© OECD/IEA,(2006) Forging the Link: The Caspian and Central ...

IEA Discussion paper to the Regional Conference on Eurasian Energy Security, Market Access &
Investment Policy co hosted by IEA and Georgia on from the 19 th to the 21 st of June 2006
Forging the Link:
The Caspian and Central Asian supply potential and the South Caucasus as the
enabler for a public private partnership on diversity of supply
© OECD/IEA,(2006)
A Georgian window on Eurasian Energy Security
International Energy Agency, June 2006
Energy market integration in Eurasia (Europe, Russia, Central Asia and the Caspian and
Black Sea regions) requires further investment to diversify upstream energy supply for
consumers, downstream security of demand for producers and enhanced midstream
transport infrastructure to increase market access and interconnectivity for both.
Recent trends in Eurasian energy markets appear to reflect a change in attitude of
government and corporate policy makers on conditions for market integration. The growing
asymmetry between stronger national monopoly trends in energy markets structure among
suppliers and a slow progression towards market opening in Europe are widely recognized.
Multilateral issues
The challenge for both government policy makers and corporate strategists remains: How to
align Eurasian energy market governance and market structures in a stable long-term policy
framework to reflect its physically integrated and economic inter-dependent characteristics,
to safeguard its reliable operation and to mobilize timely investment. A satisfactory
accommodation guided by the principles of the Energy Charter that reflects the interests of
all stakeholders along the Eurasian energy chain is still called for.
Bilateral issues
Policies to accommodate producer, transit and consumer interests reflect legitimate market
concerns that the International Energy Agency has long since promoted, drawing on the
considerable experience among its membership. The desire of producers to diversify access
to rapidly growing oil and gas demand in new emerging markets in Asia, on one hand, and
the desire of consumers to diversify imports with new supply of oil and gas from Central
Asian and Caspian Sea basins are the complimentary parts of the same energy security
objective.
Market Diversity
Efforts to diversify demand or supply options constitute rational energy market behavior.
They are not directed against the interest of any producer or consumer but in fact reinforce
common interest. IEA Member country experience in the producer/consumer dialogue with

IEA Discussion paper to the Regional Conference on Eurasian Energy Security, Market Access &
Investment Policy co hosted by IEA and Georgia on from the 19 th to the 21 st of June 2006
oil producing countries shows that diversity of oil supplies have improved oil sector
performance globally. The economic discipline that market diversity brings by making
alternative supply or demand options available to dominant trade patterns facilitates cost
effective investment, prompts technological advancement and fosters stability along the
entire energy chain.
In the absence of a balanced market integration alignment, energy market security is
fragmented throughout Eurasia. This has undermined investor confidence and obscured
market transparency. Objective price signals that are provided in a genuine market context
are required for the reliable operation of energy systems and the allocation of capital and
technology toward its most economic use so that new capacity can be installed on a timely
basis to meet growing demand.
Landlocked Centre Stage
The Caspian and Central Asian region serve the diversity-of-supply interests of western
markets through multiple export outlets through Russia and the South Caucasus in the Black
Sea and through Turkey to the Mediterranean Sea. Kazakhstan has also recently opened an
oil export outlet to China to serve similar interest of eastern markets in diversity of supply
relative to their dependency on the Middle East and diversify its export markets relative to
Russia. Turkmenistan and Uzbekistan are also promoting such market outlets and have
accommodated major upstream investment from Asian state owned oil & gas companies.
This explains the rising importance of the Caspian Sea and Central Asia region for enhancing
global energy market security and diversity of supply. Beyond the misalignment between
liberalizing, opening import depended markets in Europe and monopolistic practices among
European energy suppliers, geography has placed this region centre stage between these two
poles of Eurasian energy commerce. The South Caucasus provides supply alternatives to
import depended markets while the Caspian basin and Central Asia allows diversification of
supplies to a new resource base that is relatively close to markets. Here the Caspian Sea and
Central Asia region provide an important market alternative through the South Caucasus in
an increasingly complex Eurasian playing field.
Why Georgia?
Georgia hosts three new independent oil and gas pipeline outlets to western markets from the
Caspian basin. The Baku-Supsa and Baku-Tbilisi-Ceyhan crude oil pipelines and the South
Caucasus (Baku-Tbilisi-Erzerum) natural gas pipeline. Georgia provides rail transport links
to black sea ports such as Batumi remains a key host for gas exports from Russia to Armenia
and potentially to Turkey in future. Georgia is well suited for further gas transit from
Azerbaijan, Kazakhstan, Turkmenistan and Iran to provide further volumes to diversify gas
imports through Turkey to South Eastern Europe or across the Black Sea to the Ukrainian
market and further downstream to Central Europe. In Central Europe gas import dependency
is far above the threshold of 30 % that IEA member countries have established as best
practice for depending on any single external energy supply source.
Georgia is not a major energy producer but plays a major strategic role in providing the land
corridor for the transit of Caspian and Central Asian oil and gas resources to western
© OECD/IEA,(2006)

IEA Discussion paper to the Regional Conference on Eurasian Energy Security, Market Access &
Investment Policy co hosted by IEA and Georgia on from the 19 th to the 21 st of June 2006
markets. The current state of play in Eurasian energy markets has amplified the importance
of Georgia as a gateway for Caspian and Central Asian energy resources to make their way to
wider European energy markets.
The 1.2 million barrels a day Baku-Tbilisi-Ceyhan pipeline will evacuate the Azeri Chirag
Guneshli oil field in Azerbaijan offshore and possibly from Kazakh fields via a Caspian
Transport System of unit barges that is under consideration.
The South Caucasus Pipeline from Baku-Tbilisi-Erzerum will supply 7.7 billion cubic meters
of natural gas from the Azeri Shah Deniz gas field to the Turkish border by the end of 2006
expanding to 8.4 billion cubic meters per year of natural gas as it takes on output from Shah
Deniz I. Additional compression can boost pipeline throughput considerably to 20 billion
cubic meters per year to accommodate the second generation investment plans for Shah
Deniz II that are currently under consideration. Gas from lower gas horizons in the Azeri
Chirag Guneshli oil field and other Caspian oil and gas fields that are currently in their
development phase will increase the gas volumes through the Southern corridors and relieve
upward price pressure in downstream markets.
Associated gas volumes from the giant Kashagan offshore field of Kazakhstan that is
operated by a consortium of international oil majors lead by ENI, and Block 1 offshore of
Turkmenistan being developed by the National Oil and Gas Company Petronaz of Malaysia
could well justify further midstream investment in a southern gas corridors to forge the link
between significant Caspian gas volumes and down stream markets in Central and Eastern
Europe.
In January 2006 gas security in energy consuming countries of IEA became an issue as gas
supply shortfalls were the result of Russian/Ukrainian commercial disputes. This has led to
greater interest in increased market diversity, new gas market entrants and greater
interconnectivity between markets along the energy chain. This means improving market
access for notably Central and Eastern European gas markets to the supply potential of the
Caspian and Central Asian region in partnership with Russia. Russia, too, can be a
beneficiary of the strategic role that Georgia and Azerbaijan in the South Caucasus and
Turkmenistan, Uzbekistan and Kazakhstan in Central Asia can play in providing diversity of
supply and transport to bolster Eurasian energy market security.
What lies ahead?
The Caspian and Central Asian region is already delivering on its promise to provide global
oil markets with incremental volumes and diversified routes. This is particularly true for the
North Western Caspian Basin where Azerbaijan, Russia and Kazakhstan are all producers.
Various operational joint development agreements have been concluded to side step
contentious issues on Caspian delimitation that still encumber development in the South East
Caspian Basin that Turkmenistan shares with Iran and Azerbaijan. Through attractive
investment conditions, Caspian and Central Asian host governments were able to attract
strategic investors to help realize this potential. Lately the fiscal and legal conditions to
mobilize investment from major international oil and gas companies have shifted in Central
Asia. In Azerbaijan and Georgia, where new heads of state have recently come to power,
© OECD/IEA,(2006)

IEA Discussion paper to the Regional Conference on Eurasian Energy Security, Market Access &
Investment Policy co hosted by IEA and Georgia on from the 19 th to the 21 st of June 2006
investor confidence seems to be improving. In as far as Caspian gas is concerned, Azerbaijan
will start to supply the Turkish market at Erzerum with natural gas from its Caspian offshore
field ‘Shah Deniz’. Though Caspian gas resources are proximate to European demand
markets and can therefore be realized at relatively low cost, many hurdles still remain before
Caspian gas, especially the east Caspian resource base, will further diversify wider European
gas imports.
Energy Sector Diversity touches on Foreign Policy issues: public private partnerships
These hurdles are wide ranging and involve data transparency on reserves and transport
infrastructure, economic and technical requirements as well as matters involving
macroeconomic and social issues related to good governance and extending the corporate
standards of publicly listed investor companies relative to state owned companies. Here the
diversity of supply interests of Eurasian energy markets converge with the broader foreign
policy and security issues that are at play in the region. The challenge here is to devise a
public private sector partnership that can configure the issues in energy sector and foreign
policy and security domains in a way that they reinforce the opportunities contained in each
and add momentum to overcome obstacles in this region.
A public private partnership for diversity of supply through a Southern Corridor
Such a public private partnership would be particularly helpful to further unlock the Central
Asian gas potential south east of the Caspian Sea for the benefit of wider Eurasian market
performance. The current limited Central Asian gas export options for the approximately 50
billion cubic meters per year of natural and associated gas that is expected to rise rapidly over
the next decades allow incumbent suppliers to ‘bank’ high cost Siberian reserves and
maintain market dominance. This has allowed Gazprom to sell Central Asian volumes into
European markets at a considerable price differential through its pipeline system
downstream. For some, this has implied living with a monopoly risk, affecting transparent
and sustainable performance of Eurasian energy supplies. The South Caucasus and Georgia
in particular would enable diversity of supply options that would serve the interest of
stakeholders interested in Eurasian energy demand and supply security. In this respect, the
increasing references to Trans Caspian pipelines by Presidents Saakashvili of Georgia and
Ilham Aliev of Azerbaijan, Commissioner Andris Piebalgs, Ministers of Energy Hilmi Güler
of Turkey and Baktykozha Izmukhambetov of Kazakhstan should come as no surprise.
Ultimately, whether oil and gas volumes through a ‘Southern Corridor’ to Eurasian markets
will involve a Trans Caspian gas pipeline from Kazakhstan or Turkmenistan or both or a
Caspian Pipeline Consortium II for oil should be for private sector investors to decide after
thorough analysis of the market context. Governments are essential to creating the context in
the Caspian and Central Asian region for companies to take up the commercial opportunities.
Georgia, a newly independent state that hosts key oil and gas transit systems from the
Caspian Sea to international markets, and the International Energy Agency, which represents
energy security policy experience of 26 industrialized economies of the OECD, wish to play
a constructive part in this debate and have therefore invited you, as a stakeholder, to this
policy dialogue on the 19 th and 21 st of June 2006 in Tbilisi.
© OECD/IEA,(2006)