey, most of the available untapped natural gas supply lies in Turkmenistan, Iran and Iraq, all of which present their own unique challenges.

According to the U.S. Energy Information Administration, Turkmenistan has the 6th largest natural gas reserves in the world with about 7.5 trillion cubic meters of proven reserves — most of it untapped. However, because it is very sensitive to Russian influence, analysts say it would only risk its relationship with Moscow if it could sign a very large and logistically difficult export deal with Western partners. Such a deal has never been close at hand.

Meanwhile, Iraq's internal politics and Iran's external politics each make a significant energy deal difficult for Europe.

Where that dynamic may be beginning to change is in Iraq, where Turkey again has been key. In November, Turkey inked a $60 billion-dollar oil and gas deal with officials from the Kurdistan Regional Government in northern Iraq. The deal will resume the import of Kurdish oil into Turkey with a target of 1 million barrels per day in 2015 and as much as 20 bcm of gas may be imported annually, with transit starting as soon as 2017 through a yet-to-be-built pipeline. Much of these resources will be destined for re-export to European markets.

Baghdad, however, has challenged the constitutionality of these arrangements and disputes over revenue-sharing and political control continue.

Although many questions still surround the Southern Energy Corridor, the developments to date have nonetheless strengthened Georgia's position as a key transit country and a partner in an emerging regional bloc. Last month, the presidents of Turkey, Georgia and Azerbaijan held a summit in Tbilisi to deepen strategic cooperation in energy, defense and politics.

Cecire said that although energy pipelines have formed the "spine" of the three countries' cooperation to date, the completion of the Baku-Tbilisi-Kars railway in 2015 will take their relations to the next level.

"[I]nitiatives are already underway to match the opening of the BTK with a trilateral economic space to match it - to better facilitate the movement of goods and people throughout the region. Of course, economic trilateralism reinforces, and is reinforced by, political trilateralism, which continues to make gains at the highest levels of the three governments," he said.