Shah Deniz to kick off second phase, pipeline decision to follow

By bne IntelliNews April 18, 2012

Clare Nuttall in Almaty -

The $25bn second stage on Azerbaijan's massive offshore Shah Deniz gas field was officially kicked off on April 17. Project operator BP says the crucial decision on the route through which Azerbaijan will export the gas to Europe will finally be made in 2013.

The decision to go ahead with Front End Engineering and Design (FEED) for the project was announced on April 17 following a meeting between Azerbaijan's President Ilham Aliyev and Bob Dudley, chief executive of BP.

"Over the past two years we have made substantial progress on all the individual components of this mega-project," said Rashid Javanshir, president of BP for the Azerbaijan, Georgia and Turkey region, in a statement. "Engineering studies, commercial agreements and the support of the State of Azerbaijan and other governments give the Shah Deniz consortium the confidence to embark upon this FEED phase.'' At this stage engineering studies will be refined, additional wells drilled, commercial agreements finalised and construction contracts will begin, the BP statement added.

Shah Deniz is one of the world's largest gas condensate fields, boasting over 1 trillion cubic metres (cu m). It is being developed by an international consortium comprising BP, Eni, Total, Lukoil, National Iranian Oil Company, Turkey's TAPO and Azeri state oil and gas company Socar. The second stage should boost Azerbaijan's gas output by 16bncm of gas a year, with production due to start in 2017. The field's first phase is currently producing around 9bncm a year.

In addition to drilling work, the second stage will also include projects to open up a connection from the field to Europe's Southern Gas Corridor, through which Caspian sea gas will be carried to Turkey and then on to Europe. That will include regional infrastructure upgrades including expansion of the South Caucasus Pipeline, construction of additional pipelines, and expansion of the Sangachal Terminal just south of Baku.

However, the decision on how the gas will be exported remains the crucial one that stands to affect the geopolitical balance across Europe and Russia. BP says the Shah Deniz consortium will finalise its selection of export routes across Turkey and into Europe during the FEED stage.

"Three options are being considered to carry gas into Europe," the project leader says. These are the Trans Adriatic Pipeline (TAP) which would carry gas across the Balkans to Italy; the South East Europe Pipeline (SEEP) via Hungary, Bulgaria and Romania; and Nabucco West - a shortened version of the practically defunct EU Nabucco dream - which would run from the Turkish border through Eastern Europe to Austria.

The consortium has already narrowed down its options, with BP announcing in February 2012 that it would not use the Interconnector Turkey-Greece-Italy, or ITGI, pipeline for gas exports from Shah Deniz.

Top choice

European governments have been lobbying hard in Azerbaijan and Central Asia in the hope of securing gas supplies from the Caspian basin in a bid to reduce reliance on Russian gas.

Russia not only exports its own gas to Europe, it is also the conduit for Central Asian exports, exposing Europe to the vagaries of Russian energy politics. The crisis of January 2009, when Gazprom suddenly cut off gas exports via Ukraine because of a dispute with Ukrainian energy company Naftogaz over the size of its debts, resulted in power shortages in 18 European countries during an intense cold snap.

This was a wake up call for Europe to start exploring other options. The most ambitious and - with a $12-15bn price tag - most expensive of these is Nabucco, which would run 2,000km from Turkey to Austria.

Whilst Nabucco attracted wide scale backing on the ground from companies willing to build the pipeline, it has consistently struggled to find suppliers to fill it. In addition to Azerbaijan, the consortium has considered sourcing gas from several countries including Egypt, Iraq and Turkmenistan.

However, given Azerbaijan's relative political stability and geographic advantages, Shah Deniz became the top choice. However, those hopes were dealt a blow in November 2011 when Azerbaijan and Turkey struck a deal under which gas from Shah Deniz phase II will be exported via Turkey's existing pipelines, making it a considerably cheaper option.

BP has indicated that having selected TAP over ITGI as its preferred option for the Italian route, the Shah Deniz consortium will decide between Nabucco and SEEP for the East European route, before making its final decision on whether to export via Eastern Europe or Italy.

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