Caspian Report - Issue: 07 - Spring 2014

caspian
published by caspıan strategy ınstıtute | SPRING 2014 ıssue: 07
Southern Gas
Corridor and the
Potential for Genuine
Diversification
Aura Sabadus
Afghanistan’s Uncertain
Future Threatens Global
Peace
Ahmet Yukleyen
Contribution of Trans
Adriatic Pipeline to the
Italian Economy
Matteo Verda
Discussions about
Violation of the Montreux
Convention and the
Future of Turkish-Russian
Relations
Fatih Ozbay

caspian
Publisher
Caspian Strategy Institute
Owner on Behalf of Publisher
Haldun Yavaş
Editor-in-Chief
Efgan Nifti
Managing Editor
Hande Yaşar Ünsal
Editorial Board
Siddharth Saxena, Gönül Tol, Bekir Günay, Efgan Nifti, Şaban Kardaş, Svante E. Cornell, Taleh Ziyadov, Amanda
Paul, Mitat Çelikpala, Ayça Ergun, John Roberts, Fatih Macit, Şener Aktürk, Kornely Kakachia, Ercüment Tezcan,
Vladimir Kvint, Joshua Walker, Sham L. Bathija, Emin Akhundzada, Hayreddin Aydınbaş, Ahmet Yükleyen, Mübariz
Hasanov, Fatih Özbay, İbrahim Palaz, Friedbert Pflüger
Researcher
Seda Birol
Research Assistants
Ayhan Gücüyener
Emin Emrah Danış
Translator
Cansu Ertosun
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The opinions expressed within are those of the authors
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CASPIAN Report
2
The urgent need to diversify energy supply sources hit
the European policy agenda as geopolitical complications
in and among the region’s supply and transit countries.
As a consequence, Europe has increasingly been
feeling the strain of high import dependence. Projects
of common interest announced by the EU, of which one
is the Southern Gas Corridor, are aimed at bringing alternative
energy sources through diversified routes to
ensure European energy security.
Notwithstanding key developments that have eased immediate
concerns over energy supply - including the
shale gas revolution in the US i , increased efficiency
measures for energy use, growth in the production of
renewable energy, and the stagnant trend in natural gas
demand - the need for diversification and energy security
has by no means disappeared. In this regard, the
Southern Gas Corridor remains one of the most feasible
and reliable projects on the ground in terms of providing
a secure energy supply from the Caspian to Europe.
Efgan Niftiyev
Editor-in-Chief
Twitter: @enifti
efgan.niḟtiẏev@hazar.org
The Caspian Report continues to monitor and evaluate
the European energy outlook, providing incisive policy
analysis on key developments. In the cover story of Caspian
Report, Aura Sabadus of King’s College discusses
the Southern Gas Corridor and its potential to provide
genuine diversification for Europe. Another key component
of the Southern Corridor, the Trans Adriatic
Pipeline (TAP) project, is explored in detail by Davide
Tabarelli, Antonio Sileo and Matteo Verda. A prominent
voice in energy studies, Frank Umbach, assesses the
strategic perspectives for unconventional gas in the EU
in the context of resistance to fracking for shale gas from
European publics and policy makers alike.

EDITORIAL
As in the previous issues of the Caspian Report, our
Spring issue focuses on the evolving energy agenda. To
this end, Mubariz Hasanov, Radu Dudau and Emin Akhundzada
highlight current trends in the Turkish and
Romanian energy markets as Turkey pursues its energy
hub aspirations, and Romania seeks to develop its energy
sources.
The ongoing crisis in Ukraine, the instability in Iraq,
Iranian nuclear negotiations and the recent presidential
elections in Afghanistan will shape the security climate
in Europe and the Middle East in the months and
years to come. The potential deterioration of the security
situation in Afghanistan in the aftermath of the US
withdrawal and the country’s uncertain future threaten
Afghanistan and its neighbors. Fatih Ozbay, Ahmet Yukleyen
and Luay Al-Khatteeb provide unique perspectives
on the volatile politics of the region.
So without further ado, get your coffee mug and prepare
for a good read!
Southern Gas
Corridor remains
one of the most
feasible and reliable
projects on the
ground in terms of
providing a secure
energy supply from
the Caspian to
Europe.
i.
According to BP statistics the United States has now become the
largest natural gas producer in the globe due to shale gas production.

caspian
CASPIAN Report
4
06
AHMET YUKLEYEN
Afghanistan’s Uncertain
Future Threatens Global
Peace
22
MATTEO VERDA
Contribution of Trans
Adriatic Pipeline to the
Italian Economy
32
AURA SABADUS
Southern Gas Corridor and
the Potential for Genuine
Diversification
46
DAVIDE TABARELLI
Environmental Effects of
the Trans Adriatic Pipeline
54
MEHMET AKIF OKUR
Iran Nuclear Negotiations
and Turkey
64
FRANK UMBACH
Strategic Perspectives for
Unconventional Gas in the
EU

TABLE OF CONTENS
80
ANTONIO SILEO
The Importance of TAP for
Italy Some Scenarios
106
LUAY AL-KHATTEEB
Why World Oil Prices Should Be High and
Stable
110 EMIN AKHUNDZADA
Turkey as an Energy Hub: Opportunities
and Challenges
92
RADU DUDAU
Romania’s Energy Strategy
Options: Current Trends in
Eastern Europe’s Natural
Gas Markets
116
124
FATIH OZBAY
Discussions about Violation of the
Montreux Convention and the Future of
Turkish-Russian Relations
MUBARIZ HASANOV
Some Remarks on Economic Benefits of
TANAP for Turkey

AHMET YUKLEYEN
6
Afghanistan’s
Uncertain Future
Threatens Global
Peace
Ahmet Yukleyen
EXPERT, CENTER ON POLITICS AND SOCIAL STUDIES, HASEN

Osama bin Laden, the leader of Al-Qaeda,
was killed by US Navy Seals on May 2,
2011. It looked like the “War on Terror”
had been won.
IntroductIon
Al-Qaeda’s September 11, 2001 attacks
challenged America’s post-
Cold War era global hegemony. In
response, President George W. Bush
launched the “War on Terror”, and
within a month, American and British
troops had entered Afghanistan.
They were later joined by NATO, the
Northern Alliance, and the United
Nations in their mission to destroy
al-Qaeda and eliminate its safe haven
by removing the Taliban from power.
Hamid Karzai became the twelfth
president of Afghanistan following
the removal of the Taliban regime in
late 2001, and Osama bin Laden, the
leader of Al-Qaeda, was killed by US
Navy Seals on May 2, 2011. It looked
like the “War on Terror” had been
won. However, two Chechen brothers
– though found to be self-radicalized
and unconnected to any outside terrorist
groups – were nonetheless motivated
by Jihadism and the wars in
Iraq and Afghanistan. They learned
how to build explosive devices from
an online magazine produced by
the al-Qaeda affiliate in Yemen, and
planted bombs at the finish line of
the Boston Marathon on April 15,
2013 killing three and wounding
264. 1
The Obama administration has not
officially used the term “War on Terror”
since 2009. It has become clear
that preventing terrorist attacks
requires more than dismantling Al-
Qaeda or removing the Taliban or
Saddam from power. Moreover, the
US has begun peace talks and negotiations
with the Taliban in Afghanistan,
as the country is undergoing a
major political transition and faces
significant challenges in 2014. In his
state of the union speech on January
28 th , 2014, President Obama said
that, with the so-called Bilateral Se-
7
CASPIAN REPORT, sprIng 2014
1.
Michael Cooper, Michael S. Schmidt, and Eric Schmitt (2013) “Boston Suspects Are Seen as Self-Taught and
Fueled by Web” April, 23. http://www.nytimes.com/2013/04/24/us/boston-marathon-bombing-developments.
htmlhp&pagewanted=all&_r=0. Retrieved on February 25, 2014.

AHMET YUKLEYEN
8
In Afghanistan’s presidential elections this
year, Karzai was barred by the constitution from
running again as a candidate.
curity Agreement (BSA) 2 , America
would keep on a “small force” of
Americans to train Afghan forces and
pursue what remains of al-Qaeda. 3
In Afghanistan’s presidential elections
this year, Karzai was barred by
the constitution from running again
as a candidate. Tough bargaining between
the Afghan government and
the United States over BSA continues.
What will this mean for the future of
Afghanistan
Justifying starting a war is easier than
making the case for ending one. The
uncertainties around the US withdrawal
from Afghanistan have global
as well as national implications. If
Taliban gets back in power and terrorist
networks return to their safe
haven, Jihadist networks could pose
an increased threat to global peace.
These networks gain strongholds in
countries with “failed states” such as
Iraq, Syria, and possibly Afghanistan
again.
This article examines the current
political negotiations between President
Obama and Karzai (and his
successor as President) over the US
withdrawal, and what this means
for the future of Afghanistan and beyond.
It lays out the challenges for
the country, and also the world. It argues
that the biggest challenge is the
potential reemergence of the Taliban,
and through it, an increased threat of
global Jihad. The persistence of Al-
Qaeda affiliated terror networks despite
the killing of Bin Laden and destruction
of Al-Qaeda’s infrastructure
has demonstrated that Al-Qaeda is a
not a top down organization of Jihadists
as some US intelligence experts
had mistakenly assumed. 4 The Jihadist
movement is global and cannot be
limited to a single organization. This
alternative approach argues that Jihadists
are self-recruits, educated,
and well-off. 5 According to The National
Intelligence Estimate, which
includes input from the US’s sixteen
intelligence agencies, predicts that
the Taliban and other power brokers
will become increasingly influential
as the US troops leave Afghanistan. 6
2.
Council on Foreign Relations (2013) “United States and Afghanistan’s Security and Defense
Cooperation Agreement” Published on November 21. http://www.cfr.org/afghanistan/unitedstates-afghanistans-security-defense-cooperation-agreement-november-2013/p31921.
Retrieved on February 23, 2014.
3.
The Economist (2014) “Afghanistan’s uncertain future. Playing with fire: Hamid Karzai’s
vilification of America is risking his country’s security” January 30. http://www.economist.com/
news/asia/21595472-hamid-karzais-vilification-america-risking-his-countrys-securityplaying-fire.
Retrieved on February 22, 2014.
4.
Elaine Sciolino and Eric Schmitt (2008) “A Not Very Private Feud Over Terrorism” June 8.
http://www.nytimes.com/2008/06/08/weekinreview/08sciolino.htmlpagewanted=all&_r=0.
Retrieved on Jan. 19, 2014.
5.
Marc Sageman (2008) Leaderless Jihad: Terror Networks in the Twenty-First Century
(Philadelphia: University of Pennsylvania Press).
6.
Ernesto Londoño, Karen DeYoung and Greg Miller (2013) “Afghanistan gains will be lost quickly
after drawdown, U.S. intelligence estimate warns” Washington Post. December 28
http://www.washingtonpost.com/world/national-security/afghanistan-gains-will-be-lost-
quickly-after-drawdown-us-intelligence-estimate-warns/2013/12/28/ac609f90-6f32-11e3-
aecc-85cb037b7236_story.html. Retrieved on February 20, 2014.

A stable future for Afghanistan looks
bleak, which means that any country
concerned with global Jihad terrorism
needs to understand this movement
and the details of its operations:
specifically, how they recruit,
grow, and operate in the context of
Afghanistan’s uncertain future.
to negotiate. The Loya Jirga, which
was composed of tribal leaders and
The Bilateral Security Agreement (BSA) will
allow about ten thousand foreign troops - 8000
American and 2000 NATO - to continue training
and assisting Afghan security forces.
US-Afghan Relations
The Bilateral Security Agreement
(BSA) will allow about ten thousand
foreign troops - 8000 American and
2000 NATO - to continue training
and assisting Afghan security forces.
Without the presence of these foreign
troops, many Afghans fear that
the influx of foreign aid will cease,
and that, unable to resist the Taliban,
the state could collapse. The first
sign of trouble came in last November,
on the occasion of a Loya Jirga, a
grand assembly of 2,500 community
leaders and tribal elders. The meeting
was convened to approve the
BSA, which had taken nearly a year
elders close to Karzai had overwhelmingly
endorsed it. However,
President Karzai criticized American
allies for a number of failures, including
civilian deaths from a NATO
bombing strike on January 15 th , 2013,
and making big prisons on several
occasions including a recent interview
with the Sunday Times. 7
Karzai’s other condition for the BSA
was for the US to open serious peace
talks with the Taliban. It transpired
that in early February, Karzai had
been holding secret peace talks with
the Taliban, without telling his Western
allies, though ultimately with
limited success. 8 Karzai does not
9
CASPIAN REPORT, sprIng 2014
7.
Christina Lamb (2014) “Hamid Karzai: America has left me with a mess. I can’t wait to go”
February 2, The Sunday Times. http://president.gov.af/en/news/full-transcript-of-presidentkarzais-interview-with-british-newspaper-the-sunday-times.
Retrieved on February 21, 2014.
8.
Azam Ahmed and Matthew Rosenberg (2014) Karzai Arranged Secret Contacts With the
Taliban” February 3. http://www.nytimes.com/2014/02/04/world/asia/karzai-has-held-secretcontacts-with-the-taliban.html.
Retrieved on February 22, 2014.
Afghan
delegates
discuss the
Bilateral Security
Agreement
during a fourday
Loya Jirga.

AHMET YUKLEYEN
10
want to face the same fate as Najibullah,
the last Soviet-backed president,
who was hanged when the
Taliban first came to power. 9 If the
Americans do not accept his conditions,
he added, “they can leave
anytime and we will continue our
lives”. 10 This was despite the agreement
reached between NATO and
Karzai at the Lisbon summit in 2010,
that NATO would pull its troops out
of Afghanistan at the end of 2014. If
BSA is not signed, all NATO troops
will leave at the end of this year and
all military aid will be cut off, which
would likely bankrupt the Afghan
army and the government. This is
easier said than done. Karzai has
even looked to Afghanistan’s neighbours
– India and Iran – for defense
assistance and support. Just a week
after he expressed his reluctance to
sign the BSA, Karzai signed a security
pact with Iran and soon thereafter
went to New Delhi. However,
the BSA has broad regional support
from friends and rivals alike – China,
India, Pakistan, and Russia. 11 Thus
President Karzai may be over-playing
his hand under these circumstances.
Nevertheless, President
Obama reaffirmed that America
would stand by Afghanistan and
keep on a “small force” of Americans
that would train Afghan forces and
go after “what remains of al-Qaeda”
in his state of the union speech on
January 28, 2014. 12
Even if Karzai does not sign the BSA,
his successor will, after the elections
scheduled for April of this year.
An October poll by the Moby Group
in Kabul, Afghanistan’s largest private
media organization, suggests
the two leading contenders are
former Foreign Minister Abdullah
Abdullah and former Finance Minister
Ashraf Ghani. 13 Some say Karzai’s
preferred candidate is Foreign
Minister Zalmay Rassoul. 14 They
are all pro-Western and continue to
support American and international
presence. In a way, Karzai knows
that the agreement will be signed
anyway, so his country is not going
to lose anything. By not signing it,
he is preserving his own reputation,
and indeed gaining credibility by
standing up for the Afghan people
and avoiding accusations of being a
“puppet” for the Americans.
9.
Fred Kaplan (2014) “Hamid Karzai Isn’t Crazy. He’s a wily survivor whose main concern is
watching his own back” Feb. 13. http://www.slate.com/articles/news_and_politics/war_
stories/2014/02/hamid_karzai_isn_t_crazy_the_afghan_president_is_trying_to_survive_a_
post.htmlwpisrc=burger_bar. Retrieved on Feb. 23, 2014.
10.
BBC (2014) “Afghanistan-US deal ‘hinges on Taliban peace talks’” Jan. 25. http://www.bbc.co.uk/
news/world-asia-25893296. Retrieved on Feb. 22, 2014.
11.
Ankit Panda (2013) “U.S. Intelligence Community Pessimistic About the Future of Afghanistan”
Dec. 31. http://thediplomat.com/2013/12/u-s-intelligence-community-pessimistic-aboutthe-future-of-afghanistan/.
Retrieved on Feb. 20, 2014. 5. Marc Sageman (2008) Leaderless
Jihad: Terror Networks in the Twenty-First Century (Philadelphia: University of Pennsylvania
Press).
12.
The Economist (2014) “Afghanistan’s uncertain future. Playing with fire: Hamid Karzai’s
vilification of America is risking his country’s security” Jan. 30. http://www.economist.com/
news/asia/21595472-hamid-karzais-vilification-america-risking-his-countrys-securityplaying-fire.
Retrieved on Feb. 22, 2014.
13.
John R. Allen and Michael E. O’hanlon (2013) Ignore Karzai’s Arrogant Insults” Nov. 28. http://
www.nytimes.com/2013/11/29/opinion/ignore-karzais-arrogance.html. Retrieved on Feb. 20,
2014.
14.
John R. Allen and Michael E. O’Hanlon (2014) “Solidify the U.S.-Afghanistan
Alliance” Jan. 23. http://www.brookings.edu/research/papers/2014/01/
solidify-us-afghanistan-alliance-ohanlon-allen

Afghanistan’s National
Challenges
The stalemate over the signing of
BSA only exacerbates the existing national
and global challenges. It introduces
more uncertainty to an already
fragile situation. As they say, Americans
have the watch but Afghans
have the time, especially the Taliban.
Afghan politics is based on betting
on who will win, and siding with that
party. If people calculate that power
will be redistributed, they make new
alliances based on those predictions.
All of the actors - ethnic groups, tribal
leaders, warlords, local police, and
power brokers - are interested in
maximizing their gains and can (re)
make any alliance. In this complex
power matrix, there are three interrelated
questions: security, politics,
and the economy. The security question
requires an evaluation of the
ability of the Afghan Security Forces’
(ASF) to counter the Taliban insurgents.
Even if the ASF is stronger,
the legitimacy of a new government
in Kabul depends on the success of
the presidential elections this year
for which people should feel secure
enough to go to polls. Moreover, if the
US troops leave and foreign aid weakens
the economy to support ASF or
state services fail. If Afghanistan falls
into a civil conflict, the war economy
will take hold of peoples’ lives. In this
economic structure, war means employment,
and peace means unemployment.
Thus, evaluating the security,
politics, and economy prospects
for Afghanistan is a matter of life and
death for the betters.
Security
Afghan politics is based on betting
on who will win, and siding
with that party.
Over the last twelve years, the war in
Afghanistan has cost 2,310 American
lives 15 and $700 billion. 16 In his memoir,
former US Defense Secretary
Robert Gates described how the US’s
Afghanistan policy changed from
perceiving a fight that had to be won,
to a situation that America just had
to exit. The exit strategy has been to
build the capacity of the ANF and to
train them to defend their own country
- but is ANF ready to take over
There are some very optimistic views
on the capacity of the ANF and on the
country’s stability, but also deep pessimism,
that once the US leaves, everything
will fall apart. 17 According
to the unclassified assessment by the
US military, violence in Afghanistan
has diminished, and “Afghan security
forces are now successfully providing
security for their own people.” 18
11
CASPIAN REPORT, sprIng 2014
15.
Iraq Coalition Casualty Count. http://icasualties.org/oef/. Retrieved on Feb. 23, 2014.
16.
National Priorities Project. http://nationalpriorities.org/cost-of/. Retrieved on Feb. 22, 2014.
17.
Ernesto Londoño, Karen DeYoung and Greg Miller (2013) Afghanistan gains will be lost quickly
after drawdown, U.S. intelligence estimate warns” Dec. 28. http://www.washingtonpost.
com/world/national-security/afghanistan-gains-will-be-lost-quickly-after-drawdown-usintelligence-estimate-warns/2013/12/28/ac609f90-6f32-11e3-aecc-85cb037b7236_story.
html. Retrived on Feb. 20, 2014.
18.
US Department of Defense (2013) Report on Progress Toward Security and Stability in
Afghanistan. http://www.defense.gov/pubs/October_1230_Report_Master_Nov7.pdf. P. 1.
Retrieved on Feb. 19, 2014.

AHMET YUKLEYEN
12
In short, ANF has made progress but
is not ready to control the country.
According to Stephen Biddle, a defence
policy expert at the Council
on Foreign Relations, Afghanistan
experts in and out of government
have varying opinions. The optithe
classified US National intelligence Estimate
predicts that the Taliban and other power
brokers will become increasingly influential as
US troops withdraw.
However, the classified US National
Intelligence Estimate predicts that
the Taliban and other power brokers
will become increasingly influential
as US troops withdraw.
Despite the progress ANF has made,
they are not yet ready to provide security
for the country on their own.
The United Nations reported that civilian
casualties rose 16 percent in
the first eight months of 2013. 19 The
ANF needs more time to operate on
their own. Today, there are 38,000
US and 19,000 NATO troops serving
in Afghanistan, training, advising,
and assisting Afghan forces, both
military and police. 20 Since 2009, the
number of Afghan security forces
has grown from 100,000 poorly
equipped and minimally trained
troops to a force of nearly 350,000,
which is now planning and executing
95 percent of daily patrols. Despite
this impressive growth, these
troops are still mostly illiterate, and
they lack supporting airpower, intelligence,
and medical capabilities.
Moreover, institutional ability to
train and pay personnel or resupply
units is weak. 21
According to the UNAMA Mid-Year
Report 2013 on Protection of Civilians
in Armed Conflict, as Afghan security
forces have begun to conduct
the majority of operations, the number
of casualties has risen considerably.
22 During the second quarter of
2013, over 3,500 Afghan service personnel
were reportedly wounded or
killed in action. On 1 July, the Ministry
of the Interior reported that
299 police officers were killed in
June, a 22 per cent increase over the
same period in 2012. Large-scale
unauthorized absences, in the army
in particular, remain an issue. The
same report documented 3,852 civilian
casualties (1,319 deaths and
2,533 injuries). “That marked a 14
per cent rise in civilian deaths and
a 28 per cent increase in civilian
injuries compared to the first six
months of 2012, with civilian casualties
up 23 per cent overall.”
19.
United Nations Assistance Mission in Afghanistan (2013) “UNAMA registers 16 per cent
rise in civilian casualties in Afghanistan” Oct. 2. http://unama.unmissions.org/Default.
aspxtabid=12254&ctl=Details&mid=15756&ItemID=37327&language=en-US. Retrieved on
Feb. 19, 2014.
20.
NATO (2014) “International Security Assistance Force: Key Facts and Figures” Jan. 15. http://
www.isaf.nato.int/images/stories/File/2014-01-15%20isaf%20placemat-final.pdf. Retrieved
on Feb. 15, 2014.
21.
Janine Davidson (2014) “If there are no U.S. or NATO troops in Afghanistan after 2014, what
happens” Feb. 3.http://www.cfr.org/afghanistan/if-there-no-us-nato-troops-afghanistanafter-2014-happens/p32320.
Retrieved on Feb. 15, 2014.
22.
United Nations Assistance Mission in Afghanistan (2013) Afghanistan: Mid-Year Report 2013.
Protection of Civilians in Armed Conflict. P. 1. http://unama.unmissions.org. Retrieved on Feb
10, 2014.

An Afghan
protester holds
up a banner
reading “Signing
Bilateral Security
Agreement with
the USA is a
Treason”.
13
mists see Afghan security forces
expanding their territorial control
until the Taliban is forced into a
peace deal. Pessimists fear that the
government could eventually lose
control of the capital and other big
cities because ANF is too weak. Biddle
himself predicts “a stalemate for
years to come.” 23
The future of Afghanistan lies in rebuilding the
legitimacy of the national political system
through fair and free elections; creating
functional state institutions that build trust
in the national government rather than local
power brokers; and fighting corruption.
rather than local power brokers; and
fighting corruption.
CASPIAN REPORT, sprIng 2014
PolItIcs
The future of Afghanistan lies in
rebuilding the legitimacy of the national
political system through fair
and free elections; creating functional
state institutions that build
trust in the national government
The upcoming presidential elections
are an opportunity and challenge for
politics. The acceptance of the final
election outcome by Afghanistan’s
main constituencies would represent
a great step toward political legitimacy.
If Afghan people can reach
political consensus on a candidate,
23.
Ernesto Londoño, Karen DeYoung and Greg Miller (2013) Afghanistan gains will be lost quickly
after drawdown, U.S. intelligence estimate warns” Dec. 28.http://www.washingtonpost.
com/world/national-security/afghanistan-gains-will-be-lost-quickly-after-drawdown-usintelligence-estimate-warns/2013/12/28/ac609f90-6f32-11e3-aecc-85cb037b7236_story.
html. Retrived on Feb. 20, 2014.

US President
Barack Obama
holds a bilateral
meeting with
Afghanistan
President Hamid
Karzai.
AHMET YUKLEYEN
14
they can move forward - but that has
not yet happened. Although many
policymakers and analysts focus on
who will be the next president, the
more important question in relation
to sustainable peace and political
consensus is whether Afghanistan’s
Pashtun, Uzbek, Tajik, Hazara, and
other major constituencies will support
the election’s outcome. The biggest
opposition to any political consensus
is the Taliban, who are mostly
Pashtuns. The Taliban leader Mullah
Omar disparaged the upcoming elections
as a “waste of time”, highlighting
allegations of fraud and corruption
in previous elections as part of
a campaign to discourage election
participation. 24
State institutions beyond the security
sector must be viable. These
include the public-finance system;
health services and education; infrastructure
for transportation, communications,
irrigation, and energy.
State institutions should be able to
manage sources of revenue, including
municipalities. A reform agenda
needs to address corruption and
ensure services work not only in the
major cities but also in the towns and
villages. The rural areas are most
open to corruption and risk falling
into the hands of local power brokers.
If sub-state actors (especially power
brokers from northern and western
Afghanistan) lose faith in the central
government, they are likely to accelerate
their efforts to rearm. These fissures
will undermine the cohesiveness
of the ANF and other security
agencies. If the central government
cannot control the distant regions
of Afghanistan, then India, Russia,
and Iran will likely increase support
for anti-Taliban forces in the north
and west, while Pakistan would support
the Taliban and other Pashtun
groups in the south and east. 25
24.
United Nations Assistance Mission in Afghanistan (2013) Afghanistan: Mid-Year Report 2013.
Protection of Civilians in Armed Conflict. P. 1. http://unama.unmissions.org. Retrieved on Feb
10, 2014.
25.
Graeme Smith, Seth G. Jones, Nader Nadery, Clare Lockhart, Director, and Daniel S. Markey
(2013) “Prospects for Afghanistan in 2014” Dec. 18. http://www.cfr.org/afghanistan/prospectsafghanistan-2014/p32094.
Retrieved on Feb. 18, 2014.

The reliance of the US forces on manipulative
powerbrokers and controversial
paramilitary forces, such as the Afghan
Local Police, has been extremely
problematic for stability and counterterrorism
objectives in the long term. It
was often the powerbrokers’ politicaltribal-criminal
patronage networks
that shaped the stabilization and statebuilding
effort in Afghanistan. “Many
Afghan people themselves refer to the
post-2002 political dispensation and
the rise of non-Taliban protagonists as
mafia rule.” 26
Mafia rule can gain a great deal of legitimacy
and political capital among the
population, especially if it outperforms
the state in providing security, services,
and socio-economic benefits. But mafias
can be highly abusive, capricious,
and ultimately deficient in providing
security or economic benefits to the
population, which is the situation that
emerged in post-Taliban Afghanistan.
“Since many of the mafia-like powerbrokers
have been linked to the Afghan
government and even frequently held
positions in the government, many Afghans
have come to see the state itself
as a mafia-like structure.” 27
Karzai’s presidency has largely lost legitimacy
due to corruption. If the political
actors of Afghanistan fail to use the
elections this year as an opportunity
to build political consensus and legitimacy
through trustworthy state institutions,
no military power can stabilize
the country. This could lead all players
to default to a civil war in which they
all lose out.
Economy
A stable economy is a vital in providing
security and dependable political
institutions. If soldiers in ANF are not
paid, they will seek out other options.
If state officials are not paid well, they
begin to engage in corruption and
bribery. Moreover, without stability
and well-functioning bureaucracy, investments
cannot grow. The Afghan
economy has been trapped in this
vicious circle for decades, and consequently
is reliant on two main sources
of income: foreign aid and opium.
If security is not provided once US
troops leave, aid workers and investment
dollars will leave as well. The
hard-won gains from twelve years of
fighting and $17 billion in economic
assistance 28 could be lost if the country
slides into another violent civil war,
reverts to Taliban rule, and if al-Qaeda
reclaims its former safe haven. The
sooner Afghanistan moves toward
revenue self-sufficiency, the sooner
it can act to prevent international aid
dependency. This requires focusing
on certain sectors for growth such as
agriculture, extractives, and light industry
and linking them to markets
inside and outside the country. It also
requires fighting corruption and reducing
revenue losses to middlemen. 29
15
CASPIAN REPORT, sprIng 2014
26.
Vanda Felbab-Brown (2013) “Afghanistan After ISAF” Harvard International Review Vol. 35, No.
2.http://hir.harvard.edu/not-a-drop-to-spare/afghanistan-after-isafpage=0,2. Retrieved on
Feb. 2, 2014.
27.
Ibid. p. 3.
28.
U.S. Agency for International Development http://www.usaid.gov/afghanistan/about-us.
Retrieved on Feb. 12, 2014.
29.
Graeme Smith, Seth G. Jones, Nader Nadery, Clare Lockhart, Director, and Daniel S. Markey
(2013) “Prospects for Afghanistan in 2014” Dec. 18. http://www.cfr.org/afghanistan/prospectsafghanistan-2014/p32094.
Retrieved on Feb. 18, 2014.

AHMET YUKLEYEN
16
The second big challenge in stabilising
the Afghan economy is the
opium trade. The 2013 World Drug
Report highlighted that Afghanistan
accounted for 74 per cent of the
world’s illicit opium production in
2012. 30 The global area under poppy
cultivation rose by 15 per cent in
2012, driven largely by increases
in Afghanistan. Global production,
however, fell by almost 30 per cent,
mainly as a result of poor yields
in Afghanistan owing to adverse
weather conditions. Moreover, there
are nearly 1 million Afghans affected
by drug use — one of the world’s
highest levels of addiction — and
only 10 per cent receiving any form
of treatment.
In the midst of this gloomy picture,
there are two glimpses of hope for
the Afghan economy: energy and
youth. On July 7 th , Afghanistan became
the fifty-fourth member of the
Energy Charter Treaty. On July 9 th ,
progress was made on the Turkmenistan-Afghanistan-Pakistan-India
(TAPI) gas pipeline project with a
contract signed in Ashgabat between
Afghanistan and Turkmenistan on
the sale and purchase of gas. On July
13 th in Kyrgyzstan, a meeting of the
Foreign Ministers’ Council of the
Shanghai Cooperation Organization
reaffirmed support to Afghanistan
as an “independent, peaceful, neutral
and prosperous state, free from
terrorism and drug-related crime.” 31
The central role of the United Nations
in international efforts to improve
the situation in Afghanistan was also
underlined. Under the Istanbul Process,
regional technical groups on all
six of the agreed confidence-building
measures held meetings.
Human capital is the most valued
type of capital in today’s high-tech
global economy. Afghanistan’s new
generation—tolerant and talented—
is the future of this country. This new
generation is full of the energy and
resources required to tackle its country’s
challenges. 32 As Afghanistan
navigates the complex road ahead,
these aspirations and voices must be
addressed.
Global Challenges: Jihadi
Salafism, Al-Qaeda, and the
Taliban
The uncertainty in Afghanistan’s future
brings global as well as national
challenges because of the affinity
among Jihadi Salafism, Al-Qaeda,
and the Taliban. With a degree of
simplification, it can be claimed that
Jihadi Salafism is the bonding ideology
between Al-Qaeda and the Taliban.
This means that if the Taliban
gains ground in Afghanistan, Al-Qaeda
can regain footing in this part of
the world. Jihadi Salafis are already
a global movement, but they gain
30.
United Nations Assistance Mission in Afghanistan (2013) Afghanistan: Mid-Year Report 2013.
Protection of Civilians in Armed Conflict. P. 1. http://unama.unmissions.org. Retrieved on Feb
10, 2014.
31.
United Nations Assistance Mission in Afghanistan (2013) Afghanistan: Mid-Year Report 2013.
Protection of Civilians in Armed Conflict. P. 1. http://unama.unmissions.org. Retrieved on Feb
10, 2014.
32.
Graeme Smith, Seth G. Jones, Nader Nadery, Clare Lockhart, Director, and Daniel S. Markey
(2013) “Prospects for Afghanistan in 2014” Dec. 18. http://www.cfr.org/afghanistan/prospectsafghanistan-2014/p32094.
Retrieved on Feb. 18, 2014.

traction in places where they can
train new recruits. Failed states such
as Somalia and Syria provide fertile
ground. If Afghanistan becomes a
safe haven for Jihadi Salafists once
again, this would be especially significant,
because Al-Qaeda (as the
spearhead for Jihadi Salafism) began
here. If Jihadi Salafism is understood
as the common denominator of Al-
Qaeda and the Taliban, the potential
danger here is clear.
Jihadi Salafism
The Arabic term Salaf literally means
predecessors. Salafism claims that
“true Islam” is based on (i) a literalist
interpretation of the Quran and Hadith,
the sayings of the Prophet Muhammad;
(ii) a puritanical approach
to traditional Islamic practices, rejecting
them as bid’a, cultural innovations,
that adulterate “pure” Islam
(e.g. celebrating the birth of Prophet
Muhammad and visiting the tombs
of Sufi masters); and (iii) an exclusivist
conception of religious truth
and salvation. Salafists claim that
only their interpretation of Islam can
bring salvation. They often quote the
hadith, sayings of Prophet Muhammad
according to which Muslims
will divide into seventy factions at
the end of days, and only one group
will be saved. They believe they are
this group.
Salafism calls on followers to purge
Islam of cultural and mystical traditions
and to reassert tawhid, the
unity of God. The Salafist conception
of tawhid is pitted against Sufi
emphasis on the role of a master to
guide one’s spiritual journey to God.
The puritanical practice of Salafism
The uncertainty in Afghanistan’s
future brings global as well as
national challenges because of
the affinity among Jihadi Salafism,
Al-Qaeda, and the Taliban.
is based a rejection of all Islamic
interpretations and practices that
are not based on direct, literal references
to the Quran and Hadith. These
rejected practices are known as
bid’a, innovations, that lead Muslims
astray. They are particularly critical
of Sufism, which involves mystical
rituals, sometimes music, and guidance
by spiritual masters. This is
considered shirk, a violation of God’s
unity. The Salafists are exclusivist
because they reject all other interpretations
of Islam. This exclusivism
ranges from calling themselves “Ahl
al-najat” (People of Salvation), indicating
they are the only group that
will be saved on Judgment Day, to
outward rejection of all who do not
follow their path as apostate, takfir.
The literalist, puritanical, and exclusivist
Salafist discourse provides
a “simple and straightforward” understanding
of Islam, which comforts
those seeking certitude without
questioning at the expense of
other Muslims, considered to be
misguided at best, and apostates at
worst. The Salafists underline the
differences in their discourse with
the other Islamic interpretations in
order to recruit more followers from
other Islamic organizations. On the
one hand, this attitude wins them
new followers because they appear
non-compromising and “authentic”
with their emphasis on learning Arabic
and dress code, which includes
17
CASPIAN REPORT, sprIng 2014

AHMET YUKLEYEN
18
beards and long tunics for men and
the niqab, or face veil, for women.
Three sub-trends within Salafism—
apolitical, political, and Jihadi—have
emerged. 33 This division occurred in
response to the arrival of US troops in
Saudi Arabia during the First Gulf War
in 1992. Apolitical Salafists believe
that they should obey the Saudi King
even though his decision to invite the
“infidel” to sacred grounds was wrong.
They preach that only God can make
laws and that Muslims must refrain
from being involved in politics because
it leads to compromise and corruption
of faith. They are interested
in fulfilling rituals, as well as learning
and spreading “true” Salafism. Political
salafists have criticized the Saudi
King and became independent and
got involved in politics. They also perform
selective readings of Sayid Qutb,
which justifies violence under some
circumstances. Jihadi Salafists believe
that Islam is under global attack, especially
by the United States, and that
nobody is defending it. To them, this
means that all Muslims are responsible
for taking up arms and fighting. Indeed,
Bin Laden issued a fatwā against
the United States, which was first published
in Al Quds Al Arabi, a Londonbased
newspaper. 34 It was entitled
“Declaration of War against the Americans
Occupying the Land of the Two
Holy Places” referring to Mecca and
Medina in Saudi Arabia. The reference
to ‘occupation’ in the fatwā referred
to US forces based in Saudi Arabia for
the purpose of controlling air space
in Iraq, known as Operation Southern
Watch.
The Taliban, Al-Qaeda, and
Jihadi Salafism in the Middle
East
The Taliban’s extremely strict and
anti-modern ideology combines Pashtun
tribal codes, or Pashtunwali, with
jihadism of Osama bin Laden. 35 Their
ideology marked a departure from the
Islamism of the anti-Soviet mujahideen
rulers they replaced, who tended
to be mystical Sufis, traditionalists, or
radical Islamists inspired by Sayyid
Qutb. 36 Both Osama Bin Laden’s Jihadism
and Taliban’s ideology were pragmatic.
They have found ways to justify
their actions based on religious ideals.
For instance, between 1996 and 1999,
Mullah Omar reversed his opinions
on the drug trade, apparently as it
only harmed the infidels or kafirs. The
Taliban controlled 96% of Afghanistan’s
poppy fields and made opium
its largest source of taxation. 37 Taxes
on opium exports became one of the
mainstays of Taliban income and
their war economy. 38 According to
33.
Quintan Wiktorowitz “Anatomy of the Salafi Movement,” Studies in Conflict & Terrorism 29 no.
3, (2006): 207-239.
34.
Peter L. Bergen (2002) Holy War, Inc.: Inside the Secret World of Osama bin Laden (New York:
Free Press).
35.
Rashid, Ahmed (2000) Taliban: Militant Islam, Oil and Fundamentalism in Central Asia (New
Haven: Yale University Press) p. 132, 139.
36.
Rashid, Ahmed (2000) Taliban: Militant Islam, Oil and Fundamentalism in Central Asia (New
Haven: Yale University Press) p. 87.
37.
Chouvy, Pierre-Arnaud (2010) Opium: uncovering the politics of the poppy (Boston: Harvard
University Press). p. 52.
38.
Dexter Filkins (2001) “A Nation Challenged: Rise and Fall; The Legacy of the Taliban Is a Sad and
Broken Land” Dec. 31, 2001. http://www.nytimes.com/2001/12/31/world/nation-challengedrise-fall-legacy-taliban-sad-broken-land.htmlpagewanted=3.
Retrieved on Feb. 10, 2014.

Rashid, “drug money funded the
weapons, ammunition and fuel for
the war.” 39 In the New York Times,
the Finance Minister of the United
Front, Wahidullah Sabawoon, declared
the Taliban had no annual
budget but that they “appeared to
spend US$300 million a year, nearly
all of it on war.” 40 He added that the
Taliban had come to increasingly rely
on three sources of money: “poppy,
the Pakistanis and bin Laden.” 41
In a similar manner, Bin Laden’s
pragmatism worked to justify the
death of innocents during his first
bombing attack on December 29,
1992, which killed two people at the
Gold Mihor Hotel in Aden. Al-Qaeda
was reported to have developed its
justification for the killing of innocent
people. According to a fatwa
issued by Mamdouh Mahmud Salim,
the killing of someone standing near
the enemy is justified because innocent
bystanders will be rewarded
by going to paradise, provided they
were good Muslims, and to hell if
they were bad or non-believers. 42
Their ideological affinity was followed
by an organizational alliance.
In 1997, Bin Laden strengthened his
alliance with the Taliban by sending
several hundred Afghan Arab
fighters to help the Taliban fight
the Hazaras, the third largest ethnic
group and overwhelmingly Shia and
Persian speakers in Afghanistan. 43
In February 1998, Osama bin Laden
and Ayman al-Zawahiri co-signed a
fatwa in the name of the World Islamic
Front for Jihad Against Jews
and Crusaders, which declared the
killing of North Americans and their
allies an “individual duty for every
Muslim” to “liberate the al-Aqsa
Mosque (in Jerusalem) and the holy
mosque (in Mecca) from their grip”. 44
Bin Laden left Sudan for Afghanistan
on May 18, 1996 and forged a close
relationship with Mullah Mohammed
Omar along with 300 Afghan-
Arabs, most of whom became Jihadist
fighters.
The ideological and organizational
alliance between the Taliban and Al-
Qaeda also has implications for the
Middle East. Journalist and author
Robin Wright sums up the differences
between Wahhabis and Salafis
as follows: “Not all Saudis are Wahhabis.
Not all Salafis are Wahhabis,
either. But Wahhabis are basically
all Salafis.” 45 In other words, Saudi
controlled Salafis are called Wahhabis.
Saudi Arabia is using Salafis
to develop its Middle East policies.
The major threat of this dangerous
approach is that it may fuel sectarian
civil war in the Middle East. Accord-
19
CASPIAN REPORT, sprIng 2014
39.
Ibid. p. 3.
40.
Ibid. p. 3.
41.
Ibid. p. 3.
42.
Testimony of Jamal al-Fadl, U.S. v. Usama bin Laden, et al. http://cryptome.org/usa-v-ubl-dt.
htm. Retrieved on Feb. 23, 2014.
43.
Ahmed Rashid (2000) Taliban: Militant Islam, Oil and Fundamentalism in Central Asia (New
Haven: Yale University Press) p. 139.
44.
World Islamic Front Statement (1998) “Jihad Against Jews and Crusaders” Issued on February
23. http://www.fas.org/irp/world/para/docs/980223-fatwa.htm. Retrieved on Feb. 20, 2014.
45.
Robin Wright (2012) “Don’t Fear All Islamists, Fear Salafis” August 19.http://www.nytimes.
com/2012/08/20/opinion/dont-fear-all-islamists-fear-salafis.html_r=0. Retrieved on Feb.
20, 2014.

Anti-war
demonstrators
rally near the
Federal Building
calling for a
troop pullout in
Afghanistan.
AHMET YUKLEYEN
20
ing to Salafists, Shia are not Muslim
– indeed, Al-Qaeda lists Shia along
with “heretics, [...] America, and Israel”
as the four principal “enemies
of Islam.” 46 For instance, Al-Qaeda
affiliated organizations attack the
Syrian regime because they consider
Alawites to be one of the enemies of
Islam.
Al-Qaeda has several direct and indirect
affiliates in the Middle East. The
Al-Nusra Front is a branch of Al-Qaeda
operating in Syria and Lebanon.
It announced its creation on January
23, 2012. 47 Since then it has been
described as “the most aggressive
and successful” force up to ten thousand
fighters and making up nine
percent of the Free Syrian Army. 48
The group has been designated as a
terrorist organization by the United
Nations. There are indirect affiliates
of Al-Qaeda in Syria as well, such as
the “Islamic State of Iraq and the Levant”,
or ISIS in Arabic abbreviation.
There have been claims and counter
claims of a merger between the Al-
Nusra Front and ISIS. Most recently,
Al-Qaeda declared that they have cut
off ties with ISIS. 49 The affiliations
and ideological affinities of Al-Qaeda
46.
Lawrence Wright (2006) The Looming Tower: Al-Qaeda And The Road To 9/11 (New York:
Knopf) p. 303.
47.
Agence France-Presse (2013) “Zawahiri disbands main Qaeda faction in Syria” Nov. 8.http://
www.globalpost.com/dispatch/news/afp/131108/zawahiri-disbands-main-qaeda-factionsyria-0.
Retrieved on Feb. 21, 2104.
48.
David Ignatius (2012) “Al-Qaeda affiliate playing larger role in Syria rebellion” Nov. 30.http://
www.washingtonpost.com/blogs/post-partisan/post/al-qaeda-affiliate-playing-larger-rolein-syria-rebellion/2012/11/30/203d06f4-3b2e-11e2-9258-ac7c78d5c680_blog.html.
Retrieved on Feb. 20, 2014.
49.
Liz Sly (2014) “Al-Qaeda disavows any ties with radical Islamist ISIS group in Syria, Iraq” The
Washington Post. February 3, http://www.washingtonpost.com/world/middle_east/al-qaeda-
disavows-any-ties-with-radical-islamist-isis-group-in-syria-iraq/2014/02/03/2c9afc3a-8cef-
11e3-98ab-fe5228217bd1_story.html. Retrieved on Feb. 25, 2014.

in the Middle East illustrate that
Jihadi Salafism remains the greatest
challenge to global peace from
Afghanistan.
Conclusion
Uncertainty calls for instability
and powerbrokers negotiate even
harder in Afghanistan. If the young
people of Afghanistan lose hope in
the establishment of a national will
that overcomes the interests of local
actors and power brokers, the
future of Afghanistan will remain in
jeopardy to the detriment of all. The
future of Afghan politics and global
peace are closely interlinked. If the
Taliban returns to power and terrorist
networks grow stronger, then the
“War on Terror” will be lost. Even if
a precarious stability is reached in
Afghanistan, the threat from global
Jihadism will remain. Jihadism can
flourish as long as there are conflicts
in Muslim-majority countries.
No country can afford to believe
that they can use Jihadists for their
national interests without being
harmed. For instance, the US sponsored
the Mujahedeen against the
Soviet Union in the 1980s, and then
became the victim of Al-Qaeda Jihadists
two decades later.
Policies to counter terrorism require
global collaboration. Even the
comparison of various national programs
to de-radicalize Jihadists have
produced inconclusive results. 50 This
is a global challenge that demands
global cooperation. If national actors
calculate their short-term narrow
“national” interests as their only
measurement in understanding and
countering Jihadist terrorism, then
people in Boston, London, Madrid,
Moscow, Istanbul, Nigeria, and Damascus
remain in danger. If Afghanistan
falls into the hands of terrorist
networks again, this will pose a serious
threat to global peace. A successful
political transition and stability in
Afghanistan is necessary for global
peace.
21
CASPIAN REPORT, sprIng 2014
50.
Angel Rabasa, Stacie L. Pettyjohn, Jeremy J. Ghez, and Christopher Boucek (2010)
Deradicalizing Islamist Extremists (Arlington VA: RAND Corporation).

Matteo Verda
22
CONTRIBUTION OF
Trans Adriatic
Pipeline TO
THE ITALIAN
ECONOMY
Matteo Verda
SENIOR FELLOW, CENTER ON ENERGY AND ECONOMY, HASEN

The decision of building the Trans
Adriatic Pipeline (TAP) represented a
major breakthrough in the development
of the European natural gas system.
The decision of building the Trans Adriatic
Pipeline (TAP) represented a major
breakthrough in the development of
the European natural gas system. The
pipeline will eventually materialise the
Southern Gas Corridor, after a decade of
public discussion but no actual investment
decision, and it will allow a muchawaited
diversification of the European
import routes. TAP is indeed designed
to transport the natural gas coming
from the field of Shah Deniz, in the Caspian
offshore, to the EU final markets.
TAP is not a stand-alone pipeline, but
it is the final branch of a composed infrastructural
system which will include
the South Caucasus Pipeline (SCP) and
the Trans Anatolian Natural Gas Pipeline
(TANAP). SCP is an already existing
pipeline, running for 700 km from
the Azerbaijani production facilities
through Georgia, up to the border with
Turkey. SCP will be upgraded to transport
additional volumes, through the
laying of a second line along the same
route of the existing one. TANAP will be
the second section of the infrastructure
and it will transport Azerbaijani natural
gas across Turkey, following a new
route of 1.700 km. TANAP will end at
the border with Greece, where TAP
will start. 1
This last section will run across
Greek and Albanian territory, with
a secondary branch directed from
Greece to Bulgaria. TAP’s main destination
will be the Italian market,
which will be the largest and most
important gas market connected to
the pipeline. Despite a protracted crisis,
indeed, in 2013 Italy consumed
approximately 70 billion cubic metres
(bcm), remaining the second gas
market in continental Europe after
Germany. 2
TAP will be a 760 km-long pipeline
and its estimated construction costs
amount to 5,7 billion euros, mainly
concentrated in Greece and in the offshore
between Albania and Italy. After
its commissioning, TAP is expected to
work for at least fifty years and the
greatest share of its capacity will be
devoted to supply the Italian gas system.
In fact, out of a capacity of 10
bcm per year, 8 will be marketed in
Italy. As a consequence, the long term
impact of the pipeline will be mainly
concentrated in that country.
23
CASPIAN REPORT, SPRING 2014
1.
See TANAP website (http://www.tanap.com/en/) (accessed 30/04/2014).
2.
See Eurogas, Drop in 2013 EU gas demand emphasises need for swift change, 18/03/2014.

Matteo Verda
24
TAP will be a 760 km-long pipeline and its estimated
construction costs amount to 5,7 billion
euros, mainly concentrated in Greece and in the
offshore between Albania and Italy.
Contribution to the local
economy
Even if with to a limited extent, TAP’s
contribution to the Italian economy
will start during the construction
period, mainly in Apulia, the southeastern
region where the pipeline
will join the Italian gas network. According
to Nomisma Energia, a consultancy,
the value of the activities
directly related to the construction
of the infrastructure will be approximately
80 million euros per year. At
the same time, an average of 150 jobs
will be created locally. 3
Direct effects will continue during
the whole life of the pipeline, with
fixed operating costs related to the
maintenance of infrastructures. The
estimated impact is 4 million euros
per year, with the creation of 30 permanent
jobs. Indirect effects at local
level will include further 8 million
euros per year of turnover and 220
permanent jobs. The overall size of
the impact is limited, but its local dimension
and the long-term duration
are a key part of the social acceptability
of the infrastructure. Analogously,
local taxation generated by property
taxes on the infrastructures will be
limited to less than half a million euros
per year, but it will enhance local
acceptation of the project, at least
within local governments.
Contribution to the energy
security
Besides its direct effects, TAP will
have relevant indirect effects, beginning
with the improvement of the Italian
energy security. Natural gas represents
one third of the Italian energy
consumption and its supply depends
on imports for more than 90%. As a
consequence, a redundant and diversified
natural gas import system is a
priority for the reliability of the energy
supplies to the Italian economy.
Natural gas is also the most important
fuel for power generation (38%) and
the stability of the electrical system
has a relevance which is not limited
to the economic dimension, but it also
involving a strong security dimension.
Consequently, any improvement of
the Italian import capacity of natural
gas has a political relevance.
During the past decade, state-owned
Eni provided the strategy and investments
for the development of the Italian
natural gas system. The last major
investment in import capacity made
by Eni was the construction of the
Green Stream, a pipeline linking Libya
and Sicily, commissioned in 2004. After
that period, Italian natural gas market
adapted to the EU regulation and the
central position of Eni was progressively
dismantled, starting from the
ownership of the transport infrastructure,
which was completely unbundled
in 2012. As a consequence of the transitional
period, no new international
pipeline has been built in Italy and only
two new liquefied natural gas (LNG)
3.
See TAP social responsibility website (https://en.conoscitap.it/our-contribution) (accessed
30/04/2014).

Greece’s
Finance
Minister Yannis
Stournaras
listens to
Trans Adriatic
Pipeline’s
Managing
Director Kjetil
Tungland after
the signing
of an host
government
agreement in
Athens.
regasification facilities have been commissioned:
Rovigo in 2009 and Livorno
in 2013. At the same time the Italian
market initially expanded, reaching
its historical record of 84 bcm in 2005,
then stabilising above 80 bcm, until the
effects of the economic crisis reduced
energy demand. 4
During the past decade, the international
context became more and more
unpredictable, endangering the reliability
of the flows directed to Italy.
The single most important source of
natural gas for the Italian market is
Russia, which provides approximately
one third of the consumption. Since
all natural gas directed in Italy transits
through Ukraine, economic and political
instability in the country has created
a potential risk for the stability of Russian
supplies.
Algeria is the second source of natural
gas for the Italian market, accounting
for approximately one quarter of its
consumption. Algerian gas reaches
the Italian market through Tunisia
and both countries are exposed to the
risk of instability, due to the difficult
regional context and to the evolution of
the internal political systems, including
a relevant terrorism threat. Considering
the interaction of those factors, instability
in Northern Africa is a very serious
risk for natural gas supplies to the
Italian market, as demonstrated by the
unstable trend shown by exports from
Libya, ravaged by the consequences of
the civil war.
TAP will indeed provide a determinant
contribution to increase the diversification,
both in terms of suppliers and
transit route. TAP’s gas will indeed
come the Caspian region, which is a
completely new source not only for the
Italian market, but for the whole EU.
Moreover, Caspian gas will come transiting
through countries currently not
included in other routes. This double
diversification will reduce the risk level
25
CASPIAN REPORT, SPRING 2014
4.
See Ministero dello sviluppo economico (MiSE), online database (http://dgerm.sviluppoeconomico
gov.it/dgerm/bilanciogas.asp) (accessed 30/04/2014). Figures are standardised to a gross calorific
value of 39 MJ/cm.

SHAREHOLDER
STRUCTURE
OF TAP
Matteo Verda
BP
(20%)
SOCAR
(20%)
STATOIL
(20%)
FLUXYS
(16%)
TOTAL S.A.
(10%)
E.ON
(9%)
AXPO
(5%)
26
of the Italian imports. Albeit TAP’s contribution
to the Italian energy security
cannot be directly translated into a
monetary value, it probably represents
the single most important contribution
of the new pipeline to the Italian
economy.
Contribution to the
hub-strategy
According to the system operator
Snam Rete Gas, Italian natural gas consumption
in 2023 will be 73 bcm per
year, while domestic production will
continue its slow decline. 5 The combined
effect of growing demand and
shrinking production will be an additional
import demand of 7 bcm compared
with 2013 level.
However, if we consider pre-crisis levels,
expected import demand for 2023
is substantially at the same level of
2008, when new LNG regasification
facilities were not online. Those infrastructures
added a combined capacity
of nearly 12 bcm per year, substantially
increasing spare capacity. As a
consequence, existing infrastructural
endowment is largely sufficient to ensure
the reliability of the system, also
considering the existing storage capacity,
totalling more than 14 bcm. 6
Nevertheless, the existing import capacity
could be not enough for the
future needs of the Italian gas system.
The Italian National Energy Strategy
devises indeed a role of southern European
hub for the Italian gas network. 7
5.
Snam Rete Gas, Piano decennale di sviluppo delle reti di trasporto di gas naturale
2014-2023, 2014.
6.
See MiSE, Piano d’azione preventivo – Sistema gas Italia, 19/04/2013.
7.
See MiSE, Strategia energetica nazionale, 08/03/2013.

In practice, the Italian network should
become a transit point for the natural
gas directed in other European countries,
thus gaining a central position
for exchange activities, but also gaining
from the transit fees of the natural gas
transiting on the Italian gas network.
create value for the state-owned Snam
Rete Gas. Transit fees can be estimated
approximately in 200 million euros
per year for an export of 8 bcm, which
would not be possible to collect without
the construction of TAP. 8
In terms of infrastructural development,
this strategy entails the creation
of both exporting and importing capacity.
According to current plans, exports
in 2023 are expected to amount to approximately
8 bcm per year, directed to
Northern markets through Switzerland.
In particular, the plans include a permanent
flow reversal of the Transitgas, the
pipeline currently transporting natural
gas from Netherlands and Norway to
the entry point of Passo Gries.
The role of TAP is therefore essential
to provide new import capacity to the
Italian system. Indeed, the additional
capacity provided by TAP will be exactly
the same size of the expected export
flows, thus fully compensating them.
Without TAP’s capacity, instead, the
Italian system would lack the necessary
spare capacity to maintain an adequate
level of security and flexibility.
From an economic perspective, the realisation
of the hub-strategy would also
The role of TAP is therefore essential to
provide new import capacity to the
Italian system.
Contribution to the
competitiveness of the
market
Despite the progress achieved by the
Italian market, its competitiveness is still
limited by the role played by the incumbent,
Eni, which controls a large share of
the import capacity. The construction
of TAP would contribute to reduce Eni’s
market power and to foster competition,
by offering new volumes which can be
used to compete and increase the market
share of smaller operators.
Seven energy companies with long term
interests in Italy have already signed the
contracts for all the volumes imported
through TAP. 9 And none of them has a
market share above 7%. 10 Therefore,
27
CASPIAN REPORT, SPRING 2014
8.
The estimate is based on current transit fee, but it is purely approximate since tariffs are
regulated by the National Authority. Moreover, while the exit point is known (Passo Gries, at
the border with Switzerland), entry point for the exported gas is unknown. Finally, tariffs for
the entry point in Apulia are yet to be defined.
9.
The companies are GdF Suez of France (2,6 bcm/y), E.ON of Germany (1,6 bcm/y), Shell of
Great Britain and Netherlands (1 bcm/y), Hera of Italy (0,3 Gmc/a), Enel of Italy, Gas
Natural Fenosa of Spain and Axpo of Switzerland (which haven’t disclosed the exact volumes
purchased). Staffetta Quotidiana, Gasdotto Tap, chiusi contratti gas. In Italia arriveranno 8
mld mc/anno, 19/09/2013.
10.
Autorità per l’energia elettrica, il gas e il sistema idrico (AEEG), Relazione annuale 2013,
26/06/2013.

Matteo Verda
28
Azerbaijani gas will not entrench the
position of the incumbent, but conversely
will allow more competition
and, in theory, a reduction of the wholesale
prices. An important signal of the
potential impact of those contracts is
the pricing mechanism chosen by several
operators, such as GDF Suez, to find
innovative solutions non oil-indexed
and increase the competitiveness of
their volumes on the final markets . 11
TAP’s positive impact on the competitiveness
of the wholesale market is also
a fundamental element in the decision
of the Italian Energy Authority to grant
to the pipeline a third party access
exemption for 10 bcm per year for 25
years, in cooperation with Albanian and
Greek counterparts. Moreover, Energy
Authority also expects a relevant effect
in the final market: “due to the correlation
between wholesale and retail gas
prices in Italy, an improvement of the
competitive structure at the wholesale
level will most likely also have positive
effects downstream at the retail level.” 12
would create a significant supply increase,
which in turn would create a
downward pressure on prices. TAP’s
volumes will amount to 8 bcm, for a
market between 70 and 80: a sudden
10% increase in the supply would
be bound to have structural effects. A
partial “over-supply effect” could also
occur if the export capacity were only
partially used, creating a minor but
still significant downward pressure on
prices.
In any case, TAP’s positive effects on
wholesale and final prices in the Italian
market could be compensated by other
factors. Rising demand at EU level, supply
shortages, change in subsidisation
policy for renewable energy sources
are all fast-changing factors currently
very hard to predict, but which could
nullify any price reduction caused by
TAP. In this case, TAP’s positive effect
would be less evident but not less important,
since it would contribute to
avoid or reduce significant increase of
the energy prices.
Besides the effects on competition,
TAP’s construction could also affect
prices through a basic supply-demand
mechanism, in the case of a mothballing
of the hub strategy. Indeed, the
hub-strategy could be delayed and TAP
could start functioning before the commissioning
of the exporting capacity at
the border with Switzerland. Without
relevant export flows, TAP’s volumes
The sheer size of the Italian market
nonetheless provides a strong multiplier:
even a small change has a remarkable
effect in absolute value. In
2013, Italy imported 60 bcm at an average
price at the border of 330 euros
per thousand cubic metre (tcm), equal
to approximately 20 billion euros. 13
Considering that the average price of
natural gas on the final market is 450
11.
TAP is indeed a joint-venture including BP of Britain (20%), SOCAR of Azerbaijan (20%),
Statoil of Norway (20%), Fluxys of Belgium (16%), Total of France (10%), E.ON of Germany
(9%) and Axpo of Switzerland (5%). About the pricing, see Sissi Bellomo, «Gas azero a prezzi
sganciati dal petrolio. A Gdf Suez un contratto finora inedito in Europa», Sole24Ore,
11/04/2014.
12 .
AEEG-RAE- ERE, Joint Opinion of the Energy Regulators on TAP AG’s Exemption
Application, 26/07/2013.
13.
See MiSE, online database, and Istituto Nazionale di Statistica, online database
(http://bit.ly/1hZcSMv) (accessed on 30/04/2014).

Coliseum,
Rome.
29
euros per tcm, the value of the Italian
final market is approximately 30 billion
euros, taxes excluded. 14 Each single
percentage point of shift in the price
is therefore worth 300 million euros
and TAP’s potential impact could be
significant.
Potential TAP’s expansion
TAP’s first stage will have a capacity
of 10 bcm per years. However, the infrastructure
is designed to expand up
to 20 bcm per year, by adding more
compression capacity. The decision of
expanding TAP’s capacity will depend
on the availability of competitive upstream
capacity and by the expected
levels of consumption in the final
markets.
According to current forecasts, the Italian
final market is expected to grow
very slowly during the next decade.
Even considering a further decrease
of the domestic production, additional
volumes deriving from a TAP’s
upgrade would be largely redundant
for the Italian market.
The viability TAP’s expansion therefore
will depend on the possibility of
allocating a large share of the flows
to markets other than the Italian one.
A part of those flows could be allocated
to the Balkan markets, also beyond
Albania and Bulgaria. However
those markets are unlikely to expand
enough to absorb 10 bcm of Azerbaijani
gas, especially if the South
Stream will be completed during the
current decade.
CASPIAN REPORT, SPRING 2014
14.
See AEEG, online database (http://bit.ly/PSAOtY) (accessed on 30/04/2014).

Matteo Verda
30
In the end, the viability of TAP’s expansion
will depend on the possibility of
symmetrically expanding the export
capacity of the Italian gas network,
in order to supply Northern European
markets. If realised, the impact
If realised, the impact of TAP’s expansion will
be a further strengthening of the relevance
of the Italian gas network as a transit route,
with relative benefits for Snam Rete Gas.
of TAP’s expansion will be a further
strengthening of the relevance of the
Italian gas network as a transit route,
with relative benefits for Snam Rete
Gas. Clearly, additional import capacity
will also improve the level of security
of the Italian supply.
The relevance of TAP’s expansion
could be very different in the case of a
structural reduction of flows coming
from another source, due for example
to enduring political instability in
Northern Africa and lack of upstream
investments in the region. In this case,
TAP’s additional capacity would replace
missing volumes on a permanent
basis and the Azerbaijani gas would
substantially increase its share in the
Italian supply.
TAP’s current projects include only
one expansion up to 20 bcm per year.
Despite its relevance for the countries
directly involved, and especially Italy,
without a further expansion TAP’s impact
at EU level is bound to remain limited.
At the moment, constraints in the
upstream and a weak demand on the
final markets are limiting the viability
of the second line. However, if the pipeline
will be upgraded and its routes
will include the Italian gas network,
the impact for the Italian economy will
be absolutely positive.
Final remarks
All in all, TAP’s impact on the Italian
economy is consistently positive. During
the construction period, it will
provide small but still tangible positive
effects on the territory where the
infrastructure will be built (80 million
euros per year), which will partially
continue after its commissioning (12
million euros per year). Once operating,
it will increase competition among
the operators on the final markets, in
theory reducing wholesale and final
prices.
In the case of development of export
capacity on the Italian gas system, TAP
will provide the necessary volumes to
preserve a security buffer on the Italian
gas network and therefore allow
significant export flows without endangering
the stability of the final offer
on the Italian market. Therefore, TAP
will be essential for the export flows
which will allow Snam Rete Gas to collect
estimated 200 million euros as
transit fees. If the export capacity will
not be realised on time, Azerbaijani
gas will flood final market with competitive
natural gas, further reducing
final prices. Potential savings for the
final consumers will be 300 million euros
for each percentage point of price
reduction.
TAP’s positive impact on the Italian
economy is increased by the fact that
the investment is completely covered
by private capitals or, at least, not by
the Italian public spending. Therefore,
the Italian economy is benefitting from

more security, more competition and
potential price reductions without
resorting to the economic distortions
caused by taxation.
Besides its measurable economic impact,
TAP’s construction will improve
the Italian energy security. TAP will
indeed provide an effective diversification
of the Italian gas supply, considering
both to the origin of the gas and to
the route of the pipeline. For a country
which imports 90% of its natural gas
consumption, such diversification is a
relevant achievement, whose economic
value is difficult to assess. But which
probably represents the most important
contribution of TAP to the Italian
economy.
31
CASPIAN REPORT, SPRING 2014

Aura Sabadus
32
Southern Gas
Corridor and the
potential for genuine
diversification
Aura Sabadus
RESEARCH ASSOCIATE, EUROPEAN CENTRE FOR ENERGY AND
RESOURCE SECURITY (EUCERS), KING‘S COLLEGE

The Southern Gas Corridor has been
described as the successful outcome of the
EU’s quest to diversify supplies and wean
itself off Russian gas, a priority of its energy
security strategy.
The Southern Gas Corridor (SGC) – a
3,500 km route that in its first stage
will facilitate the transport of 10
bcm/year of Caspian gas to Southern
Europe by the end of the decade - has
been described as the successful outcome
of the EU’s quest to diversify
supplies and wean itself off Russian
gas, a priority of its energy security
strategy.
Nevertheless, such a description is
somewhat simplistic. Firstly, it gives
the false impression that energy
security can be achieved simply by
replacing one molecule of gas with
another of different geographical
origin, without emphasising that it is
the diversity of norms and practices
underpinning contractual agreements
between buyers and sellers
that offers greater choice, and implicitly
greater flexibility, rather than
merely swapping the products.
Secondly, diversity of supply is not
itself a guarantor of energy security,
as demonstrated by the case of the
US, which relies almost entirely on
nationally produced gas. In Europe,
where consumption is projected to
increase to 550 bcm/year in 2020
from 490 bcm/year in 2012, there
is admittedly a need for more gas
to plug the shortfall. In this context,
multiple sources of supply can
ensure greater security, providing
they are physically deliverable, commercially
attractive and politically
invulnerable. 1
This article proposes to assess the
viability of the SGC against these
three benchmarks, noting that despite
its rather limited dimensions
compared to Europe’s other sources
of supply – notably Russian and Norwegian
pipeline gas as well as the
potential for increased LNG imports
– the project could bring greater economic
efficiency throughout the
continent, help to integrate the EU’s
more vulnerable south eastern region
and establish itself as a link between
east and west.
The discussion will show that in
the light of recent political tensions
between Europe and Russia over
Ukraine, there is also a pessimistic
obverse to this scenario whereby the
33
CASPIAN REPORT, SPRING 2014
1.
I am grateful to my colleagues Louise Boddy and Ben Wetherall for pointing these out.

Aura Sabadus
34
Russian-backed rival South Stream
could challenge the project, as Moscow
seeks alternative transit routes.
Other challenges may come from
potentially new Iranian pipeline or
US LNG exports to European markets
that could enter in direct competition
and raise questions over the
The partners in the Shah Deniz consortium have
hinted at the possibility of expanding further
into Western Europe by offering to supply
Switzerland and France.
ability of the SGC to deliver on any of
those three key points.
Physically deliverable
The economics of the Southern Gas
Corridor - equally supported by the
EU and Azerbaijan, the country that
will supply the gas - are eye-catching:
a $45 billion project, transporting
16 billion cubic metres of gas per
year, including six to Turkey, along
the shortest route from the Caspian
Sea to Italy and providing energy
to seven million European homes
when the second phase of the offshore
Shah Deniz platform comes on
stream in 2018/19. 2
Some countries along the route may
see their biggest ever investments as
a result – Georgia, for instance. According
to a conference report by the
Jamestown Foundation last year, 3
the expansion of the existing South
Caucasus Pipeline (SCP), the first
leg of the corridor - currently used
to ship gas from the Caspian Sea to
Turkey - will bring investments of up
to $2.2 billion to Georgia as a transit
country.
At Erzurum in north-eastern Turkey,
the SCP will connect with the newly
built Trans Anatolian Natural Gas
Pipeline (TANAP), which will travel
westward to Turkey’s Greek border
and bring some $8 billion in direct
investments to the Turkish economy.
From there, the volumes will head
further west along the Trans Adriatic
Pipeline (TAP) and offer added
benefits to countries along the route.
Greece will see cash inflows of $2.04
billion and the creation of 2,000
direct and 10,000 indirect jobs. In
Albania, TAP will be its largest investment,
allowing it to diversify its
sources of energy, while in Italy TAP
will contribute to the creation of permanent
jobs and cover up to 12% of
the country’s supplies. 4
The partners in the Shah Deniz
consortium have hinted at the possibility
of expanding further into
Western Europe by offering to supply
Switzerland and France. TAP
will also help Greece to lower its
dependence on Russian gas, having
already reduced it from 84.2%
in 2000 to 52.8% in 2010 thanks to
LNG imports. 5 Similarly, Italy has re-
2.
“The Southern Gas Corridor,” (July 2013), Holman Fenwick Willan, London
3.
“Azerbaijan and the Southern Gas Corridor; Implications for US and European Energy Security,” (13
September 2013), The Jamestown Foundation.
4.
Ibid.
5.
Vatansever, A., Koranyi, D., (December 2013) “Lowering the Price of Russian Gas: A Challenge for
European Energy Security,” Atlantic Council Issue Brief

duced the share of Russian gas from
36.6% to 18.8% 6 over the same
period and will require the Caspian
volumes to replace its declining production,
tipped to decrease by 10%
annually as well, as find substitutes
for the Russian, Algerian and Libyan
contracts that are expected to expire
within the next decade.
In a nutshell, the Southern Gas Corridor
is not only physically deliverable,
but also has the potential to reach
deep into the economies of its target
area.
Critics, however, have pointed out
that the previously proposed transit
route – Nabucco West - a 1,300 km
pipeline that would have carried the
gas from the Turkish border to Austria
via Bulgaria, Romania and Hungary
- would have made a greater
contribution to supply diversification
in Eastern Europe, which remains
overwhelmingly dependent
on Russian gas. 7 The consortium
In a nutshell, the Southern Gas Corridor
is not only physically deliverable, but also
has the potential to reach deep into the
economies of its target area.
operating Shah Deniz rejected the
project last year in favour of TAP. A
frequently quoted justification for
the decision is the cheaper cost of
TAP. 8
In reality, others have said, the
choice of TAP over Nabucco West
delivered a resounding victory to
Moscow, as Russia will now seek to
forge ahead with the construction of
its 63 bcm/year rival South Stream,
a pipeline designed to reach out to
both Central and South Eastern Europe.
Consequently, argue proponents
of this view, Europe has failed
in its bid to diversify away from Russian
gas and build infrastructure
that would have been instrumental
in its drive to integrate the eastern
flank. 9
35
CASPIAN REPORT, SPRING 2014
The construction
of TANAP project
will kick off by early
2015.
6.
Ibid.
7.
Abbasov, S., (19 July 2013), “Azerbaijan: When it Comes to Pipelines, It’s Not Personal, It’s Strictly
Business,” Eurasianet.org
8.
Ibid.
9.
Dempsey, J., (1 July 2013), “Victory for Russia as the EU’s Nabucco Gas Project Collapses,”

Aura Sabadus
36
The criticism has gained traction in
the light of the recent breakdown
in relations between Moscow and
Kiev, as Russia is expected to press
ahead with the construction of South
Stream as an alternative transit
route to that offered by Ukraine. In
this context, the physical deliverability
of the Southern Gas Corridor will
be tested on three accounts.
The first test surrounds the ability
of SGC to compete against South
Stream, pitted in a David versus Goliath
battle to capture EU markets.
The 10 bcm/year expected to reach
Southern Europe through TAP by
2019 has already been pledged under
long-term contracts signed between
the Shah Deniz partners and
the recipients of the gas.
However, any attempts by the Shah
Deniz partners to ramp up exports
once Azerbaijan increases its production
from the current 28 bcm/
year to 55 bcm/year by 2020 may
be stymied by the deluge of Russian
gas reaching central and South Eastern
Europe within a few years, saturating
a region that already has low
demand for the fuel. South Stream is
designed to transport gas to Italy via
Bulgaria, Serbia, Hungary and possibly
Austria. It also aims to reach
Western Balkan countries such as
Croatia and Slovenia.
The second question refers to the
battle for the control of infrastructure
assets along the route. Cohen
points out that in 2007-2008, Moscow
completed acquisitions of pipelines
and storage facilities in Bulgaria,
Serbia, Hungary and Austria
in preparation for the rollout of the
South Stream project. 10 Last year,
Russia’s Gazprom and its Russian
proxy, Sintez, attempted to purchase
both the Greek incumbent DEPA and
its subsidiary, the transmission system
operator DESFA. The combined
takeover would have given Russia
control over Greece’s infrastructure
and market. However, Russia pulled
out of the tenders amid warnings
that the takeover would contravene
EU competition laws. In December
last year, Azerbaijan’s incumbent SO-
CAR, and one of the main partners in
the SGC, was awarded a 66% share
of DESFA.
Russia already has an overwhelming
grip on Europe’s pipelines, either
through the legacy of the Soviet
energy grid that placed central and
Eastern European countries under
the control of Moscow in a manner
that remains difficult to alter, 11 or
through the purchase of cheap assets
in the energy sectors of these
states immediately after the collapse
of communism.
The third question refers to the degree
of flexibility and penetration
that the Southern Gas Corridor will
have in markets adjoining its route.
South Stream proposes building
spurs alongside the trunk line to
feed the smaller western Balkan
10.
Cohen, A., (2009), p. 94, “Russia: The Flawed Energy Superpower” in Energy Security Challenges
for the 21st Century: A Reference Handbook, ed. Gal Luft and Anne Korin (Greenwood Publishing
Group: Santa Barbara, California)
11.
Jaffe, A.M, Soligo, R., (2009), p. 122 “Energy Security: The Russian Connection,” in Energy Security
and Global Politics, ed. Daniel Moran and James A. Russell (Routlege, London)

states, potentially capturing market
share targeted by SGC. Similarly,
SGC hopes to reach out to Bulgaria
through the Interconnector Greece-
Bulgaria (IGB), which will have a capacity
of one billion cubic metres per
year and is expected to be financed
and built by TAP. However, it will
come up against competition from
South Stream, which also targets the
Bulgarian market.
In sum, the question that emerges
is: to what extent can the Southern
Gas Corridor ensure the competitive
delivery of gas in the long-term
in a manner that fulfils Europe’s diversification
goals in its vulnerable
south eastern region The answer is
straightforward – by offering everything
that Russia will not.
In its current form, the Southern Gas
Corridor may not bring much added
value to that already touted by South
Stream. To a significant degree, both
the SGC through TAP and South
Stream will vie for the same European
markets, including the largest
along their routes - Italy.
On the other hand, TAP has already
been granted a 25-year exemption
from third party access (TPA), placing
its operators in control over midstream
assets and barring adjacent
countries from off-taking volumes.
Russia is seeking a similar exemption,
and at the time of writing the
Bulgarian parliament expects to
modify its domestic law to prevent
TPA to South Stream.
The EU, as the supporter of the SGC
and the stakeholders of the SGC itself,
should promote, finance and
the question that emerges is: to what extent
can the Southern Gas Corridor ensure the
competitive delivery of gas in the long-term in
a manner that fulfils Europe’s diversification
goals in its vulnerable south eastern region
develop small-scale interconnectors
among regional countries and
allow the free flow of any additional
volumes that would come on stream
once production is increased in
Azerbaijan. These interconnectors
should be linked either directly or
indirectly to TAP, allowing regional
countries access to Caspian gas. The
connecting lines, already identified
by the EU as projects of common interest
(PCI) should facilitate reverse
flows between Turkey and Bulgaria,
Bulgaria and Greece, Bulgaria and
Serbia, Bulgaria and Romania, Romania
and Hungary, Croatia and Slovenia,
Austria and Italy.
With such a network of small-scale
interconnectors, Caspian volumes
would reach deep not only in the
southern part of the continent, but
also into central and Eastern Europe,
ensuring greater security of supply
and the integration of regional markets.
They would also facilitate the
free access and use of underground
storage facilities across the region.
Crucially, the free flow of Caspian gas
through regional interconnectors
would challenge Russia’s control
over infrastructure and markets.
In conclusion, the only way for the
Southern Gas Corridor to be competitive
in the long run, and to ensure
that its ambitions for growth
are not thwarted by Russia or any
37
CASPIAN REPORT, SPRING 2014

Aura Sabadus
38
other large rival that may enter the
scene, is to offer flexibility and promote
greater integration through appropriate
infrastructure.
It is expected that the price for Caspian gas paid
by Turkish and European customers should be
between 10 to 12% cheaper than that paid for
Russian gas.
Upholding the status quo by insisting
on TPA exemption and failing to develop
interconnectors with reverse
flows connecting regional countries
would not only fall short of Europe’s
diversification goals, but also place
the SGC at a severe disadvantage to
South Stream.
Furthermore, in their drive to secure
further growth and lock in new
markets, the Shah Deniz consortium
should reconsider their ambitions to
expand into Western Europe, which
already benefits from multiple
sources of supply and opt instead to
compete directly with Russia in central
and Eastern Europe, where there
is a greater need for diversification.
Caspian gas can beat off competition
from South Stream, providing it is
supported by flexible transport option
and commercially viable terms.
Commercially attractive
A product is commercially viable if it
brings financial benefits to both buyers
and sellers.
From a seller’s perspective it has
been argued 12 that the choice of TAP
was decidedly more attractive than
its rival Nabucco West. TAP offered
the Shah Deniz consortium a transit
tariff of €3 ($4.11 at April 2014
exchange rate) per 100 km of pipeline,
fractionally cheaper than that
advanced by Nabucco West over the
same distance. TAP was also 459 km
shorter than its competitor, making
for even cheaper tariffs; the investment
needed to build TAP was €4.4
billion ($6 billion) compared to
€6.6 billion ($9 billion) for Nabucco
West. 13
It is expected that the price for Caspian
gas paid by Turkish and European
customers should be between
10 to 12% cheaper than that paid
for Russian gas. The exact values are
not known, nor are the formulae by
which they are determined. However,
it may be assumed that they are
largely linked to the price of oil and,
from a buyer’s point of view, should
be more competitive than those
charged by Russia in the region.
Nonetheless, the commercial viability
of the Southern Gas Corridor
should be seen not only against
present conditions, but also in the
long-term against the impact of two
potential developments: competition
from existing and emerging regional
producers as well as US LNG
and the future of oil indexation.
This subchapter will discuss the viability
of the SGC against these two
developments and reflect on its potential
to bring greater economic
efficiency, its impact on the liber-
12.
Abbasov, S., Ibid.
13.
Ibid.

European natural
gas network.
alisation process in target countries
and further afield and its ability to
remain competitive in the long run.
The regional and global energy scene
is in flux. New gas producers such as
Cyprus, (northern) Iraq and Israel
are expecting to establish themselves
as firm suppliers by the end of
the decade, bringing into the equation
more choice for Turkish and European
markets. In that sense, they
will be fulfilling the role that Azerbaijan
expects to undertake within
the Southern Gas Corridor.
These projects are still in their early
stages and have the added inconvenience
of being fraught with political
problems that will first have to be
resolved. Nevertheless, it is widely
discussed that up to 10 bcm/year
and another 7 to 8 bcm/year could
reach Turkey and possibly Europe
from northern Iraq and Israel, respectively,
by the end of the decade.
Analysts have told this author that
the price of northern Iraqi gas could
be one of the cheapest in Turkey and
Europe, while Israel’s may be close
to that charged by Azerbaijan.
Prospective buyers suggested in an
interview with the author that if Israel
opts to sell gas via pipeline to
Turkey, rather than as LNG, the price
for the volumes may contain an element
of hub indexation, possibly one
linked to the British NBP, bringing
much greater flexibility than a purely
oil-indexed value.
Another regional competitor could
be Iran if sanctions introduced in
response to its alleged nuclear programme
are lifted. Sitting on over
33 trillion cubic metres of gas, the
country has the potential to become
an energy superpower. However, its
infrastructure remains poor and
would require multi-billion dollars’
worth of investment to ramp up
production for internal and regional
needs.
As an emerging supplier in great
need of finance, Iran could consider
establishing itself as a competitive
39
CASPIAN REPORT, SPRING 2014

Aura Sabadus
40
player by selling volumes at cheaper
prices to Turkey and Europe. However,
its present insistence on retaining
a high export price to Turkey
– its largest gas market – casts
doubts over its willingness to grant
discounts in the future.
Another competitor that may
emerge in the region is the US
through the export of LNG. Countries
such as Greece and Hungary
have been lobbying Washington for
volumes once they become available
towards the end of the decade. Even
though Turkey has not expressed
interest, the competitive price expected
to be charged for exports to
Europe may be attractive enough for
private licence-holders to enter the
market. Under current conditions –
high international LNG prices – and a
capped regulated price, Turkish private
companies cannot afford to purchase
LNG. Greece itself may find the
US LNG price attractive, compared to
that, say, of Russian gas even now after
Gazprom granted a 15% discount
backtracked to June 2013.
Prices to various European countries
expecting to import US LNG will vary.
However, news and price publishers
ICIS estimate that depending on
the shipping distance, landing prices
into Europe could hover between
$10.00 - $12.00/MMBTu based on a
US Energy Information Administration
(EIA) projected Henry Hub average
for 2015 at $4.11/MMBTu. 14
At an average $11.00/MMBTu
($395.00/1000m 3 ) US LNG could be
reportedly $2.00/1000m3 15 cheaper
than the currently discounted Russian
border price for Greece.
However, Russian gas prices to European
markets either through existing
contracts, or as part of future
agreements signed after the comple-
14.
“Focus: Eastern Europe warms to US LNG (27 February 2014), Global LNG Markets (GLM), ICIS.
15.
“Greece’s DEPA secures 15% discount from Gazprom,” (26 February 2014), European Spot Gas
Markets (ESGM), ICIS.

tion of South Stream could be erratic.
The example of Ukraine, which saw
its contractual price fall and rise dramatically
within less than six months
amid political tensions, should send
a strong warning signal to all offtakers
of Gazprom-supplied volumes.
Russian border prices to Turkey
and EU markets vary largely and the
discounts granted for exports are
either politically motivated or come
with strings attached. For example,
Gazprom agreed this year to grant a
10% discount to Turkey’s private importers
on condition that next year’s
price includes a 10% mark-up.
Under current arrangements, Caspian
gas prices are likely to be comparatively
more competitive than
those for Russian gas and could help
the economies of its target markets
to become more efficient. However, it
is important to remember that Russia,
as the monopoly supplier in the
region has greater leeway in offering
discounts which are underpinned
Under current arrangements, Caspian gas
prices are likely to be comparatively more
competitive than those for Russian gas
and could help the economies of its target
markets to become more efficient.
by political motivations rather than
commercial realities. In contrast, TAP,
as a smaller project needs to stick to
its commercial goals, without enjoying
Russia’s flexibility in handing out
generous discounts to preferential
clients.
Apart from the competition emerging
from new and existing regional
actors, a major challenge to sellers
of gas in the Southern Gas Corridor
could come from developments surrounding
oil indexation.
A recent article in Barron’s points
out that new discoveries of oil in the
US and worldwide, combined with
flattening consumption, could drive
down the price of crude from the
current $100 to $75/barrel. 16 This
means that gas prices in long-term
contracts indexed to oil are likely to
be revised down, raising questions
about the competitiveness of such a
formula.
In order to establish and retain its
competitive edge, the Southern
Gas Corridor will have to pursue
two goals: increase its capacity and
reconsider its pricing structure
in a way that would benefit all
counterparties.
As the supplier of Caspian gas for
SGC, Azerbaijan is already considering
ramping up exports once
more gas comes on stream from additional
offshore blocks such as Absheron,
Umit, Babek, ACG Deep possibly
after 2020. In addition, Shah
Deniz partners may consider opening
up TANAP and TAP to volumes
from Israel and possibly Northern
Iraq once they become available by
the end of the decade.
A senior SOCAR representative
told the author that the company
was interested in working with the
Turkish incumbent BOTAS in shipping
Israeli gas through TANAP
41
CASPIAN REPORT, SPRING 2014
16.
Epstein, G., (29 March 2014), “Here Comes $75 Oil”, Barron’s

and possibly further to Europe, although
neither party has yet made
official statements in this regard.
The price of any additional volumes
reaching Turkey and Europe will
have to be responsive to demand
and supply rather than follow rigid
oil-indexed formulae.
respond to the needs of both buyers
and sellers will hinge on a crucial factor
– its political invulnerability.
Politically invulnerable
Aura Sabadus
42
In the light of the two challenges
looming on the horizon – greater
competition from global LNG and
regional supplies as well as uncertainty
regarding the oil indexation,
a hub rather than an oil-indexed
price will be beneficial to both buyers
and sellers. A competitive market
price will enhance economic
efficiency in the target and neighbouring
countries. In this context,
Turkey’s role in creating a liberalised
traded gas market will take
centre stage.
Turkey is the only country in the region
that has the size, demand and
proximity to three quarters of the
world’s conventional hydrocarbon
reserves to establish a liquid hub
similar to those seen in the UK or
the Netherlands. The creation of a
traded gas market in Turkey would
have a domino effect on neighbouring
South East European countries
where the liberalisation process has
so far failed.
Nevertheless, the establishment of
an effective Southern Gas Corridor
that can accommodate along its already
pledged Caspian gas, volumes
from neighbouring regions at competitive
market-driven prices that
Turkey is the only country in the region that has
the size, demand and proximity to three quarters
of the world’s conventional hydrocarbon reserves
to establish a liquid hub similar to those
seen in the UK or the Netherlands.
To what extent will the Southern
Gas Corridor prove a reliable supply
route for Turkey and Europe, unencumbered
by political jostling as
recently seen between Russia and
Ukraine What guarantees does it
bring that end consumers will not
suffer from politically induced interruptions
that could leave them out in
the cold, literally After all, the transport
of Caspian and possibly Iraqi
or Israeli gas to Europe via Turkey
will happen in an already politically
sensitive environment fraught with
complex and simmering tensions.
Until the end of the Cold War, the
concept of insecurity was typically
associated with military threats as
states concentrated capabilities to
protect their sovereignty. However,
after 1990 and with the emergence
of a globalised world, the notion expanded
into new terrain, as states
sought security in diverse areas such
the economy, environment, energy.
Security can be defined as “freedom
from threats”. 18 Depending on the
18.
Waever, O., (1995), p. 52) “Securitisation and Desecuritisation” in On Security, ed. Ronnie Lipschutz (New York: Columbia
University Press)

fields they refer to, the threats can be
of economic, military, ecological, etc.
extraction. Extrapolated to energy,
the definition of energy security is
more complex since energy itself is
an all-subsuming category. Nothing
exists that is not energy or is not affected
by energy. 19 Energy influences
and is influenced by everything
ranging from geopolitics, economics,
environment, to our everyday existence.
In that respect it is sought by
states, as guarantors of free and reliable
access to energy resources, and
by individuals, as end consumers of
those energy resources.
In seeking to ensure energy security,
states either take a hands-on approach
or step back, allowing markets
to regulate and guarantee the
flow of resources. Different attitudes
stem from the way in which states
perceive various threats to their energy
security. As Waever notes, in
naming a certain development a security
problem, the state can claim
a special right, one that will, in the
final instance be defined by the state
and its elite. 20 In this context, if the
geopolitical factor is deemed a risk
to energy security, states, as quintessentially
geopolitical actors, may
assume exclusive authority over the
provision of energy security and the
actions associated with it.
True to its laissez-faire philosophy,
the US stepped back, allowing the
market to handle risks as well as the
delivery of energy resources, - its
natural gas market being one of the
most developed and competitive in
the world. Other countries, such as
China or Russia went in opposite direction
as their governments (either
themselves or through state-owned
companies) took centre stage in underwriting
energy security.
Yet, the idea that risks are minimised
if states engage in bilateral relations
is challenged by at least two
examples.
Firstly, the EU succeeded in reducing
its vulnerability to political shocks
by putting in place reliable infrastructure,
pushing for greater market
integration, and, not least, by allowing
markets to take control of the
supply-demand balance. As a result,
even though Ukraine still represents
one of the main transit routes for
Russian gas supplies into Western
Europe, the fall-out from the current
standoff between Kiev and Moscow
is likely to have a smaller impact
than it would have had in 2009 or
2006 during the Russia-Ukraine gas
wars.
Secondly, as the current Russia-
Ukraine crisis proves, state-to-state
relations may leave countries exposed
to volatile political environments.
There are numerous other examples
that support this argument,
for example the interruption of oil
or gas supplies from Iraq or Iran to
Turkey in the aftermath of political
disputes between or involving these
countries.
43
CASPIAN REPORT, SPRING 2014
19.
Ciuta, F., (April 2010), “Conceptual Notes on Energy Security: Total or Banal Security” in Security
Dialogue 2010 41:123
20.
Waever, O., (1995) ibid, p.54

Aura Sabadus
44
The Southern Gas Corridor provides
balanced state and private participation,
which can guarantee greater
stability and reduce risks. However,
it is important to note that Turkey’s
current representation in the project
is exclusively through its state companies
– the transmission system
operator BOTAS and its oil and gas
incumbent TPAO may enhance the
political vulnerability of the SGC.
Sensitive topics such as Turkey’s
and Azerbaijan’s stance towards Armenia
could place Ankara and Baku
in a difficult relation to one another
and enhance the potential for political
spill-over into the energy sector.
Since Turkey will be a crucial link
in the Southern Gas Corridor, as
well as an important recipient of
its gas, neither Turkey itself nor
the partners involved in the project
can afford to incur political risks.
For that reason, the Turkish government
ought to be encouraged to
take a back seat, allowing the private
sector to establish itself as a
buffer against the consequences of
possible disputes emerging at state
level. Admittedly, the Turkish government
hinted in February at the
possibility of putting up part of its
20% stake in TANAP for privatisation,
but since then there have been
no further developments.
Compared to other regional
projects, notably Russia’s supply
of gas through existing and upcoming
infrastructure such as South
Stream, the Southern Gas Corridor
offers not only lower political risks
thanks to the participation of public
and private companies, but also
establishes itself as a much-needed
link between east and west. This
connection will, on the one hand,
allow Azerbaijan and possibly other
gas-rich Caspian countries such as
Kazakhstan or Turkmenistan as
well as Middle Eastern or Levantine
producers to gain a foothold
in Turkey and the EU, and on the
other open up exceptional trading
opportunities deep into Eurasia for
Turkey and Europe.
Conclusion
The Southern Gas Corridor is being
hailed as the successful outcome
of Europe’s diversification quest
along its south eastern flank. It offers
the prospect of cheaper prices
than those asked by Russia and is
less politically vulnerable thanks to a
balanced participation of public and
private companies.
However, the emergence of the
Moscow-backed South Stream following
political tensions between
Russia and its neighbouring transit
country, Ukraine, could raise serious
uncertainties for regional gas supply
ventures. In its current format – a 16
bcm/year project – the Southern Gas
Corridor will find it difficult to rival
the 63 bcm/year South Stream both
in terms of market share and pricing.
While Russia can afford to hand out
price discounts to loyal political clients,
the Southern Gas Corridor does
not enjoy that luxury.
In this context, the only way for the
Southern Gas Corridor to beat off
competition is to offer everything
that Russia cannot: a more flexible
infrastructure that reaches out not
only to Southern Europe but also

anches off into the central and
eastern part of the continent, prices
that reflect supply and demand
rather than political diktats and
greater confidence in the private sector
as the main driver of the project.
For that reason, any new volumes
that will be offered through the
Southern Gas Corridor to Turkey
and the EU from the Caspian region,
the Middle East or the Levant under
those terms will not only offer more
competitive terms, but also represent
a genuine contribution to Europe’s
ambitions for diversification
and market integration.
45
CASPIAN REPORT, SPRING 2014

Davide Tabarelli
46
Environmental
effects of the Trans
Adriatic pipeline
Davide Tabarelli
NE Nomisma Energia

On April 17 th 2014, the TAP consortium
handed an updated, 1,200 page version
of the Environmental and Social Impact
Assessment of the Italian section of
the TAP project, as required by Italian
authorities.
Italy is probably the most difficult
place on earth to build new industrial
infrastructures, at least judging
from the troubles encountered by
any proposed energy project over
the last several decades. In Italy almost
all new producing plants or infrastructures
are likely to face some
opposition, and this is even more so
for projects involving energy. Things
are especially difficult in some areas,
notably southern regions like Apulia,
where TAP should come ashore.
In order to get an idea of the highly
complex environment faced by companies,
it is helpful to begin with a
brief summary of the lengthy and
tortuous permissions process. Let’s
start with the endpoint: on April 17 th
2014, the TAP consortium handed
the Italian Ministry of Environment
(MATTM) and the Italian Ministry of
Cultural Heritage (MINBAC) an updated,
1,200 page version of the Environmental
and Social Impact Assessment
of the Italian section of the TAP
project, as required by Italian authorities.
After evaluating 12 alternative
routes for the pipeline, as requested
by MATTM and MINBAC in March,
the document confirms that the
one coming ashore near San Foca is
the best solution in environmental,
technical and socio-economic terms.
The TAP consortium restated that
the pipeline will be ready for operation
in 2019.
This was the last step in a very complex
path towards attaining the
relevant environmental authorisations
for the project, as the 5.6 GB
of publically available documents
produced by the consortium stand
to testify. The Environmental Impact
Assessment (EIA) is a technical-administrative
procedure that,
according to Legislative Decree no.
152/2006, is normally carried out
by an ad hoc decision making process
by competent agencies (Conferenza
dei Servizi). The Conferenza
dei Servizi review the decisions of
all governmental agencies involved
in the EIA procedure, including central
and local governments. This
type of coordination is designed to
guarantee that all stakeholder interests
are taken into consideration,
while enabling the EIA to comply
with its schedule, which should not
exceed 150 days.
For the TAP, as for any natural gas
pipeline of that relevance, Legislative
Decree no. 152/2006 requires an
EIA procedure, in order to carefully
47
CASPIAN REPORT, SPRING 2014

Davide Tabarelli
48
evaluate potential environmental
and cultural heritage risks. According
to Article 21 of the same Decree,
an EIA procedure may be preceded
by a period of consultation (so called
“scoping”), in which the proposers of
the project agree with relevant authorities
on the documents to be submitted
for the following procedural
steps. This phase is expected to take
up to 60 days; for the TAP project, it
took more than 11 months. In fact,
the TAP consortium began consultation
with the MINBAC in May 2011;
the Ministry issued an opinion only 9
months later (February 2012). Meanwhile,
the TAP consortium begun to
prepare the Environmental Impact
Study, which was presented on March
15 th 2012.
In the period leading up to this first
submission, a total of five alternative
route options were investigated:
the San Foca route was concluded
to represent the optimal solution in
environmental, technical, socioeconomic
and safety terms. This solution
brings the pipeline ashore near San
Foca, and places the Pipeline Receiving
Terminal (PRT), the facility to
connect TAP into the Italian gas network,
in Melodugno. This route was
presented by the TAP consortium to
the Italian authorities as the optimal
solution.
Inevitably, the TAP consortium had
to revise its study in order to account
for Ministry views, issued as part of
the scoping phase. In December 2012,
MINBAC gave the TAP Consortium 9
months to consult with local authorities
and local NGOs on the potential
environmental and social impacts
of the project. In September 2013,
the Consortium came up with a new
document, which addressed some of
the comments received during the
new consultation period. Under the
revised plan, the pipeline still comes
ashore at San Foca, but the landfall
site was shifted slightly to diminish
the impact on the seashore, to further
prevent any damage to the area’s
protected Posidonia sea grass, and
to avoid any visual impact. A 1500 m
micro tunnel 10 meters underground
was also proposed. Furthermore, the
Consortium decided to reduce the
size and to optimize the location of
the PRT in Melendugno, in order for
it to conform with the typical configuration
of local structures such as farm
buildings, thereby reducing its visual
impact.
the TAP consortium made it clear that
San Foca remained the best option for the
pipeline to come ashore.
The documents prepared by the TAP
Consortium were considered by the
main national (MATTM, Ministry of
Tourism) and local (Apulia Region,
Lecce Province, Melendugno Municipality)
authorities. In January
2014, Apulia Region issued a negative
(non-binding) opinion on the EIA
procedure, as it had already done in
September 2012. This decision was
based on “landscape-issues”, and
the regional authorities requested
the Consortium to consider another
landfall site for the pipeline. In March
2014, MINBAC and MATTM requested
some integration to the Consortium
submission of September 2013: the
Ministries required the company to

Signing
ceremony of
host government
agreement in
Athens on June
26, 2013.
submit an in depth evaluation of alternative
routes for the pipeline. In
particular, some suggested that given
that another pipeline (ITGI) is coming
ashore near Otranto, around 20 km
south of San Foca, and that it has already
obtained the relevant authorisations,
the TAP pipeline landfall site
could be moved near Otranto. However,
in its April 2014 delivery, the
TAP consortium made it clear that San
Foca remained the best option for the
pipeline to come ashore; in the same
document, the consortium provided a
reasoned reply to the criticisms made
by the Apulia Region authorities and
other stakeholders.
The difficulties faced by the consortium
in obtaining the relevant
authorisations and in rallying support
for the project from local and
national authorities are in contrast
to the relevance of the infrastructure.
In fact, the Italian government and
the EU have repeatedly declared the
TAP gas line to be of “strategic importance”.
The reason is quite simple: it
adds a new supply route to Europe,
different from the traditional ones,
like Russia, North Africa or even the
North Sea, where reserves are falling
very quickly. There is no need for any
expertise in energy strategy or economics
to understand that when you
are highly dependent on an imported
commodity, it makes sense to diversify
supply sources in order to lower
the risks of a sudden interruption,
and also to generate lower prices
through competition. It would be also
the first time that gas from the former
Soviet Union, from the Azerbaijani
part of the Caspian Sea, is delivered to
Europe without being absorbed into
the Russian system of transport grids
and, more importantly, commercial
contacts.
It is also important to note that the
project is competing with future supply
from Russia without posing any
real threatening to Moscow. Europe
is likely to need, if its economy recov-
49
CASPIAN REPORT, SPRING 2014

View of the old
town Ostuni,
Puglia, Italy.
Davide Tabarelli
50
ers, some 200 billion cubic meters per
year (bcm/y) of additional gas up to
2030. Russia will not be able to cover
the full scope of this demand, and
there will be plenty of room left for
gas supplies through South Stream,
the other gigantic gas line that will
bring Siberian gas to Europe through
the so-called northern corridor.
Thus, we should ask ourselves why
this project is facing such a fierce opposition
from the South of Italy. The
answer is complex, with its roots
reaching back centuries into the history
of the poorest part of the country,
where economic development,
imposed from central governments
with controversial results, has never
been really achieved. Lagging behind
the rest of the EU, the south of Italy
is one of the weakest parts of the EU,
with average levels of unemployment
close to 20%, reaching peaks of 40%
among the youngest. Emigration from
has been a constant feature of the
past century and has re-emerged as a
major trend with the latest economic
crisis forcing thousands of people
to look for jobs abroad. Experience
teaches us that as a territory develops,
its inhabitants become increasingly
familiar with industrial infrastructures,
and thus it is more likely that
the realisation of a new project will
succeed. What has often happened
in the past is that investors in the
southern Italian regions anticipated
a welcome from local authorities and
people, since they thought they were
bringing new opportunities for local
development.
But in the last few years, the opposite
has happened. A very strong negative
perception of any kind of industry
grew in precisely those poor areas
where industrial development could
have helped most. This is a common
problem all over Italy, where the
media tends to focus on the negative
impacts connected to pollution,
deaths, and contamination. Due to
this negative campaigning, factories,
or any kind of investment, are seen as
bringing harmful changes. As a consequence,
the positive impacts on employment
and economic development
are ignored.
Apulia Region has a complex relationship
with industrial infrastructures,

as illustrated by the Ilva case. Ilva is
Europe’s biggest steel factory, located
near Taranto, 130 km from San Foca,
and owned by the Riva Group, one of
world’s largest steelmakers. In July
2012, Ilva was forced to close after
a judge ordered an asset freeze in
an environmental probe. The court
dispute centres on studies suggesting
that up to 386 people might have
died of cancer over the past 13 years,
and that people living downwind of
fumes from the plant have suffered
negative health effects. The history
of the Ilva industrial complex dates
back to the beginning of the 20th century.
The developments of July 2012
are a single chapter in a very long
struggle involving the plant’s high
pollution levels, environmental risks
and employment issues: the factory
employed some 12,000 workers, and
it was the largest private employer
in the Apulia Region. The needs and
the feelings of the local population on
the subject were expressed on April
14, 2013, when a referendum on the
future of Ilva took place. Asked if they
wanted the plant to shut down i, the
majority of the population (80.4%)
did not vote, indirectly supporting
the preservation of workplaces.
The big coal plant of Cerano, located
10 km south of Brindisi and 40 km
north of Melodugno, also faces heavy
criticism. It is a 2,600 MW plant that
burns imported coal. Given the low
price of coal compared to gas, it is
running at full speed. According to
environmentalists, it is one of Europe’s
most polluting plants. In reality
it is an efficient and modern plant
emitting a lot of CO 2
simply because
it produces a lot of electricity using
large quantities of fossil fuel.
Brindisi is famous for its international
gas industry, particularly for
Brindisi is famous for its international gas
industry, particularly for the LNG terminal
that BG fought - unsuccessfully - to build for
almost a decade.
the LNG terminal that BG fought - unsuccessfully
- to build for almost a
decade. The project, along with ten
more all over Italy, was drawn up at
the beginning of the 1970s and. Then,
having been forgotten for years, it
was resurrected in 2000 by the UK
gas company. At the beginning, the
proposal was welcomed, but immediately
delays emerged. In August 2001,
the UK Prime Minister Tony Blair sent
a letter to the Italian Prime Minister
Silvio Berlusconi complaining about
the delays in the development of the
project. The Berlusconi government
then forced Enel, the Italian power
utility, to enter into the project, in a
bid to speed up the process. However,
that did not happen, and later in 2005,
Enel, having understood the difficulties
facing the LNG terminal, decided
to drop out. Despite all the legislative
and bureaucratic hurdles, the British
company succeeded in obtaining
the relevant authorisations from local
authorities, but new elections in
2006 brought a new administration
that rejected and appealed against
it. Then, an investigation into bribes
paid to obtain the first authorisation
was launched, bringing further
problems. The drop in domestic gas
consumption, linked to the 2008 economic
crisis, made the project much
less attractive. Finally, in March 2012,
after eleven years and an investment
51
CASPIAN REPORT, SPRING 2014

Davide Tabarelli
52
of some 200 million Euros - a significant
part of which was spent on legal
fees - BG decided to abandon Brindisi.
The statement by the President of Apulia
Region reflects a general resistance to
anything complex, modern and with the
potential to benefit private companies that
often represent industries believed to harm
public health.
Even investments in renewable energy
sources often face fierce opposition,
a problem that has rescinded
only because financial incentives to
the sector were sharply reduced in
2013. At the end of March 2014, the
President of the Apulia Region, Nichi
Vendola, declared that Apulia “has already
given a lot in terms of wind and
photovoltaic plant; the construction
of new plants should be capped. We
are leaders in Italy in new renewable
production with a share of 40% out
of the total electricity output, against
a European target of 20% by 2020.”
Apulia, where the TAP project should
come ashore, has a large amount of
new renewables simply because it has
been blessed with favourable natural
conditions. One of the biggest Italian
regions, its territory runs across vast
planes. Its geographical location in
the southern part of Europe and in
the middle of the Mediterranean provides
very good insolation levels and
optimal wind conditions. Moreover,
Apulia is sparsely populated with
large parts of the Region inhabitated.
Over the last decade, its once thriving
agricultural sector has suffered from
the economic downturn, which has
pushed many farmers to welcome
wind and photovoltaic plants in exchange
for royalties. The statement
by the President of Apulia Region reflects
a general resistance to anything
complex, modern and with the potential
to benefit private companies that
often represent industries believed to
harm public health. This is the effect
of the so-called antagonism applied in
the realm of politics and to the decision-making
authorisation process of
a modern democracy whose economy,
however, relies on complex industries.

In this regard, Nichi Vendola is one of
the most meaningful cases in Europe,
since he is a successful politician who
in 2009 founded the SEL party (Sinistra
Ecologia Libertà, literally Left,
Ecology and Freedom). Throughout
his political career, Vendola has received
many votes not only from the
far left, where his party should be
placed, but also from an electorate
that usually voted for other political
factions, even right-wing parties.
His ideas, well explained and clearly
articulated given that he is a highly
skilled politician, are based mainly on
a brand of environmentalism that inevitably
takes on anti-modernity positions,
envisaging a poorly defined
social vision in which people can
achieve liberation from dependence
on technology.
The influence of local authorities in
the permissions process is one of the
most debated issues in relation to infrastructural
developments, or rather
the lack thereof. After more than ten
years since the transfer of a major
part of these competences from central
governments to local authorities,
a large political coalition now argues
that it is time to re-centralise the full
scope of these competences. In early
2001, a weak left wing government
managed, few days before resigning,
to get parliament to approve changes
to the 5 th section of the Italian constitution.
These changes were later
voted in by the Italian people through
a referendum and thus signed into
law in November 2011. In that period,
the constant pressure to improve the
efficiency of Italian politics paved the
way for federal ideas (so-called “devolution”),
as if this alone could solve
the problems in national politics.
The strongest party in some parts of
the richer northern Italian regions
was the Northern League, a quasiseparatist
party. It was believed that
increased involvement by regions,
provinces and municipalities would
help streamline the permissions
process, at the same time as improving
citizens’ support for democracy.
Constitutional Law no. 3 of November
2001 transferred competences
from the central government to the
regions, and energy was one of the
issues involved in that transfer. This
Law has been widely recognized as
a failure, since the problems raised
by local communications cannot be
solved in any case. One of the objectives
of the new government led by
the young Matteo Renzi is to re-centralise
some of the competences now
managed by the regions and among
these is energy. This would not be an
easy process, but these are necessary
steps if Italy wants to modernise its
energy sector, and remain a major
European and international economy.
53
CASPIAN REPORT, SPRING 2014

Iran Nuclear
Negotiations and
Turkey
Mehmet AkIf Okur
Mehmet Akif Okur
DEPARTMENT OF INTERNATIONAL RELATIONS, GAZI UNIVERSITY
54

The internal dynamics of the U.S. and Iran,
along with their interpretation of regional
and global balances, have contributed
significantly to the provisional agreement.
The fate of the nuclear negotiations
between Iran and P5+1 and the future
of the Iranian-Western relations
are hot topics for academics and
researchers working on the Middle
East. If the ongoing negotiations give
rise to an agreement, significant developments
may occur both at the
regional and global level. In order to
fully understand this critical process
and its possible consequences, the
motivations and objectives of the
parties involved should be carefully
analysed.
The internal dynamics of the U.S. and
Iran, along with their interpretation
of regional and global balances,
have contributed significantly to
the provisional agreement. Both
parties have chosen to re-evaluate
their worries, aims and expectations
on different issues and establish
a dialogue. Any achievements or
problems encountered on the way
from dialogue to agreement would
either strengthen or destabilise each
party’s initial motivations. However,
in order to answer our questions,
we must analyse the original and
current motivations of the parties
involved.
We should go back to the U.S. invasion
of Iraq. The pillars of the proposal
for a direct meeting, reportedly
presented to the U.S. in April 2003
with Khamenei’s approval, provide
significant clues about Iran’s expectations
and objectives. 1 Essentially,
Iran was suggesting full-scale cooperation
with the U.S. in return for
acknowledgement of its demands
in relation to the new order to be
established in Iraq. These included
recognizing Iranian defence needs
and “legitimate” interests in the Middle
East, ending economic sanctions,
maintaining its “peaceful” nuclear,
biological, and chemical programs,
and protecting the regime. The pro-
55
CASPIAN REPORT, SPRING 2014
1.
Discussions about the details of Iran’s proposal for a “Grand Bargain” to the USA in May 2003 still continue. Some
documents about the issue were published in New York Times in 2007 by Nicholas D. Kristof. Nicholas D. Kristof, “Iran’s
Proposal for a ‘Grand Bargain’”, The New York Times, April 28, 2007, http://kristof.blogs.nytimes.com/2007/04/28/
irans-proposal-for-a-grand-bargain/

Mehmet AkIf Okur
56
posal stated that Iran would recognise
a two-state solution in relation
to the Israel- Palestine issue, support
to Palestinian groups would be cut
off within certain parameters, and
Hezbollah would be transformed a
political group whose activity was
limited to Lebanon. It is believed
that subsequent to rejecting this
suggestion, the Bush administration
decided to avoid dialogue with Iran,
which it regards as a part of the “axis
of evil”. 2 Thus, the proposals presented
by President Rouhani’s delegation
during the current nuclear
negotiations between Iran and the
European trio were not accepted by
the U.S. Although Iran suspended
its programme during the negotiations,
it found the economic facilities
offered by the European contingent
for the final agreement to be inadequate.
3 The actual objective was
to reach an agreement with the U.S.
uranium enrichment activities were
resumed in 2006 when Iran was feeling
much stronger in relation to the
U.S., which was under pressure due
to the escalating political unrest in
Iraq. Would it open a “huge bargaining”
window that is suitable for new
balances in the future The similarity
between the proposal rejected
by the diplomatic mission under the
leadership of Rouhani and Zarif, and
the current status of Iran strengthens
the belief that this was a key question
during that stage.
In examining the relationship between
the fluctuation in nuclear negotiations
and the changes in Iran’s
domestic policy, the critical turning
points are: overthrowing the reformist
wing, the transition to the Ahmadinejad
era, and Rouhani’s accession
to power. 4 It is certainly true that
Khamenei remains the ultimate decision
maker on foreign policy issues
such as nuclear negotiations within
In examining the relationship between the
fluctuation in nuclear negotiations and the
changes in Iran’s domestic policy, the critical
turning points are: overthrowing the reformist
wing, the transition to the Ahmadinejad era,
and Rouhani’s accession to power.
the Iranian state system. The nuclear
programme has gradually become a
national issue that is supported by a
large part of Iranian society. 5 However,
these views do not assert that
Iran lacks a political sphere that also
incorporates nuclear negotiations.
Regarding the negotiations, there are
differences between the approach
of the Revolutionary Guards 6 (who
gained more power as Ahmadinejad’s
2.
Trita Parsi, “The Price of Not Talking to Iran”, World Policy Journal, Vol. 23, No. 4 (Winter, 2006/2007), pp. 11-17.
3.
For documents about the negotiations between the European Trio and Iran, see Great Britain/Foreign and Commonwealth
Office, Iran’s Nuclear Programme: A Collection of Documents, The Stationery Office, 2008
4.
For an example about transition discussions, see Yonah Alexander, Milton M. Hoenig, The New Iranian Leadership:
Ahmadinejad, Terrorism, Nuclear Ambition, and the Middle East, Praeger, 2008.
5.
For the relation between nuclear program and state identity at the discourse level and its transformation, see Homeira
Moshirzadeh, “Discursive Foundations of Iran’s Nuclear Policy”, Security Dialogue, December 2007 Vol. 38, no. 4, pp.
521-543.
6.
Ali Alfoneh, “The Revolutionary Guards’ Role in Iranian Politics”, Middle East Quarterly, Fall 2008, Vol. 15 Issue 4, pp.3-14.

Iran’s Supreme
Leader Ayatollah
Ali Khamenei while
visiting the Islamic
Revolutionary
Guard Corps
Aerospace Force
exhibition in
Tehran.
support increased), and the approach
of Reformists/Pragmatists 7 (who
play a significant role in the domestic
politics of Iran). The Reformists
understand the importance of developing
Iran’s relations with the West
in order to realise their visions at the
domestic level. The military, political
and economic elites at the conservative
core of the regime, including the
Revolutionary Guards, have a different
conception of the current situation.
They are aware of the benefits of
pragmatic relations. Besides, they are
not sure whether they can preserve
their privileged position in the new
equation, the dynamics of which will
emerge as the dialogue continues.
For example, members of the Iranian
Revolutionary Guard, an essential
part of national economic life since
the Rafsanjani era, enjoy privileged
political positions whereby they
carry out high-budget construction
and energy projects as well as overseeing
high-income businesses. The
income generated by some businesses
operating under extraordinary
conditions due to economic
sanctions should also be included in
this table. 8 Investigations launched
after Rouhani’s victory in elections
reinforced international opinion
about the dimensions of those relations.
The businessmen close to former
President Ahmadinejad have
been accused of embezzling more
than two billion dollars. Zanjani, notably,
was assigned to market Iranian
petrol as a foreign import, and then
to bring the money back into the Ira-
57
CASPIAN REPORT, SPRING 2014
7.
For ideology/pragmatism aspects in Iranian foreign policy, see R.K. Ramazani, “Ideology and
Pragmatism in Iran’s Foreign Policy”, The Middle East Journal, Volume 58, Number 4, October
2004, pp. 1-11(11).
8.
Nader Habibi, “The Iranian Economy in the Shadow of the Sanctions”, in: Iran and the Global
Economy: Petro Populism, Islam and Economic Sanctions, (ed.) Parvin Alizadeh, Hassan
Hakimian, Routledge, 2013, s.187-190

Iranian President
Hassan Rouhani
and Iranian
Foreign Minister
Mohammad Javad
Zarif.
Mehmet AkIf Okur
58
nian economy via his companies in
different countries. 9 The findings of
the Parliamentary Commission obtained
after scrutinizing the privatizations
indicate that there may be
even wider-scale proceedings, if balances
of power allow. 10
Given the vital role of large foundations
in the Iranian economy, 11 it
is important to note that there are
balances of political economy in the
background of the nuclear negotiations.
In his first substantial address
to the Revolutionary Guards, 12
Rouhani stated that they should no
longer be involved in big economic
projects. This statement gives us an
idea about the pillars of reform programme.
The biggest changeover,
which supports the extension of the
civil sphere in Iran, will be the expansion
of the economy over the settled
actors within the government pyramid.
This transformation is needed
in order to attract the foreign capital
investments that will connect Iran
to the world. 13 Thus, the connection
between reshaping the economic
sphere and the nuclear negotiations
is stronger than it first seems. Those
who want the negotiations to be suc-
9.
Farangis Najibullah and Arash Hassan Nia, “Babak Zanjani, Iran’s ‘Economic Basij,’ Now In Trouble
At Home”, Radio Free Europe, Sunday, March 16, 2014, http://www.rferl.org/content/iranzanjani-corruption-charges/25217665.html
10.
Kourosh Avaei, “Iran still digging out of Ahmadinejad-era corruption”, Al Monitor, December
21, 2013, http://www.al-monitor.com/pulse/originals/2013/12/iran-ahmadinejad-legacycorruption.html#
11.
Evaleila Pesaran, Iran’s Struggle for Economic Independence: Reform and Counter-Reform in
the Post-Revolutionary Era, Taylor & Francis, 2011, p.35.
12.
Kourosh Avaei, “Will Iran’s Revolutionary Guard Reduce Economic Role”, Al Monitor, September
19, 2013
13.
For an interview indicating the awareness level in Iran about the issue, see Behdad Bordbar,
“Iranian economist says foreign competition key to growth”, Al Monitor, March 11, 2014, http://
www.al-monitor.com/pulse/originals/2014/03/iran-economy-reformists.html#ixzz2w9yeK3yG

cessful are actually pursuing their
desire to gain a greater share in the
economic wealth that will follow.
There are similarities between their
benefits and the international actors
at the table. The other side of this
equation is the interests of the given
system and the expectations in case
the negotiations fail.
Khamenei is the most influential person
in the Iranian power matrix, and
he remains at the centre of all the
power balancing. The reason he supports
nuclear negotiations lies in the
internal and external dynamics he
faces. With the events of 2009, the
opposition acquired political energy
through public support; this entailed
a process of alienation to the regime.
These events should have been managed
before they reached a devastating
point. 14 It was impossible to do
this without shedding the burden of
economic sanctions. The increasing
influence of the groups who mobilised
against Khatami and Ahmadinejad
should have been managed
before they became a threat. 15 Moreover,
the Obama administration’s desire
to reduce U.S. engagement in the
Middle East extended the bargaining
ground. It should be recalled that
there was an expectation that following
its withdrawal from Iraq, the U.S.
would seek to establish pragmatic
collaboration with Iran rather than
chasing a regime change. In this way,
Rouhani - famous for his pragmatism
despite his position at the core of the
regime- has found a way to meet the
needs and expectations in question.
Khamenei is the most influential person
in the Iranian power matrix, and he
remains at the centre of all the power
balancing.
On the U.S. side, the vision and policy
changes that have occurred under
the Obama government play a major
role in today’s structure. Firstly,
the U.S. government tried to develop
a new perspective for the Middle
East while shifting the foreign policy
axis to Asia, and started to implement
projects to end its energy dependence
on the region. 16 Then it
dealt with the Israeli security issue
in a way that the Israeli right wing
did not appreciate. According to
Washington, signing a peace agreement
with Palestine in the evolving
Middle East will not only ensure Israel’s
security, but also pave the way
for its rise in the region. The political
psychology based on the tension
between religious sects - which escalated
with the Syrian civil war - increased
Israel’s room for manoeuvre.
If Israel were to sign a peace agreement,
it would find new allies within
regional balances. Moreover, a possible
agreement would facilitate Iran’s
return to the system.
59
CASPIAN REPORT, SPRING 2014
14.
For the “Green Movement” in Iran and its consequences, see Hamid Dabashi, The Green
Movement in Iran, Transaction Publishers, 2011.
15.
For the thesis claiming that the increasing power of the Revolutionary Guards in Iran can change
the regime in the country, see Ali Alfoneh, Iran Unveiled: How the Revolutionary Guards Is
Transforming Iran from Theocracy into Military Dictatorship, AEI Press, 2013.
16.
Robert D. Blackwill and Meghan L. O’Sullivan, “The Geopolitical Consequences of the Shale
Revolution”, Foreign Affairs, March/April 2014.

Mehmet AkIf Okur
60
The steps that Obama tried to take
in this regard during the early years
of his presidency failed due to the
power of the Israel lobby. Netanyahu’s
active dissident behaviour during
his campaign for the second term
was unprecedented in the history of
U.S.-Israel relations. But still, the U.S.
government has not given up. This
process, the end of which remains
difficult to predict, has the potential
to yield crucial results with regard
to U.S.-Iran relations beyond nuclear
negotiations.
The Obama administration’s policy
of forcing Iran to transform through
economic sanctions is based on a
prudent strategy that keeps pragmatic
cooperation opportunities at
hand, using professional and clever
diplomatic language and ‘back doors’
ajar. The architecture of this strategy
not only increases the cost of
The steps that Obama tried to take in
this regard during the early years of his
presidency failed due to the power of the
Israel lobby.
avoiding negotiations, but also rewards
actions taken toward reconciliation.
In particular, the shared
understanding of the opportunities
offered by the Syrian civil war
to Al Qaeda affiliates, the two parties
found a way to build a common
approach toward the region. ISIS’s
activities in Ambar have brought
the U.S., Iraq, and Iran together, and
have given clues about future possibilities
for cooperation.
However, it remains unclear which
of these alternative scenarios will
become real - collaboration or conflict.
Thus, the consequences of both
possibilities for the Iranian system
should be kept in mind. The highest
priority for the dominant factions
in Iran is to ensure the continuity
of the regime to which they are tied,
through ideological but also material
interests. When we examine the possible
scenarios, we can map out the
scenario as follows. Signing an agreement
after the nuclear negotiations
will not only relieve Iran economically
but also enable it to further develop
its relations with the West in
the future. Thanks to foreign investments
and increased production triggered
by technology, the rising level
of national welfare will alleviate the
social and economic problems that
provide political ammunition for the
opposition. However, that interaction
will raise the demand for certain
rights, particularly among minority
groups that regard themselves as outside
the power centre. This climate
will heighten the impact of the West’s
criticisms of Iran’s human rights violations,
and could give rise to a future
where contradictions within the regime
are further questioned.
In this case, while the dynamics
that support the reformist movement
in Iran are increasingly potent,
it is likely that minority rights will
become a flashpoint, with Turks,
Arabs, Kurds and Baluchs expressing
their identity-related demands
more loudly. 17 Among these developments,
the most important one is the
17.
For a study emphasizing the importance of the minority issue for Iran’s future, see Rasmus
Christian Elling, Minorities in Iran: Nationalism and Ethnicity after Khomeini, Palgrave Macmillan,
2013.

Israeli Prime
Minister Benjamin
Netanyahu
criticized recent
U.S. policy towards
Iran under Obama
administration.
strengthening opposition based on
different ethnic references among
various Turkish groups that constitute
less than one-third of the population.
Sectarian identifications will
lead to cumulative reactions against
the regime, the erosion of national
identity, and a tendency toward
secularisation. Further questions for
consideration include ‘the identity
competition’ which emerged with
the increasing Persian emphasis on
secularization in Iran, and the attraction
of Iran’s increasingly prosperous
neighbours - Turkey and
Azerbaijan. 18
If nuclear negotiations are suspended,
it is likely that relations between
Iran and the West will become
even more strained. If sanctions
continue along certain lines, economic
problems and social unrest
will be sustained. This scenario will
increase the pressure on the oppo-
If nuclear negotiations are
suspended, it is likely that relations
between Iran and the West will
become even more strained.
sition due to increasing unrest in
the future, and will increase the
tendency toward bipolarization
and radicalisation. Tension will accumulate
on the fault line between
the main opposition and the regime,
and the alienation of ethnic/
religious minorities will accelerate.
The short-term success of coercive
measures to suppress these various
elements of unrest will create
a more divided country in the medium
and long-term. Identifying
high factors will be triggered by
this massive potential for instability
is a concern for not only Iran but
also many international actors, particularly
its immediate geographical
neighbours.
61
CASPIAN REPORT, SPRING 2014
18.
Conducted studies indicate that political conscious based on ethnic identity is strengthening
in Azerbaijani Turks. For example, see Emil Souleimanov, Kamil Pikal ve Josef Kraus, “The Rise of
Nationalism Among Iranian Azerbaijanis: A Step Toward Iran’s Disintegration”, MERIA Journal,
2013, Vol. 17 Issue 1, p.1-23.

Mehmet AkIf Okur
62
It is possible to estimate the extent
of the current concerns and expectations
by looking at the geopolitical
shockwaves across the Middle East
following the signing of the interim
agreement. Some Gulf countries
think that the U.S. commitment to
their security will soften and there
will be more space for Iran. Those
countries, particularly Saudi Arabia,
have already embarked on a quest:
the increasing interaction with Russia
and China, and the struggle to
determine a common position with
Israel, demonstrates the complexity
of the balances in the Middle East.
Of course, Turkey will be among the
most affected countries in terms of
the consequences of either the U.S.-
Iran rapprochement or an escalating
conflict environment. The question
being asked is: “Which Iran would be
better to have as a neighbour” The
multiplicity of future routes makes
it harder to find simple answers.
Nonetheless, setting aside the risk
of ignoring the details and minor
scenarios, we can talk about three
major possibilities. If no agreement
is signed after the negotiations, we
should consider that the government
bloc we face in Syria, Iraq and
other areas will likely strengthen its
position in Tehran. Ankara found an
opportunity to test its strengths and
weaknesses against Iran in the context
of the Syrian civil war. As a member
of the Western alliance, Turkey
is a big power with a developed
economy and qualified population.
The same thing applies to its military
capabilities. Turkey has built its security
infrastructure on the basis of
its alliances, and it has a protective
shield as long as it avoids conflict
with its current alliance structure.
However, being a part of a system
also entails some restrictions. We
do not have the confidence of Iran,
which can conduct proxy wars by
organizing armed groups outside its
borders. It is extremely difficult for
us to carry out such activities without
abandoning our pro-global system
position. If Ankara cannot build
Turkish capacity to catch up with the
opponent in their areas of advantage,
the best way is to encounter the opponent
across platforms that will
limit its current capabilities. We can
predict that a transformation that
pushes Iran toward integration into
the international order will bring
Ankara’s advantages to the forefront
in the Turkey - Iran competition.
The second scenario foresees that
Iran will conclude the nuclear negotiations
with an agreement, and
develop pragmatic cooperation with
the West while protecting its alliances
and extensions in the Middle
East. In this case, Iran will continue
to utilise the qualifications and capacities
that give it asymmetric advantages
against Turkey, far from
the reach of the West. Above all, if
the U.S. and Iran succeed in adopting
an approach that sees them fighting
against “common enemies”, the balance
of power will be disturbed in
ways that affect Turkey.
In the latter scenario, it is assumed
that Iran will begin to resemble
Turkey with a transformation both
in the domestic and international
level through integration into the
global system. A scenario whereby
Iran relinquishes the interventions
and operations that it currently car-

ies out via third parties abroad and
which are contrary to international
law, and instead starts to extend
domestic freedoms will be significantly
more advantageous for Turkey.
Thus, Ankara should utilise its
limited transformative effect on bilateral
relations in this regard. However,
it must be noted that the actor
which commenced the negotiations
would not want to get into this way
voluntarily. Khamenei wants to reconstruct
the regime’s legitimacy
by finding pragmatic solutions to
cumulative problems, and he will do
his best to prevent Iran turning into
a country that he cannot control.
the expected domestic reform process.
Unsecurization of the demands
for right in Southern Azerbaijan will
lead to more stability in Iran and less
hostility in the region. 20
It is possible to evaluate Iran’s relations
with Azerbaijan through the
same lens. As long as Iran’s concerns
(which underpin its hostile policy
against Baku since its independence)
are eliminated, the opportunities
and legitimacy offered by the
negotiations will strengthen former
positions. 19 In order to draw a new
road map, Iran needs to face the demands
for freedom, which also cover
ethnic/cultural rights. In view of the
potential contribution to permanent
stability in Iran, the steps taken in
this regard will demonstrate the
baselessness of Iran’s concerns towards
Azerbaijan. If Iran reviews its
priorities in relation to Armenia and
its Caucasus policy in accordance
with the new political realities, it will
see the energy which will strengthen
63
CASPIAN REPORT, SPRING 2014
19.
Iran’s concerns about Azerbaijani Turks affect its approach toward the Caucasus, Turkey, and
the Turkic world in general. For an assessment about this issue, see Alam Saleh, Ethnic Identity
and the State in Iran, Palgrave Macmillan, 2013, p.77-79.
20.
Findings of a field study carried out in Ardabil underline the importance of the issue by indicating
that “ethnic feelings are like the fire under the ashes” as stated by the researchers. Mansour
Salehi and Mohammad Bagher Sepehri, Ethnic Challenges in Iran: A Case Study of Ardabil,
Canadian Social Science, 6/30/2013, Vol. 9, Issue 3, p.74-83.

Frank Umbach
64
Strategic Perspectives
for Unconventional
Gas in the EU
Frank Umbach
ASSOCIATE DIRECTOR, EUROPEAN CENTRE FOR ENERGY AND
RESOURCE SECURITY (EUCERS), KING‘S COLLEGE

The expanded role for natural gas in the
world economy has prompted the IEA to
envisage a “Golden Age of Gas” era with
unconventional gas being a “game changer.”
Introduction
The U.S. shale gas development is not
a technical revolution, but rather an
evolution of modern techniques and
the combining of two key technologies
– horizontal drilling and “slick
water” hydraulic fracturing. Together
these can crack shale rock, and have
thus cracked the code with regard to
opening up major North American
shale gas resources.
The rapidly expanding production
of shale gas has transformed the U.S.
from the largest LNG import market
to a self-sustaining gas producer and
a net gas exporter. In 2009, the U.S.
even overtook Russia as the world’s
largest gas producer, and in 2010 it
exceeded Qatar as the world’s largest
LNG exporter by about 60%. In 2012,
U.S. natural gas production increased
to 681.4 billion cubic meters (bcm;
20.4% of the global production),
whereas Russia’s was just 592.3 bcm
(17.6% of global production).
The combination of three factors -
(1) a drop in demand linked to the
global economic recession, (2) a
unexpected dramatic increase in
incremental U.S. non-conventional
shale gas production, and (3) the
arrival of new LNG delivery capacity
- have created a sudden “gas glut”.
This stems from the overcapacity
of LNG, which made LNG in Europe
less expensive than pipeline gas
(based on long-term contracts), and
contributed to the de-linkage of the
gas prices from the oil prices in at
least Europe at present. This could
become a permanent feature of the
global energy market because the
remaining global unconventional
gas resources are considerably bigger
than conventional ones. The U.S.
could even overtake Russia as the
world’s largest combined oil and gas
producer by 2015.
The development of unconventional
gas in the U.S. since 2006 has not
only triggered a revolution in U.S.
energy markets, but has also laid the
groundwork for an expanded role
for natural gas in the world economy.
This has prompted the IEA to envisage
a “Golden Age of Gas” era with
unconventional gas being a “game
changer.” It has already transformed
the global gas markets, which were
in the past “sellers’ markets” rather
than “buyers’ markets.”
Meanwhile, some countries in Europe
(Poland, United Kingdom, Romania,
Lithuania, Spain and Ukraine)
have become very interested at the
65
CASPIAN REPORT, SPRING 2014

Frank Umbach
66
Many of the shale gas fields in Europe are
situated in areas where the geology makes it
much harder to extract than in the U.S.
exploitation of their own unconventional
gas resources. Others however
have adopted a moratorium (Bulgaria,
Czech Republic) or even a ban
on the fracking technology (France)
and the production of shale gas due
to perceived environmental risks.
Against this background, the article
analyses the different policies in regard
to unconventional gas in the
EU-member states, some of which
are in favor of shale gas production
(Poland, the United Kingdom, Romania,
Lithuania and Spain) and some
of which have adopted (temporary)
moratoriums (Germany, Bulgaria) or
even a ban (France).
Europe’s Unconventional
Gas Resources and the
Energy Policies of its
Member States
While initial assessments of Europe’s
unconventional gas potential
were relatively skeptical and conservative,
Europe has depositories
of significant unconventional gas resources
with estimated total recoverable
reserves of 33-38 tcm. Reserves
in some states are now thought to
be much larger than previously estimated,
and in others, there is growing
concern over the market dominance
of the U.S. Some are also keen
to break their dependence on Russian
conventional gas. In June 2013
the EIA published a new worldwide
assessment of unconventional gas
resources, which has added nine
more countries to the total number
of countries with technically recoverable
shale gas resources. This
number now stands at 41. For Europe,
some country estimates have
been increased, while others have
been reduced. Worldwide, the EIA
has estimated 10% more shale gas
resources in comparison with its previous
estimates of 2011.
Many of the shale gas fields in Europe
are situated in areas where the
geology makes it much harder to extract
than in the U.S. They are also
in places with much higher population
densities, and their service industries
and infrastructure for the
industry are much less developed.
But the perceived risks are often
overestimated, not very different to
conventional gas drilling and often
not related to the fracturing process
itself.
The IEA has remained cautious and
has estimated that Europe’s unconventional
gas production by 2035
may reach not more than 20 bcm by
2035 due to the unclear conditions,
specifically, to what extent social and
environmental concerns will lead
to the tightening of the regulatory
framework at the EU level.
New geological analyses in Germany
and Great Britain have confirmed
the historical experiences of fossil
fuels, whereby at the beginning of
their findings and exploration the
estimates of reserves and resources
go up for a longer time alongside of
using new technologies for discovering
and exploration of fossil fuels before
they are decreasing after having
received their peak estimates and
production levels.

EU Commissioner
for Energy,
Gunther Oettinger
during a press
conference on
offshore oil and
gas on October
27, 2011 at the EU
Headquarters in
Brussels.
In the view of the European Commission,
Europe should at least be
able to produce sufficient volumes
of domestic shale gas to replace its
depleting conventional gas reserves,
so as not to become more dependent
on imports from unreliable suppliers
or politically unstable countries.
In November 2012, the European
In June 2013, the British Geological Survey
published a new report showing that UK
shale gas reserves, up to 40 tcm in England
alone.
Parliament followed the European
Commission’s cautious policies by
adopting two resolutions of the environmental
and the industry and
energy committee (ITRE) that favour
unconventional gas exploration,
albeit calling for “robust regulatory
regimes.”
But the Commission itself is politically
divided; while the energy department
favours European shale
gas projects as a means of enhancing
energy supply security and economic
competitiveness, the Environmental
and Climate Protection Department
is presently considering an EU-wide
regulation on methane emissions,
which may further complicate the
EU shale gas projects at this critical
stage.
United Kingdom
Despite the spread of ‘Nimbyism’
in Britain, the UK government, its
Department of Energy and Climate
Change, a parliamentary commission
and new government commissioned
reports by the Universities of Durham
and Aberdeen on the environmental
risks all support shale gas exploration
and development projects.
In December 2012, the British government
lifted a ban (in place since
May 2012). In June 2013, the British
Geological Survey published a new
report showing that UK shale gas reserves,
up to 40 tcm in England alone,
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Frank Umbach
68
are considerably higher than previously
estimated (in fact, almost 20
times higher). Around 10-20% is estimated
as economically recoverable.
These new figures were confirmed in
a report by the Institute of Directors
in September 2012 (a non-party political
organization of British industry
with approximately 38,000 members
in the UK and overseas). The
report estimated that around 35,000
jobs can be created and that onshore
shale gas production in Britain could
produce enough gas to meet 10% of
the UK’s gas needs for the next 103
years, while decreasing carbon emissions
by 45 million tonnes of CO 2
.
Even if Britain only gets 10% of this
gas-in-place produced, it will supply
the UK for 25-50 years. The most optimistic
scenario has estimated the
future shale gas production at up to
122-255 bcm per year – more than
twice the present annual consumption
of almost 100 bcm.
In November 2013, the new grand coalition
government agreed on a “temporarily
fracking ban”, until environmental
issues like the use of toxic chemicals are
resolved.
Unconventional gas reserves provide
the foundation for the government’s
newly released “Gas Generation
Strategy” in December 2012, which
envisages the construction of 20 new
gas-fired power plants, with 9 gigawatts
(GW) by 2020 and 26 GW by
2030.
The Royal Society and Royal Academy
of Engineering reviewed the
scientific and engineering as well as
related environmental risks associated
with hydrofracking. The report
concluded that those environmental
risks can be managed effectively
and enforced through strong
regulation. It also sees fracking as
an unlikely cause of ground water
contamination.
Energy companies expect that it will
take as long as five years for production
to reach a commercial scale.
Like in other EU countries, public
fears in regard to potential environmental
risks have also increased and
thus slowed down the planning and
permissions processes for shale gas
projects at the local level. An engineering
consultancy advising the
Department of Energy and Climate
Change (DECC) has reduced the figure
of jobs that could be created by
the shale gas industry from 74,000
(as Prime Minister Cameron was
speculating) to 15,900-24,300. But
the UK water and fossil-fuel industry
lobbies have agreed to work together
to minimize the environmental harm
of the shale gas projects for the country’s
water supply.
The UK government is currently
seeking new ways to simplify the
permissions process for British shale
gas projects. This process has been
widely criticized as too complex for
prospective investors. In December
2013, the British government unveiled
its plans to reduce the tax payable
on a proportion of profits from
62% to 30% in order to encourage
investment in the shale gas industry.
But more than half of Britain’s
cabinet ministers may experience
shale gas projects in their constituencies,
which may further deepen

the political conflict over fracking,
and weaken political support due
to the “fear of unknown” in rural
communities.
Germany
With an annual gas consumption of
around 100 bcm, Germany’s domestic
production covers just 12% of the
national gas demand 40% of Germany’s
gas consumption is supplied by Gazprom.
With an annual gas consumption
of around 100 bcm, Germany’s domestic
production covers just 12%
of the national gas demand. 40% of
Germany’s gas consumption is supplied
by Gazprom. Despite a moratorium
adopted by the federal states of
North Rhine-Westphalia and strong
opposition to shale gas drilling on
environmental grounds, several
companies, including ExxonMobil,
have acquired exploration licenses in
six of the federal states: Nord Rhine
Westphalia, Thuringia, Lower Saxony,
Saxony-Anhalt, Hessen and Baden-
Wuerttemberg. The state of Hessen
has called for uniform practice and
legal rules across the country, fearing
a competition between federal
states.
But the previous government in
Berlin and its Ministry for Environment
have tried to slow down the
discussions and any governmental
decisions. The Environment Ministry
has generally opposed fossil fuel
resources and instead has always
favoured heavily subsidised support
for re¬new¬able energy projects.
In July 2012, the German Federal
Institute for Geosciences and Natural
Resources (BGR) published its
first estimate for domestic shale gas
reserves and officially described
them as “significant”. The estimates
are considerably higher (up to three
times) than those published by ExxonMobil
in January 2012, and much
higher than Germany’s conventional
gas reserves. The BGR also concluded
that environmentally friendly [fracking]
technology is possible from a
geo-scientific point of view and that
“fracking and drinking-water protection
are fundamentally compatible.”
It also confirmed - together with the
comprehensive environmental study
“Hydrofracking Risk Assessment” -
that the fracking risks can be controlled
and regulated. At present, a
third of Germany’s domestic production
already uses fracking technologies
- some for more than 50 years.
Germany’s energy-intensive and
manufacturing industry (i.e. Bayer,
BASF at al.) has begun to voice its increasing
concern about the implications
of the U.S. unconventional gas
revolution for its future economic
competitiveness, as the reduced gas
prices in the U.S. are an essential
cost factor for petrochemical manufacturing,
in particular ethane. These
cheap feed stocks are reshaping the
global competitive landscape for petrochemicals
with a “quite phenomenal
advantage” for the U.S. industry.
“Cracking” ethane makes ethylene,
which is the major building block for
plastics such as polythene.
In January 2013, the BGR criticised
the lack of geo-scientific expertise
on the deep underground and identified
many instances of inconsistency
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Frank Umbach
70
The UK government is currently seeking new
ways to simplify the permissions process for
British shale gas projects.
and subjective argumentation as
well as a trend of ignoring the broad
knowledge base and modern methods
of geo-scientific exploration. It
also pointed out that this allegation
of missing data on regional assessments
is not supported by facts. The
political debate moved away from
an outright national ban of hydrofracking
to the question how far to
legislate environmental safeguards
before the national parliamentary
elections in September 2013.
German Federal Institute
for Geosciences and
Natural Resources (BGR)
July 2012 – Germany’s Shale
Gas Reserves:
• Total shale gas reserves: 6.8-22.6
tcm;
• Technically recoverable reserves:
0.7-2.3 tcm (10% of total shale gas
reserves)
• ExxonMobil estimate of Germany’s
exploitable reserves: 827 bcm
• Conventional Gas reserves in comparison:
150 bcm
In November 2013, the new grand
coalition government agreed on a
“temporarily fracking ban”, until environmental
issues like the use of
toxic chemicals are resolved. Until
non-toxic fracking fluids are available,
the agreement is not a strict
ban but rather a temporary moratorium.
The German EU Energy
Commissioner Gunther Oettinger
repeatedly warned the previous
German government against fully
rejecting the shale gas exploration
through fracking technology. In
the summer 2013, three geological
research institutes, the BGR in
Hannover, the German Research
Centre for Geosciences (GFZ) in
Potsdam and Helmholtz Centre for
Environmental Research in Halle
launched a programme to support
the exploration of the country’s
shale gas potential by making the
shale gas industry more environmentally
friendly and the fracking
technology “greener”, by developing
biological alternatives to the
chemicals being used for fracking,
for instance.
Poland
Poland itself still generates more
than 90% of its power from coal,
but is seeking to replace part of
its coal consumption with gas. In
2012, Poland produced 5.5 bcm of
conventional gas in its own country.
But that covered only 30% of
its domestic gas consumption, 16
bcm in total. The shale gas reserve
estimate from the Polish Geological
Institute (PGI) in March 2012
revised downwards the estimates
of national reserves to around 2
tcm, in contrast to EIA’s optimistic
forecast of 5.3 tcm. Its technically
recoverable gas reserves may
amount to just 346-768 bcm. But
these published figures included
only archival data, predominantly
from exploration testing in the
1960s and 1970s. The preliminary
estimate will be upgraded and revised
on an annual basis. But even
the lowest estimate of 346 bcm of

Global shale gas
map.
shale gas reserves would satisfy
Poland’s domestic demand for 35
years.
The government’s proposed taxes
exceeding 40%, for instance, have
raised concerns among energy
companies as they face exceptionally
capital investments. Difficult
geology, a non-competitive service
sector, poor infrastructure, lengthy
permissions processes, an uncertain
regulatory and tax environment
as well as lack of rigs have hindered
development. In addition, preliminary
costs per well have increased to
US$15 million – nearly three times
the cost in the U.S. As a result of the
failure to provide an attractive investment
climate, the uncertainties
and bureaucratic constraints as well
as unrealistic expectations for the
short-term future, the pace of shale
gas exploration in Poland has clearly
slowed down in 2013. For the industry,
287 wells still remain open for
exploration, but at the present rate,
the exploration process may not end
before 2037.
The government and Polish industry
representatives still expect that domestic
shale gas production will be
significantly cheaper than Russian
gas. In contrast to public opinion in
Germany and France, the pro-shale
gas policies are supported by more
than 70%. The government has
In contrast to public opinion in Germany
and France, the pro-shale gas policies
are supported by more than 70%.
promised to change its shale gas regulations
to speed up its exploration
and announced last May that it will
not collect taxes on the production of
shale gas until 2020.
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CASPIAN REPORT, SPRING 2014

With Russia’s
President Vladimir
Putin watching,
Rosneft CEO
Igor Sechin
and President
of ExxonMobil
Stephen Greenlee
signing documents
on February 13,
2013.
Frank Umbach
72
ExxonMobil’s withdrawal from
shale gas exploration in Poland last
June can be seen as a warning signal
against the unrealistic hopes that
Poland will become the “sheikh of
Europe”. But the withdrawal - less
than three months after the Polish
government reduced its estimates of
shale gas reserves - is not necessarily
a confirmation of those more limited
estimates. In fact, it came only few
days after ExxonMobil agreed with
Russia’s Rosneft to develop “tight
oil” reserves in western Siberia, allowing
it access to Russia’s vast oil reserves
in its Artic region by replacing
BP. However, two other energy
companies, Talisman and Marathon
Oil Corp. have also left Poland after
the exploration yielded disappointing
results.
In June 2013, the EU’s highest Court,
the European Court of Justice, issued
a ruling that Poland had violated European
law by allowing licenses to
be issued for the shale gas projects
without fully open tenders.
The Polish government’s promotion
of its large unconventional gas resources
is driven by its energy supply
security concerns and its desire
to reduce its gas imports from Russia
and to build a diversification strategy
for supply sources and imports. Poland’s
Supreme Audit Office (NIK)
has criticized unnecessarily high gas
prices, allegedly because of poorly
conducted negotiations with Gazprom.
Poland’s gas prices rose from
US$331 in 2010 to US$433 per thousand
cubic meters in 2012.
France
After France banned shale gas exploration
in July 2011, the new socialist

French government has opposed any
lifting of the embargo since its inauguration
in May 2012, despite having
the third largest shale gas resources
in Europe (after Russia and Poland)
with technically recoverable shale reserves
of 3.88 tcm. However, debates
have intensified and have become
more polarized – even within President
Hollande’s socialist party itself.
Furthermore, though the “Jacob law”
of 2011 banned hydraulic fracturing,
other means of shale gas extractions
are allowed, as well as fracking under
certain restrictions in pursuit of
“scientific experimentation”.
The French Economy and Finance
Ministry want to lift the embargo.
The French Commissioner for Investment,
Louis Gallois, called for
the government to revoke the ban
on shale gas extraction in France in
the November 2012 “Pact for the
Competitiveness of French Industry”.
GDF Suez SA (GSZ) and Total SA (FP)
have been the most vocal industrial
supporters of shale gas projects in
France. Arnaud Montebourg, the
Minister of Industrial Renewal, has
also repeatedly supported a rethinking
of shale gas exploration and
seeks to circumvent the present ban
by developing strict guidelines. The
former French Prime Minister, Francois
Fillion, has also deplored plans
to ban research into shale gas developments
as “criminal” and indicative
of a “medieval mind set”. The IEA expects
a reversal of the moratorium
and ban on hydrofracturing, and a
subsequent rise in shale gas production
after 2020 to around 8 bcm by
2035, exceeding its peak gas production
back at the end of the 1970s.
While the French energy giant Total
has moved forward with shale gas
exploration in the U.S. and has begun
or declared its intention to invest in
shale gas exploration projects in UK,
Poland, Denmark, China and Argentina,
the French policies for shale
gas explorations will be determined
by the progress in other European
countries like Poland and the UK
President Hollande made it clear that
under his presidency no shale gas
projects will be allowed in France.
rather than by domestic developments
in the coming years. Even
the dismissal of Minister of Ecology,
Sustainable Development and Energy,
Delphine Batho, in July 2013
did not change the French government’s
position; President Hollande
made it clear that under his presidency
no shale gas projects will be
allowed in France. Furthermore, the
French Constitutional Council – the
country’s highest constitutional authority
– rejected a legal challenge
concerning the government’s ban
on fracking after the U.S. gas company
Schuepbach Energy, which was
originally granted two exploration
licenses before the anti-shale legislation
was introduced in 2011, issued
complaint against the legal ban. But
the debates are continuing.
A report by the French bank Société
Génerale warned at the end of
October 2013 that European shale
gas could be the only answer to the
poorly-functioning EU gas market
in which four foreign national oil
companies (Gasprom from Russia,
Statoil from Norway, Qatar Petro-
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Frank Umbach
74
During the last three years, exploration
licenses for Spain’s conventional and
unconventional hydrocarbon resources
have almost doubled.
leum and Sonatrach from Algeria)
control around 50% of the European
gas supply. France’s Académie
des Sciences has recommended that
further research into shale gas extraction
be undertaken, and has also
called for an “independent and multidisciplinary
scientific authority” to
assess the methods and operating
practice.
Spain
The Spanish Energy Ministry and
the Autonomous Communities have
granted numerous exploration permits
in various autonomous regions
(mainly in the northern part of the
country) after recent discoveries of
shale gas deposits. During the last
three years, exploration licenses for
Spain’s conventional and unconventional
hydrocarbon resources have
almost doubled in the Asturias/
Cantabria/Basque Country onshore
and offshore areas, as well as in the
offshore regions of Fuertenventura,
Lanzarote in the Canary Islands. In
the latter region, shale gas deposits
are reportedly much larger than
in peninsular Spain. In the Basque
Country area, a “world-class-shalegas
play” has been identified. With
the strong support of regional governments
and North American exploration
companies, the Spanish
unconventional gas industry hopes
to expand exploration activities and
go into the production of its shale
gas reserves in the mid-term.
In August 2013, the Spanish government
prepared a project for the
Law of Environmental Evaluation,
which would require all projects using
fracking technology to submit an
“evaluation of impact” report. The
government has advanced the use of
fracking and given legal protection
to the controversial technology. Due
to the severity of Spain’s economic
crisis, the concept of using cheap
domestic energy resources has had
greater resonance among the Spanish
population than in most other
European countries.
The Superior College of Mining Engineering
has estimated that Spain’s
shale gas resources can provide 39
years of domestic gas consumption.
Spanish fracking companies
have formed the lobby group “Shale
Gas Espana” to promote shale gas
projects and to dispel myths surrounding
suspected environmental
risks of the fracking technology.
Despite its dependence on imports
of hydrocarbons up to 99% - leading
to an energy deficit worth 45 billion
Euros (almost 4% of the national
GDP) - environmental groups and
dozens of Town Halls and provincial
governments as well as the Spanish
Federation of Municipalities and
Provinces (FEMP) have presented
103 motions against fracking.
At the end of last October, parliament
passed an amendment to the
country’s hydrocarbon law, which
will speed up the development
of unconventional gas projects in
Spain. The law prevents regional
governments from banning hydraulic
fracturing projects. Com-

panies are obliged to submit an
environmental impact assessment
to pass the highest environmental
approvements. However, Spain’s
history of excessive bureaucracy
causes doubts about future shale
gas projects. But despite the country’s
heavy dependence on LNG imports,
Spain is tied into relatively
few long-term take-or-pay gas contracts
for pipeline gas. This gives
Spain much commercial flexibility
for its shale gas projects.
Lithuania
For the Baltic states (as with Poland),
the exploration and development of
shale gas projects represent an important
strategy for diversifying gas
supplies, to reduce their gas dependence
on Russia and to access much
cheaper gas than the expensive Gazprom
imports.
After Poland, Romania, and Ukraine,
Lithuania is considered as the fourth
most attractive country for shale
gas production in Central Eastern.
Lithuania could hold 480 bcm of
unconventional gas with around
recoverable 120 bcm. If these unconventional
gas reserve estimates
are confirmed, Lithuania - consuming
3.4 bcm in 2011 (all supplied by
Gazprom) - could supply its domestic
gas demand for the next 30-40 years.
After Poland, Romania, and Ukraine, Lithuania
is considered as the fourth most attractive
country for shale gas production in Central
Eastern.
Lithuania was the first Baltic state
to announce a shale gas tender
in June 2012. In September 2013,
Chevron won a tender for a license
to explore shale gas resources. But
few weeks afterwards, Chevron retreated.
The investment and legal
regulations adopted by the Lithuanian
government shortly after the
tender included chaotic changes to
the legal, fiscal and regulatory frameworks
(due to a lack of governmental
coordination, which made the
tender increasingly less attractive
and commercially viable. Chevron’s
withdrawal considerably damaged
Lithuanian’s pursuit of energy independence,
or at least its aim for
reducing gas imports from Russia.
It has also damaged the national
economy by deterring other foreign
investors. But it did reveal that the
government did not seek to obtain a
broad base of public support. Nonetheless,
the government remains optimistic
that a new tender will attract
serious investors.
Romania
Bulgaria, Romania and Hungary
have around 538 bcm of technically
recoverable shale gas reserves. Romania’s
annual gas consumption
is 13-14 bcm, most of which it can
cover with its own significant gas
reserves – unlike many of the neighbouring
Balkan countries. In 2012,
Romania imported 2.17 bcm of gas
from Gazprom. Despite a temporary
until the beginning of 2013, the
Romanian government continued
its negotiations with Chevron for a
shale gas exploration project in Constanta
County. In December 2012,
the Hungarian energy company MOL
and Canada’s East West Petroleum
also obtained exploration licenses
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Frank Umbach
76
approved by the government. In the
same month, a local referendum on
the use of fracking technology for
shale gas production was declared
invalid because less than 50% of voters
participated.
At the end of January 2013, the Romanian
government awarded Chevron
exploration licenses to pursue
unconventional gas production, despite
environmental concerns. Prime
Minister Victor Ponta has warned
that Romania’s economic competitiveness
vis-à-vis Poland and other
countries will suffer if shale gas is
not exploited. He also hopes to reduce
the country’s dependence on
Russia and Gazprom, with the further
benefit of purchasing gas much
more cheaply in comparison with
Russia’s high prices of US$450 per
1,000 cubic meters. But he believes
that the exploration and confirmation
of existing or non-existing economically
exploitable resources may
take up to five years before a final
decision to produce shale gas can be
made by the government. Together
with its newly discovered offshore
conventional gas resources in the
Black Sea holding 42-84 bcm (which
would cover its gas demand for nine
years), Romania’s even higher shale
gas resources could cover its net domestic
demand and make the country
self-sufficient in terms of gas.
In November 2013, the European
Centre for Excellence in the field of
natural gas (CENTGAS) and part of
the Romanian National Committee
of the World Energy Council (RNC-
WEC) published a study concluding
that Romania’s shale gas resources
could represent a real alternative
for strengthening Romania’s energy
security and energy independence.
Romania’s unconventional gas resources
could transform the country
into a gas exporter by the beginning
of the next decade, contributing 1.5%
to annual GDP, reducing gas prices by
12% in the short-term and by 33%
in the long-term, creating jobs and
generating more tax for the state
budget with estimated annual revenues
of US$176.2 million. New hydraulic
fracturing technologies and a
responsible water management can
reduce the risks of technical accidents
and environmental impacts, as
responsible water management will
eliminate potential sources of water
pollution.
Bulgaria
Bulgaria has an annual gas consumption
of around 3 bcm and is almost
completely dependent on imports
from Gazprom. The Bulgarian government
adopted a moratorium
on the exploration of shale gas and
the fracking technology in January
2012 as a consequence of local
opposition, months of protest and
pro-Russian attitudes. Legislation
was amended in May 2012 to allow
the development of natural gas
projects by conventional drilling
technologies, for instance for the
newly discovered offshore gas fields
on Bulgaria’s Black Sea coast. However,
fracking technology for shale
gas exploration is still not permitted.
Since then, there has been a push to
lift or at least review the ban by the
Movement for Energy Independence
(DEN), parts of the government and
the Bulgarian President Rosen Plevneliev.
Even Bulgaria’s Environment

Minister stated that the moratorium
on hydraulic fracturing is rather a
temporary measure until a review of
potential environmental and health
risks have been conducted and prove
that those environmental risks can
be controlled and managed.
Romania’s issuance of exploration licenses
for its shale gas reserves and
early successful lighthouse projects
will shape the future trajectory of
Bulgarian discussions and decisions
in regard to the current moratorium
on hydrofracking. However, many
energy experts believe that this decision
is likely to be reversed once environmental
studies are completed.
Estimated European shale
gas reserves:
• UK: Up to 1,700 trillion cubic metres.
Original estimates were as high
as 5.3 tcm.
• Germany: 6.8-22.6 tcm, with technically
recoverable reserves of 0.7-2.3
tcm (10% of total shale gas reserves).
• ExxonMobil estimate of Germany’s
exploitable reserves: 827 bcm.
• German conventional gas reserves
in comparison: 150 bcm.
• Bulgaria, Romania and Hungary:
538 bcm of technically recoverable
shale gas reserves.
Conclusions and
Perspectives
Notwithstanding its own unconventional
gas prospects, the EU-28
stands to benefit from the expanding
worldwide unconventional gas
production in various ways. This
emerging global trend will open up
new sources of LNG imports, including
from the U.S. and countries for
which exporting gas is an entirely
new industry.
The U.S. shale gas revolution cannot
be replicated in Europe with the
same low costs of shale gas production;
nor will it reach the same volumes.
It will take place in an evolutionary
(rather than ‘revolutionary’)
way. Nonetheless, it is expected to
become an economically competitive
source of energy, in particular
compared to imported Russian conventional
gas from its new and very
expensive gas fields in the remote
regions of Yamal and Siberia, transported
via long distance pipelines.
With the growing use of LNG on the
global gas market, traditional oilindexed
gas contracts will gradually
decrease as the global gas market
becomes increasingly integrated,
whereas spot markets for gas will
expand both in number and importance.
Embracing unconventional
gas will keep costs lower than any
future conventional production
from new gas fields in remote regions,
including the Arctic in Russia,
as well as the hugely expensive new
(underwater) gas pipelines. Cheaper
European shale gas will help break
Europe’s overdependence on very
costly future Russian gas supplies.
The short and mid-term consequences
of ignoring or denying the
positive strategic dimensions of Europe’s
domestic unconventional gas
reserves are increased gas imports
from Russia, plus higher volumes
of LNG from often politically unstable
producer countries outside
of Europe. In 2012, the EU-27 spent
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Shale gas drilling
rig.
Frank Umbach
78
€408 billion on energy imports – six
times more than in 1999, and equal
to 3.9% of GDP. This “alternative”
not only threatens Europe’s energy
supply security and economic competitiveness,
but also creates a much
bigger CO 2
-footprint. If lifecycle
analyses are calculated based on
emissions not only from the production
process, but also from the long
distance transport via thousands of
kilometres of pipelines from Russia,
CO 2
emissions from domestic shale
gas resources would be around 30%
lower. The alternatives to domestically-produced
shale gas would
therefore lead to higher gas prices,
reduced supply security and higher
CO 2
emissions. In other words: the
use of domestically-produced unconventional
gas serves all three major
objectives of the “energy triangle”:
supply security, economic competitiveness
and environmental/climate
protection.
With the increasingly wide price gap
between the North American and
the European oil and gas market
(gas: US$4.5 per million British thermal
units in the U.S. in comparison
with US$9 in Europe and US$18 in
Asia), a “re-industrialization” of energy
intensive and other industries

is already underway on the U.S. side.
The future economic competitiveness
of Europe and Asia towards the
U.S. faces increasing challenges with
much higher gas and other energy
prices. Confronted with rising oil
and import dependency (in contrast
to the U.S.) from politically unstable
or other problematic suppliers, EU
energy security faces even more severe
risks, vulnerabilities, and uncertainties
in the future. Increased
European efforts to maximise the
potential of its own unconventional
oil and gas resources could also help
the EU to retain or create industrial
sector jobs, contributing to its overall
future economic competitiveness.
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CASPIAN REPORT, SPRING 2014

THE IMPORTANCE
OF TAP FOR ITALY
SOME SCENARIOS
Antonio Sileo
Senior Research Fellow, Institute for Competitiveness
(I-com)
AntonIo SIleo
80

It was suggested that Italy, with its geographical
position at the junction of North-African, North-
European and Russian streams, could be turned
into the “Southern Europe gas hub.”
1. Introduction
Italy, like most European countries,
is heavily dependent on gas imports
from outside the EU. Yet, as Italy’s
gas consumption grows, mainly due
to the completion of the methane
pipeline system in the country and
the increased use of gas for power
generation, there is a corresponding
decline in domestic production. 1 Inevitably,
the historical condition of
dependence will worsen. These circumstances
affect the market structure,
as almost 93% of Italian imports
flow through pipelines.
Among the possible interventions
considered over the last decade, it
was suggested that Italy, with its geographical
position at the junction of
North-African, North-European and
Russian streams, could be turned
into the “Southern Europe gas hub.”
This was clearly articulated in Italy’s
most recent National Energy Strategy
(NES). In this context, Snam, the
Italian transmission system operator
(TSO) provided for by the lawdecree
(D.L.) of January 24 th 2012,
n.1, modified in Law (L.) 24 th March
2012, n.27, and by the decree of the
Prime Minister (DPCM) 25 th May
2012, should play a major role in
contributing to supply security and,
in general, national energy security
(Sileo; 2012). 2 However, energy security
is not exclusively guaranteed
by a long-term strategy; a comprehensive
approach also demands the
ability to manage possible shortterm
supply shocks. The Italian gas
system has recently faced critical
situations, in particular in 2005 and
2006. Based on its practical experience,
Italy has learned how to cope
with emergencies, and always managed
to ensure the supplies for its
final domestic consumers. Moreover,
since 2008, gas consumption
has dropped, thanks to the financial
crisis. Having stopped growing, by
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CASPIAN REPORT, SPRING 2014
1.
It is important to say that Italian natural gas domestic production has inverted the trend since July 2011, returning to increase.
2.
According to the Italian legislation a decree-law is a decree passed by the Italian Government as an urgent measure, which has to
be approved by the Parliament within 60 days in order to become law.

AntonIo SIleo
82
the end of 2011, gas consumption
reached its 2003 level.
the Trans Adriatic Pipeline (TAP), at present the
most ambitious project concerning the Italian
gas infrastructure system, can be considered
consistent with a security-led strategy.
On this basis, the Trans Adriatic
Pipeline (TAP), at present the most
ambitious project concerning the
Italian gas infrastructure system,
can be considered consistent with a
security-led strategy. TAP’s rationale
is mainly one of diversification: carrying
10 bcm of Azerbaijani natural
gas from the Shah Deniz II field each
year, TAP would provide a new and
significant energy source. Moreover,
a second phase is already planned,
in order to increase the nominal capacity
of the pipeline up to 20 bcm/
year, through a new compression
station. This additional capacity may
play a pivotal role in the Italian supply
strategy, which depends heavily
on imports (particularly from Russia,
Algeria and Libya), both in terms
of security and industry. In the recent
past, Italy has experienced gas
shortages, due to the particularly
rigid climatic conditions and lack of
flexibility in the volumes imported
from abroad. On those occasions,
the storage infrastructures played a
much larger role than usual, raising
questions about their economic and
strategic sustainability. Moreover,
alternative uses of gas, such as unconventional
industrial uses in steel
production and a substantial shift
in fuel transportation, are likely to
emerge.
3.
A similar figure for 2012: 11.5% (equal to 8.7 bcm).
A new southern route may also
have strategic implications for Italy,
strengthening its role as an entry
point for non-Russian, non-LNG gas
to travel to Northern Europe. In this
sense, the efforts of the European
Commission through the Southern
Gas Corridor initiative - despite the
obstacles posed by divergent national
interests – has a strong basis. In this
sense, TAP may play an important role
in fulfilling the demand of other European
countries, whose consumption
patterns also seem to be shrinking.
2. Trends in the Italian gas
market: an overview
Supply and Sources
Italy is heavily dependent on gas
imports. In 2013, the national production
share was limited to 11% of
total consumption (7.7 bcm), 3 while
net imports (imports minus exports)
amounted to almost 88% of the total
(61.7 bcm). Most of this imported gas
comes from Algeria and Russia. In
2011, Italy imported 22.9 bcm from
Algeria and 19.7 bcm from Russia.
Among others, Qatar (6.2 bcm) is the
main LNG importer, through two regasification
terminals (Panigaglia and
Portoviro).
Domestic Demand
Italian natural gas demand has continued
to shrink over the last decade,
aside from a minor and temporary
recovery in 2010. This decline was
anticipated, and indeed industry-led
since 2004: total industrial consumption
has dropped by more than 35%

over 10 years (from 21 to 13 bcm).
This reduction is due to: 1) a reduction
in gas use as a result of the economic
crisis, particularly harsh for
the industries involved, and 2) more
efficient use of gas, considered a key
factor in competitiveness.
Meanwhile, the household gas consumption,
which amounts to roughly
half of the total, has experienced a
slight increase, also due to the cold
temperatures this winter. Unfortunately,
the use of gas for heating
is unpredictable, and the patterns
observable in the past years can be
considered exceptional; therefore
few can be used to predict future
trends. In addition, natural gas is facing
new competition, such as heating
pumps, induction stoves and heaters,
which will probably limit growth in
consumption.
Power generation of electricity significantly
affects Italian natural gas
consumption: in fact, it has historically
amounted to one-third of the
total. Despite the installation of further
capacity in terms of combined
cycle plants over the last decade,
consumption of thermoelectric generation
has dropped significantly
since 2009. A structural fall is evident
following the peaks in 2007
and 2009 (33 – 34 bcm), when thermoelectric
plants helped to fill the
power deficit of the electric system.
The contraction of consumption in
recent years can be explained based
on two main factors: 1) the overall
decline in electricity consumption
and 2) the upsurge in renewable energy
sources.
All in all, consumption patterns in
Italy show both a temporary low
and a structural contraction: the
actual bottom is surely related to
the economic crisis. While that will
eventually end, the decline is also
the consequence of a permanent
shift in the consumption paradigm.
In particular, we attend to the rise
of the relative (and possibly absolute)
importance of residential use.
This has two major implications.
First, whether or not total gas vol-
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CASPIAN REPORT, SPRING 2014
A fire at the Ilva
steel plant in
Taranto after it was
hit by a tornado.

AntonIo SIleo
84
Power generation of electricity
significantly affects Italian natural gas
consumption.
umes bounce back to 2005 levels,
the overall volatility of the market
will change. In fact, domestic use is
strictly related to climatic and seasonal
conditions (i.e. winter consumption
is much higher than summer
consumption) and from year to
year (for example, in the event of a
particular cold winter).
The second consequence raises security
issues: given the EU regulation
on security of supply 4 and its implementation
within national law, domestic
consumers are protected in
case of supply shortages. 5 This protection
guarantees supplies to consumers
in case of: 1) extreme temperatures
during a 7-day peak period
occurring with a statistical probability
of once in 20 years; 2) any period
of at least 30 days of exceptionally
high gas demand, occurring with a
statistical probability of once in 20
years; and 3) for a period of at least
30 days in case of the disruption of
the single largest gas infrastructure
under average winter conditions. An
increasing impact of domestic consumption
also increases the share of
protected consumers, and therefore
of the supply that must be secured to
the expenses of other uses, such as
power generation. Given the impact
of thermoelectric power generation
on total power generation in Italy, the
European provisions on supply security
raise serious concerns in case of
a winter disruption, when electricity
demand is high, photovoltaic produc-
4.
Regulation n. 994/2010.
5.
With other civil consumers, whose total consumption is less than 50,000 cubic meters per year.

tion is negligible and priority is given
to domestic consumers.
3. Security issues: lessons
from the recent past
The Italian gas system has significant
experience of critical and unexpected
situations. Two exceptional events
have taken place in recent years: the
interruption of the Greenstream flow
due to the outbreak of the conflict in
Libya at the end of February 2011,
and the 6-month shutdown of the
Transitgas pipeline (which connects
Italy to Northern Europe), from July
to December 2010, because of a landslide
in Switzerland.
In the attempt of realizing a crisis infrastructural
equipment, which can
face the interruption of a pipeline or
the consequences of an exceptional
cold snap, storage infrastructures
stand as key-asset for the system.
In the current system, those facilities
play a crucial role in satisfying
consumption modulation, because
they ensure the flexibility required
for the execution of administration
contracts to the selling companies.
Good storage capacity has also been
proven to be a basic precondition
for the creation of a liquid market,
both in the gas and electricity sector,
increasing arbitrage opportunities
among markets in different countries.
Such liquidity is currently not
a feature of the Italian system, that
cannot rely on satisfying networks
neither at the internal nor at the
European. To further illustrate this
point, it is useful to consider a spe-
cific case: the emergency situation
that arose in February 2012.
On February 1 st 2012, Gazprom did
not appear to be able to meet the
increased supply demand its European
clients. In the Italian context,
this imbalance was reflected in a
discrepancy between requirements
and transits of 12.3% at the entry
point of Tarvisio. The gap increased
up to 24.2% the following day, and
up to 30% by February 3 rd . Despite
the geopolitical tensions arising
from polarised views of Ukraine’s
alleged violation of the gas agreements
- having withdrawn more gas
than its contract allowed for - the
main factor in the 2012 crisis was
simply the cold snap which struck
Europe, Turkey and indeed Russia
itself.
The withdrawing of stored volumes
has thus covered, once again, 6 the
Russian shortage. Friday 3 rd February,
32 mcm were withdrawn from
storage, in order to meet an unusual
high demand: 414.7 mcm daily. The
following week, due to the extreme
cold and intense industrial activity,
the demand did not shrink, reaching
record highs on February 6 th and
February 7 th . Consumption on February
7 th was 465.9 mcm, setting an
absolute record of network intakes.
A comparison with the comparable
Tuesday in 2011 illustrates the exceptional
nature of this peak (Figure
2).
As a result, gas withdrawals in the
industrial sector in 2010 were heav-
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CASPIAN REPORT, SPRING 2014
6.
Similar extraordinary condition where met in 2005 and 2009.

ily limited because of the emergency
procedures that were activated. 7 It
is therefore easy to see that the supply
shortage was the result of the low
temperatures, even if it is more difficult
to recognise the size of the increase
in consumption. The obvious
practical implication of resorting to
stored natural gas at the beginning
of the season is the performance decline
acceleration. Italy had already
experienced this phenomenon during
the winter of 2005.
peak demand; that role is carried out
by storage facilities. It can, however,
ensure the replenishment of the reservoirs
during the year, especially
if new storage infrastructures are
build. TAP supplies will also cover a
substantial proportion of demand in
case of the main import routes (e.g.
from Russia or Algeria) experiences
long term disruption.
4. Environmental
implications
AntonIo SIleo
86
Some arguments have been made
in favour of increasing the storage
capacity. In fact, the greater the storage
capacity, the greater the likelihood
of guaranteed supply and, consequently,
Italian energy security.
This capacity, however, comes at an
economic cost (the remuneration of
its capital and operating expenses).
Moreover, while this is a feasible
solution in case of harsh climatic
conditions, Italy is unable to handle
a structural shortage, such as a permanent
reduction in Russian or Algerian
imports.
Italy’s past experiences demonstrate
its heavily storage-dependent
security strategy, shedding light on
the possible implications of a new
source: the TAP. In fact, an Adriatic
pipeline could be a viable alternative
both in terms of capacity (especially
with the extra 20 bcm/year) from
phase II, and in economic terms.
Provided that TAP will work at 80%
of its capacity, it will be able to provide
more than 40 additional bcms
per day. Such volumes cannot meet
The Ilva Case
The Ilva plant in Taranto is the largest
steelworks in Europe. Last year, it
was investigated for its environmental
impact. After the government
commissioner was appointed to
manage the plants transition, there
has been much discussion of ways
to achieve more sustainable production
in the medium and long term.
The production activities of Ilva have
been deemed so harmful to the environment
in terms of pollution that
multiple measures to limit the production
itself have been taken. The
repeated shutdowns of some parts
of the plant in recent years. This culminated
with an AIA (Autorizzazione
Integrata Ambientale) decision
to limit production to 8 mt of steel
per year. This has had repercussions
for the entire Italian steel industry,
which was already in trouble.
Among the potential plans for modernising
the plant to make it more
competitive and sustainable, one
entails a radical change in the pro-
7.
Just planned to face the lack of gas requirements coverage in case of adverse climate events in the
decree of the former Ministry of Industry on 26 th September 2001.

Kyoto Protocol
meeting on
December
10, 2009 in
Copenhagen.
In the current plant configuration, a
huge amount of coal is held in stockyards
and used in order to produce
coke, the chemical agent used in the
blast furnace to make hot metal. In
the blast furnace, iron oxides in the
shape of ores, sinter and pellets are
transformed into hot metal by reduction
process of steel that involves
the use of natural gas, instead of coal.
This change falls within the measures
laid down by the AIA designed
to increase productivity and improve
environmental and human protections
through the use of innovative
technologies. The use of these technologies
is in fact one of the points
contained in the “Proposta di piano
delle misure e delle attività di tutela
ambientale e sanitaria” which was
recently prepared for the Company
by an expert committee appointed
by the Minister of Environment.
In the past, a number of measures
have been taken to reduce the environmental
impact of the plant, but
the majority have been related to
post-treatment technologies. The
success of these measures in limiting
the diffusion of fugitive dust
emissions has been disputed. Since
September, experts have been working
on preliminary experiments,
checking whether the plants are
compatible with the new technology
and the new production process,
i.e. producing steel with natural gas.
This solution would replace the classical
configuration, in place since the
late nineteenth century: the coke
oven-blast furnace-converter. So far,
tests results seem positive, and further
developments will likely be announced
in the coming months.
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CASPIAN REPORT, SPRING 2014

AntonIo SIleo
88
ductant chemical reactions generated
by coke and carbon oxides (developed
through the combustion of
coke).
In the new gas-based configuration,
the reductant is natural gas. Since
this hydrocarbon, in its virgin form,
has a low reducing power, it has to be
converted into a mixture of H2 and
CO. This conversion takes place in
reactors and is called the reforming
process. During this process, both
the calorific value and the proportion
of reducing gas in relation to the
oxidizing gases (like CO 2
) increase.
When natural gas rather than coal is
used to make iron, CO 2
production
could be 50-65% lower, depending
on how one accounts for the CO 2
sources. In addition to the drastic reduction
of emissions from the plant,
the production could benefit from
greater flexibility and increased productivity.
Flexibility is guaranteed
based on the fact that the plant can
operate at a wide spectrum of hydrogen
to carbon monoxide ratios
(0.5 to 3.5). The quality of the steel
produced with the gas technology is
also higher in respect to the conventional
steel making process, because
the virgin iron contains lower levels
of unwanted elements such as zinc
and copper. Additional benefits can
also be identified in terms of operating
costs, which, defined as materials
management, are much lower.
Despite these advantages, many
doubts remain about the practical
feasibility of the new project. So far,
experts are mainly assessing the
technical feasibility of the transformation
of the production process,
but a detailed analysis regarding
the investment costs still has to be

conducted. New natural gas-based
plants around the world have shown
investment costs greater than 500
million Euros. According to Carlo
Mapelli, the Ilva consultant for the
implementation of the AIA, the natural
gas needs for the Taranto plants
could rise up to 1.5 bcm/y (representing
10% of the Italian industrial
gas demand recorded in 2012).
Fuel Shift in Transportation
the biggest deterrent to the development
of natural gas in the transportation
sector, considering also
the limited autonomy of the CNGpowered
vehicles. In recent years
progress have been made in the
The use of natural gas for transportation
is one of the objectives of the European
Commission.
The use of natural gas for transportation
is one of the objectives of the
European Commission: Member
States are to adopt national policies
in order to develop markets for alternative
fuels and their infrastructures.
In fact, the EU aims to promote
the sustainable development
of the transport sector, accelerating
the use of fuel-efficient vehicles
for transport, thereby reducing CO 2
emissions. Italy is responding to this
with the increasing use of natural
gas-powered vehicles, in particular
CNG (compressed natural gas) cars
and commercial vehicles. Indeed,
CNG vehicles currently represent a
concrete answer to two key factors:
the reduction of CO 2
emissions along
with costs for motorists. Although
the consumption of natural gas for
vehicles constitutes only 1.23% of
total demand, the sector has experience
rapid growth recently, and Italy
is now the leading EU country in
terms of CNG vehicle adoption, with
847,000 units. In the EU, three natural
gas vehicles out of four are Italian.
However, despite the strong growth
in recent years, the feeling is that the
Italian market could do more. The
scarcity of distributors is certainly
implementation of the distribution
network. The number of CNG stations
has grown by 37% in the last
four years (Figure 15), but the sector
needs even greater momentum
to overcome the obstacles to greater
market penetration.
At the Italian level, on August 9 th
2013, decree n. 69/2013, containing
measures for economic recovery,
entered into law. Specifically,
Article 4, paragraph 7 promotes the
implementation of the liquid fuels
distribution network and the use of
methane as a fuel. The fund for the
implementation of the distribution
network also aims to provide grants
for the closing and contextual transformation
of liquid fuels distribution
systems into exclusive methane distribution
facilities.
AIEE, based on a study of Federmetano,
which indicates 2,370,000
as the hypothetical natural gas road
fleet in 2020, has estimated the demand
for natural gas for low duty
vehicles at around 1.64 bcm in 2020,
and up to 4 bcm in 2030, considering
both the new CNG vehicles and those
with retrofitted engines. Moreover,
liquefied natural gas (LNG) is set to
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CASPIAN REPORT, SPRING 2014

AntonIo SIleo
90
emerge as a significant new transportation
fuel over the next years,
both for the maritime sector and for
heavy duty road vehicles. According
to AIEE, the use of natural gas as a
fuel for ferries, for example, assuming
the use of 276 ferries powered
by LNG by 2030, would lead to an
increase of approximately 1 bcm of
natural gas in demand.
5. Final remarks
TAP will bring additional import capacity
to Italy of up to 20 bcm/year
once phase II is at full speed. This capacity
will face shrinking consumption
(especially on the industrial and
power generation side) and a more
volatile and unpredictable demand.
However, the 2010 European Commission
regulation security of supply
emphasises the importance of
protecting consumers again disruption.
Given the increasing political
tensions in Russia and Ukraine, it is
important to consider whether TAP
can truly play a role in assuring supply,
as it stated in the National Energy
Strategy (SEN). Looking at Italy’s
past experiences, it is difficult to
argue that TAP alone will be able to
provide additional gas in the event of
a major interruption coinciding with
a demand peak. It can, however, improve
supply conditions to the soonto-be-build
storage infrastructures,
especially in the event of a structural
reduction in imports from one of the
exporting countries.
Aside from the security and the economic
perspectives, environmental
impacts are anticipated in two cases.
First, it is at a debate (though at its
initial phase) whether a possible
conversion of the Ilva steel plant
in Taranto from a coal-based plant
to a natural gas-based one, is economically
feasible. It is estimated
that such an intervention will significantly
reduce the plant’s harmful
emissions, which currently cause
production to be heavily limited (i.e.
it would be allowed to return to full
production capacity). Second, from

the long term perspective, the additional
gas can be used in transportation,
with a lower environmental
impact.
A final remark must be made in relation
to the “Southern-European gas
hub” opportunity. In principle, Italy
has the geographic and infrastructural
potential to become an important
hub in an integrated European
gas system. Importing gas from
Azerbaijan (through Turkey), Algeria,
Libya and from the Arabic LNG
sources such as Qatar, Italy could
to export gas to other European
countries. But if Italy is to become
the Southern-European gas hub (or
Euro-Mediterranean), it must seek a
new model, encouraged by community
regulations and focused on flexibility
and competition, as the European
Union is currently developing.
National and European market competition
should be associated with
the creation of a commercial and
infrastructural hub, serving not only
national but also European demand,
especially from the Central Eastern
market. In order to do this, investments
must be made not only in the
import capacity, but also in internal
transportation infrastructures and
at the borders with Swiss, Slovenia
and Austria, expanding the network
of reverse flow pipes.
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CASPIAN REPORT, SPRING 2014

Radu Dudau
92
Romania’s Energy
Strategy Options:
Current Trends in
Eastern Europe’s
Natural Gas Markets 1
Radu Dudau
Director of the Energy Policy Group and Associate
Professor, Bucharest University

The year 2020 stands out as a deadline
of sorts for achieving Romania’s strategic
objectives. Geology and geopolitics are
the main factors in shaping national and
regional strategic options, though domestic
policy elements also come into play.
Introduction
Romania’s most important foreign
energy policy project, the Nabucco
gas pipeline, collapsed in June 2013
as the rival Trans Adriatic Pipeline
(TAP) won out in the bidding war to
transport Azerbaijani gas to the EU.
Hence, the Southern Gas Corridor
(SGC) will link the Caspian Basin to
Southern Italy via Turkey, Greece,
Albania and the Adriatic Sea.
This paper reviews Romania’s prospective
new sources of primary energy,
both internal and external.
The year 2020 stands out as a deadline
of sorts for achieving Romania’s
strategic objectives. However, as argued,
each of these is shadowed by
considerable uncertainty. Geology
and geopolitics are the main factors
in shaping national and regional
strategic options, though domestic
policy elements also come into
play. Before turning to an analysis of
those determinants, it will be useful
to have a brief overview of the Romanian
oil and gas sector.
According to BP’s Statistical Review
of World Energy (2013), in 2012 Romania’s
proven reserves amounted
to 100 billion cubic meters (bcm)
of natural gas (a fifth of the 1992
level) and 100 million tons (mt) of
oil (half the 1992 level). 2 Romania
produces 10.9 bcm of natural gas
annually and consumes 13.5 bcm.
The yearly crude oil production
is 4.1 mt against a consumption of
8.8 mt. The aggregated depletion
rate of hydrocarbon reserves is
10% per year, meaning that without
supplementary sources, Romania’s
import dependence will grow from
less than 20% at present to 50% in
about ten years.
The East European gas market is
quasi-monopolistic, dominated by
Gazprom’s supply and infrastructure.
The prices that East European
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CASPIAN REPORT, sprıng 2014
1.
The present paper is an expanded and updated version of an article published in Romanian in the 7 Jan. 2014 issue of 22.
2.
BP’s Statistical Review of World Energy (2013), pp. 6, 20. BP’s data squares relatively well with that of Romania’s Agency for
Natural Resources (ANRM), quoted in Gândul (30 Dec. 2013)

Radu Dudau
94
countries pay for Russian gas are,
on average, 15% higher than those
charged to Western European consumers.
According to Izvestia (Jan.
2013), the average price of Russian
gas as sold to Romania during the
first half of 2012 was $431.8/thousand
cubic meters (tcm), compared
with $379.3/tcm in Germany.
The East European gas market is quasimonopolistic,
dominated by Gazprom’s
supply and infrastructure. The prices
that East European countries pay for
Russian gas are, on average, 15% higher
than those charged to Western European
consumers.
From a geological viewpoint, natural
gas is the main potential line of
development in the Black Sea Basin.
To maximise this potential, Romania
has three strategic options:
(a) to increase the productivity of
mature conventional wells through
new extraction technologies; (b) to
develop new finds in the continental
Black Sea shelf; (c) to explore
and develop the country’s shale gas
reserves.
Let us examine them in turn.
Domestic strategic options
Enhanced Productivity of Mature
Wells
Romania’s hydrocarbon reserves
are fragmented and “old,” and well
productivity is among the lowest in
Europe. In order to halt productivity
decline, massive investments are
needed to improve extraction technologies
(increase of reservoir pressure,
stimulation, deep drilling, etc).
OMV Petrom has undertaken an extensive
investment program of this
kind, and managed in 2013 to halt
production decline and even obtain
a slight increase in crude oil production
as compared to 2012. It has begun
the extensive redevelopment of
seven onshore oil fields, including
drilling new wells and modernising
production facilities. To explore
new fields deep underground, the
company has partnered with Hunt
Oil and Repsol.
Similarly, in 2012, the country’s
largest natural gas producer, stateowned
Romgaz, recorded a marginal
production increase compared
with the previous year. Nevertheless,
there remains an urgent need for
human and financial capital in this
field, and the results of this can only
be gradual and long-term.
Offshore reserves
In February 2012, Exxon Mobil &
OMV Petrom’s Domino-1 well discovered
a deepwater gas deposit of
up to 100 bcm in the Neptun block
of Romania’s Exclusive Economic
Zone (EEZ). After several “dry” exploratory
drillings in Turkish waters,
this discovery was a remarkable
success.
But despite all of its promise, the
Romanian offshore area is still filled
with uncertainty and difficulties.
First, the discovery of additional reserves
is needed in order to justify
production investment decisions.
A couple of new exploratory deep-

water wells in 2014 followed by another
dozen by 2018 will be key.
Furthermore, deepwater drilling is
much more expensive than onshore
operations. In addition, costs are
generally higher in the Black Sea region
than in other parts of the world
due to a scarcity of offshore drilling
equipment and deepwater service
providers. Lastly, issues related to
necessary new onshore infrastructure
and to a lack of clarity around
legislative and procedural require
timely attention to decision-making
and adequate investments.
If a final investment decision to
commercially develop new offshore
fields is reached by the end of 2014,
it is not until 2020 that new volumes
of natural gas will hit the market.
Shale Gas
The third strategic direction is shale
gas. According to EIA’s 2013 geological
estimate, Romania holds technically
recoverable reserves of 1,610
bcm. 3 Even if only a fraction of this
amount turns out to be commercially
viable, Romania will not only be able
to cover its internal gas consumption,
but also become a natural gas
exporter.
Several international companies are
involved at various stages in Romanian
shale gas activities. Among them,
Chevron’s operations are most advanced,
although the American IOC
has not yet started exploratory drilling.
At the time of writing, Chevron’s
first exploratory well in the Vaslui
county was due to start in a couple of
weeks’ time.
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CASPIAN REPORT, sprıng 2014
Anti fracking
activists in
Romania.
3.
U.S. Energy Information Agency (EIA) (2013), Technically Recoverable Shale Oil and Shale Gas
Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States,
Washington D.C.: Department of Energy, June 2013, p. 348.

Radu Dudau
96
This industry, however, faces fierce
public opposition fuelled by emotion
and fear, largely induced by manipulation
and disinformation - and
very little by way of scientific reasoning.
Indeed, mistrust and even
hostility on the part of the public is
a serious hurdle for shale gas development
in Romania – notwithstanding
the uncertain results of the exploration
itself.
Currently, there is a disproportionate
and inflated perception of the
environmental and public health
risks associated with shale gas
development activity. A natural
concern over the direct effects of
industry’s operations has been exacerbated
by a mixed campaign of
media manipulation, political populism,
narrow-minded economic
nationalism and militant wishful
thinking. This has given rise to an
emotionally charged atmosphere,
which prevents the clear presentation
of arguments for public interest
based on factual, costs-benefit
analyses.
The backdrop to this situation is a
relatively widespread social mistrust
in the competence and integrity
of state institutions. Indeed,
Romania lacks a culture of transparency
and public consultation in
relation to major extractive industry
projects. As such, positions are
radicalised and the odds of social
consensus are poor.
Nonetheless, public debate must be
informed by scientific knowledge
and the state must regain its credibility
as the foremost promoter
of public interest. A good starting
point would be to turn the regulatory
state agencies into truly politi-

cally independent entities, properly
equipped with human and financial
resources.
The European Commission’s (EC)
recent Recommendation “on the
exploration and production of hydrocarbons
(such as shale gas)
using high volume hydraulic fracturing
in the EU” 4 has put forward
a unified framework for shale gas
activities EU-wide. Building on the
IEA’s (2012) golden rules for natural
gas production, the Recommendation
offers conceptual clarifications
and urges strict operational
safeguards to ensure environmental
protection and adequate public
involvement.
In a scenario of increasing social
acceptance and confirmed commercially
exploitable reserves, Romanian
shale gas could enter the
market towards 2020. By then, hydraulic
fracturing technology will
probably be better understood in
the public sphere, and hence a less
frightening prospect.
Transforming trends in
the European natural gas
markets
In each of these domestic directions
of new gas sources development, an
additional element of unpredictability
has to do with potential competition
from pipeline imports. Several
recent developments in the region
are for the first time creating the
likelihood of a liquid energy market
in Central and Eastern Europe by
the end of the current decade:
(a) The growing interconnectivity
of Eastern Europe’s national natural
gas grids, which will allow for new
trading relations, are superimposed
on the East-West geographical setting
of the large Soviet-era pipelines.
Romania is already interconnected
with Hungary (albeit only west-toeast)
while reverse flow interconnections
with Bulgaria and Moldova
are to be completed in 2014.
(b) The EU competition and market
liberalisation policies passed
at the beginning of the 1990s have
become genuinely effective over the
last few years, significantly limiting
monopolistic practices within the
European energy markets.
(c) A global trend that has supported
and stimulated gas-to-gas
trade in Western Europe adds to
the dynamic: the North American
“shale gas revolution.” This made
large quantities of Qatari LNG originally
prepared for the American regasification
terminals in the Gulf of
Mexico available to Europe and Asia.
Consequently, natural gas traded on
the British, Belgian, Dutch and German
hubs has become cheaper than
the gas piped from Gazprom, Statoil
or Sonatrach, and has led to increased
contractual flexibility with
these traditional suppliers.
The long-term contracts (LTCs) concluded
between large utility companies
from Germany, Italy and France
– Eni, E.On Ruhrgas, RWE, Wintershall,
GDF Suez – and Gazprom were
for decades solid and lucrative, enabling
these companies to operate
97
CASPIAN REPORT, sprıng 2014
4.
European Commission (2014), COM(2014) 23 final, January 22.

Radu Dudau
98
de facto monopolies inside their national
markets. Their terms of delivery
(usually 20-25 years) included
clauses that suddenly became
highly problematic: oil- indexed gas
prices, “take-or-pay” (obligation to
pay at least 85% of annually contracted
volumes regardless of actual
physical delivery), and “destination
clauses” (under which imported gas
cannot be re-exported).
From 2009, the situation for Western
European utility companies was
unsustainable: under pressure from
local distributors securing cheaper
gas from trading hubs, the obligation
to acquire minimal gas volumes
at oil-indexed prices became
unmanageable. As a consequence,
utility companies required and obtained
gradual price reductions and
more flexible contractual clauses
from international suppliers. Some
concessions were reached through
amicable renegotiations, others
through decisions by international
arbitration tribunals.
Taken together, these three tendencies
of the EU natural gas markets
may well be sufficiently transformative
to allow Romania to enjoy diversified
import sources and better
contractual terms.
Import diversification
prospects
99% of Romania’s gas imports come
from the Russian Federation, equal
to about 20% of current total gas
consumption. Nevertheless, these
developing trends offer for the first
time serious prospects for diversified
import sources.
Russian gas from the West
Following the elimination of destination
clauses and the construction
of the Hungarian interconnection,
Romania could import Russian gas
from West to East; in the short to
medium term, the most feasible
options are imports from Austria’s
Central European Gas Hub (CEEGH)
in Baumgarten and der March.
To illustrate the feasibility of this option,
the case of Ukraine case is helpful.
Since 2012, Kiev has been importing
Russian gas from Germany’s
RWE through Poland and Hungary.
To enable larger scale imports, in
December 2013 Eustream (the Slovak
natural gas TSO) agreed to make
arrangements for reverse-flow into
Ukraine via one of its four major
transit pipelines, allowing Kiev to
import up to 10 bcm/year from Germany
– equivalent to more than a
third of the volumes imported from
Russia in 2013. But back then this
arrangement did not come to fruition,
since Russia rewarded ex-president
Yanukovych for turning away
from the EU Association Agreement
with a massive discount on gas
prices, from approximately $400 to
$268.5.
As it is turned out, those improved
price terms were short-lived: the
success of the Euromaidan movement
was followed by the Russian
annexation of Crimea and the onset
of an extremely tense political
standoff between Moscow and Kiev.
Not only was the gas price discount
revoked, but the new price was set
to $480/tcm, one of Europe’s highest.
Under these circumstances, the

Eastern
Mediterranean.
new Ukrainian authorities have
once again become keenly interested
in gas imports from the EU, as
well as in European financial support
in order for Kiev to be able to
service its debt to Gazprom.
However, in the meantime, Gazprom
gave Slovakia a discount, and no
new talks have yet been set about
installing reverse-flow capacity on
Slovakia’s gas transport system. Besides,
knowing Kiev’s dismal track
record on debt, it is doubtful that
European gas traders will take the
risk on arbitrage into the pricier
Ukrainian market, unless a financial
back-up arrangement from the EU,
Washington and the IMF are established
first.
The Levantine Basin
An emerging gas-producing region
closer to European markets other
than the Caspian Basin is the Levantine
Basin in the Eastern Mediterranean.
Offshore discoveries since
2009 – mostly in deep and ultradeep
water – in Israel, Cyprus and Lebanon
are estimated by the EIA (2013)
to hold 1,170 bcm of technically recoverable
gas. The Israeli Leviathan
field, with an estimated 535 bcm of
gas and 31.1 million barrels of liquid
condensate is scheduled to start
production in 2017. 5
99
CASPIAN REPORT, sprıng 2014
5.
There may well be delays, though, as the expected entrance of Australia’s Woodside Energy into
the Leviathan consortium – a 25% acquisition worth $2.71 billion – has not come to fruition by the
end of March, as previously agreed. Woodside, which is to become the project’s LNG operator,
has requested that the Finance Ministry recognizes return on capital of between 17 and 19% for
floating LNG production, yet not such clause has been included in the taxation principles’ outline
(Jerusalem Post, “Woodside Entrance into Leviathan Gas Field Consortium Still Uncertain,” 27
March 2014).

Radu Dudau
100
In October 2013, the Israeli High
Court of Justice decided to uphold a
previous Government’s decision to
cap exports at 40% of the total offshore
reserves. Under current estimates,
volumes available for export
amount to 450 bcm. The more likely
export schemes are the following: a
150 km pipeline from Leviathan to
the Israeli coast and a liquefaction
plant onshore; a 200 km pipeline to
Cyprus and a liquefaction plant at
Vasilikos; floating LNG facilities at
the largest offshore fields; a 400 km
pipeline from Leviathan-Tamar to
Turkey; a 1,200-1,500 km pipeline
to Greece via Cyprus and Crete. 6
However, the region is riven by multiple
political and military conflicts:
Israel and Lebanon are disputing
the delimitation of part of their maritime
frontier; Cyprus and Turkey
are involved in a larger political conflict
surrounding Northern Cyprus
and demands by Ankara over hydrocarbon
reserves rights in the Levantine
Basin on behalf of Turkish
Cypriots; Israel and Turkey are still
on tense, though slowly improving,
political terms following the Mavi
Marmara incident in 2010, while
the Syrian civil war looms large as
the present source of instability in
the Near and Middle East.
In spite of the lingering mistrust
between Ankara and Israel, a pipeline
connection from the Levantine
Basin to Turkey seems to make
most commercial sense, given Turkey’s
enormous gas demand and
its aspirations to become the Black
Sea region’s transit hub. Turkey is
also highly dependent on Russian
gas imports (67%), so it is keen to
establish significant new diversification
routes. Besides, the heightened
security risk of the region in the aftermath
of the Russian annexation
of Crimea makes it important for the
Southern Gas Corridor to reduce its
geographical dependence on the vulnerable
Georgian link.
The terms of the lease for the Leviathan
field released by the Israeli
national infrastructures, Energy and
Water Ministry at the end of March
2014, demand that a gas pipeline be
first constructed from the field to the
coast, and that at least 9.2 bcm/year
be supplied to the domestic market. 7
The consortium will thus be left with
only 7 bcm/year to export. Such conditions
translate into constraints
upon when the Levant gas’s exports
will begin (with a probable delay of
a couple of years), and how it will be
marketed (under the likely assumption
that a long-term contract with
an anchor customer will have to be
found).
Regional regasification
terminals
Among the easily reachable European
destinations for Levantine LNG,
there are two entry- points that are
particularly relevant for Romania:
the Revithoussa regasification ter-
6.
Bob Tippee (2014), “E. Mediterranean Gas Work Faces Geopolitical Hurdles,” in Oil & Gas Journal, 7
April 2014.
7.
Jerusalem Post, idem.

minal in Greece and the one to be
built at Omisalj (Croatia) until 2017.
Theoretically, the Greek option
could be implemented more quickly,
so that by 2019-2020 Romania
could import Levantine gas via
Greece and Bulgaria.
As for the Croatian option, delays
may well occur in the terminal’s
construction. Besides, the whole
concept of transporting gas from
Croatia to Eastern Europe via Hungary
depends on the resolution of
the current commercial dispute –
with obvious political undertones –
between Croatian company INA and
Hungarian group MOL. MOL owns
49.1% of INA and wishes to gain full
operational control. The Croatian
government, with a 44% stake in
INA, staunchly refuses. The dispute
is under arbitration at the International
Center for Settlement of
Investment Disputes (Washington,
D.C.). In any event, Hungary’s interests
can decisively influence the timing
of the opening of a new energy
corridor between the Caspian and
the Adriatic Seas.
Another LNG regasification terminal
relevant to Eastern Europe is
under construction at Swinoujscie
(Poland). As of February 2014, the
terminal was about 75% complete,
according to a statement by the
Chancellery of Poland’s PM. 8
With an initial planned capacity of
5 bcm/year, the terminal is meant
to reduce Poland’s dependency on
Russian gas. Poland has an annual
consumption of some 16.5 bcm, of
which 70% is imported from Russia.
After 2022, when a two-fold increase
in capacity is planned, Swinoujscie
may contribute to the supply
of the North-South gas corridor connecting
the Polish, Baltic, Slovak and
Hungarian gas grids. This means
that, within the next decade, the
Black Sea, the Baltic and the Adriatic
basins may be connected through
energy corridors.
South Stream
Designed in 2007 as a reaction to
the Nabucco project, South Stream
is planned to transport Russian gas
to Austria and Italy via the Black
Sea, through a high-capacity pipeline
crossing South Eastern Europe.
After the “gas wars” between Russia
and Ukraine in 2006 and 2009,
South Stream also became a tool of
political and diplomatic pressure
against Kiev, threatening the usefulness
of Ukraine’s enormous transportation
and gas storage systems.
Following the completion of the
North Stream pipeline via the Baltic
Sea, South Stream has been ascribed
a similar role as the Ukrainian bypass
via the Black Sea. This latter
function has never seemed more urgent
to Moscow, in the heated conflict
that has followed the Crimean
annexation.
South Stream has never made much
economic sense, given its enormous
projected costs. Its defining nature
has always been political, and
presently politics trumps virtually
anything else in Russia’s foreign re-
101
CASPIAN REPORT, sprıng 2014
8.
LNG World News (2014), “Poland: Swinoujscie LNG Terminal 75 Pct Complete,” 14 Feb. 2014.

Radu Dudau
102
In spite of the lingering mistrust between
Ankara and Israel, a pipeline connection
from the Levantine Basin to Turkey seems
to make most commercial sense.
lations. Its construction, either completely
or in part – that is, at least
one of the four parallel 15.75 bcm/
year pipelines – hinges first of all on
Moscow-Kiev political relations.
The two countries could, at least in
theory, find a compromise based on
self-interest and allow natural gas
flows to Europe to continue. Yet no
stable regime of the Ukrainian gas
transit and storage can be guaranteed
absent affordable and sustainable
gas prices for Ukraine, and the
latter is highly unlikely as long as
the political standoff remains in play.
The situation can only reinforce Moscow’s
resolve to build the pipeline.
Moscow has for years used the South
Stream concept as leverage in its
frequent gas pricing disputes with
Kiev. And Gazprom has surely found
partners – governmental and corporate
alike – in the EU and its southeastern
vicinity willing to join the
project.
Nonetheless, in recent months,
Brussels’s attitude toward South
Stream has evolved from cold to
glacial. In December 2013 the
EC required that the six bilateral
agreements 9 concluded between
Russia and EU member states regarding
the pipeline’s construction
be renegotiated and aligned
to the demands of Third Energy
Package – price liberalisation and
transparency of tariffs, ownership
unbundling (i.e., companies cannot
simultaneously hold production
capacities and transmission lines),
and non- discriminatory third party
access to transport infrastructure.
More recently, as an element of
political retaliation against Russia’s
conduct in Ukraine, the EC announced
that construction of South
Stream was not a priority for the EU
and that political level negotiations
to that effect have been frozen. 10 At
the same time, some EU countries
(most vocally, Bulgaria) and corporations
(especially South Stream
stakeholders) have defended the
project’s importance to the EU’s
supply security.
For Romania, South Stream could
become yet another external source
of natural gas. The project’s first
line could be finished as soon as
2015, so that new natural gas volumes
could be imported in a couple
of years through the Bulgaria-Romania
interconnector.
If several years ago, South Stream
risked increasing Central and South
Eastern European energy dependence
on Russia, the changes outlined
above demonstrate how it
could offer a new and significant
supply source in a competitive
market environment –provided the
9.
The six intergovernmental agreements were concluded between the governments of Russia and,
respectively, Bulgaria, Hungary, Greece, Slovenia, Croatia, and Austria. Although not an EU member
state, Serbia is also involved, as a member of the Energy Community.
10.
novinite.com (2014), “EU Does Not Consider South Stream Priority – Official,” 19 April.

Russian
President
Vladimir Putin
and Gazprom
CEO Alexei
Miller.
103
situation in Ukraine does not escalate
and no “third round” of Western
economic sanctions is applied.
However, it remains of paramount
importance that the EU energy market
and competition legislation be
scrupulously monitored and that
the energy market liberalisation
process be completed as planned,
for only this can ensure that Russian
natural gas will be perceived as
a commercially valuable commodity,
rather than as an instrument of political
coercion.
CASPIAN REPORT, sprıng 2014

caspian

ESSAYS

Why World Oil Prices
Should Be High and
Stable
Luay Al-Khatteeb
EXECUTIVE DIRECTOR, IRAQ ENERGY INSTITUTE
Luay Al-Khatteeb
106

After a decade of volatile prices, the past
three years saw an unusual period of
stability in the oil market, with a barrel of
crude oil averaging $110 each year.
After a decade of volatile prices, the
past three years saw an unusual
period of stability in the oil market,
with a barrel of crude oil averaging
$110 each year. However, forecasts
for 2014 predict a decline to an average
of $105, on the basis of expanding
supply and a weaker-thanexpected
demand. A combination of
geopolitical events in Syria, Libya
and Nigeria have prevented oversupply
despite the expanding entry of US
shale oil into the market. The price
has remained high thus far, but how
long can prices stay above $100
This coming price drop arrives at a
time when the world’s largest consumer
is nearing its long-held goal of
energy self-sufficiency. The United
States embarked on this quest in the
aftermath of the 1973 oil crisis, and
in recent years has seen the country
develop a comprehensive nuclear
program, develop biofuels and
seek oil from ever-more-expensive
sources: the tar sands of Canada, the
depths of the Gulf of Mexico and even
the wilds of Alaska. Further afield, it
drew on oil from Brazil’s deep-water
wells and West Africa’s low-sulphur
oil deposits, all of which contributes
to a reduced dependency on oil from
the Middle East.
More recently, the development of
unconventional sources of oil and
gas back in the United States has led
to a revolution in energy flows and
policies, as the country stands on
the verge of becoming a gas exporter.
The rapid development of shale oil
and gas fields has seemed miraculous
at times, but like many of the
conventional sources the US relies
upon the production is more expensive
(costing $60-80 per barrel) and
more risky, as output and depletion
rates seem less predictable than conventional
sources. As a result US domestic
and regional supply is quite
vulnerable to price fluctuations, as
witnessed when work at the tar
sands of Canada came to a standstill
in 2008 following a price drop.
Analysts have claimed that the age of
“easy oil” is over, and we are entering
a period of expensive extraction and
capital-intensive processing. With
the shale oil and gas sector currently
requiring $1.5 in capital investment
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CASPIAN REPORT, SPRING 2014

Luay Al-Khatteeb
108
for $1 of revenue, several major oil
companies have turned their backs
on shale in favor of expanding their
operations in the “easy” oil fields of
the Middle East. Despite the risks involved,
Iraqi oil pumped up at $20 a
barrel seems like an attractive prospect,
as do sources in Libya and Iran
when politics and security permit.
Still, will dumping more “easy” oil on
the market lower prices to the point
where shale oil production grinds to
a halt
Given the slow world economic recovery
and unexpectedly low growth
rates in India and China, lower oil
prices would seem a certainty. With
growth in demand lagging behind expanding
supplies, can the U.S. petroleum
industry weather the resulting
price fluctuations as it becomes increasingly
dependent on high prices
to stay profitable
Despite the low cost of Middle East
oil production, only a few of the
region’s smaller states could cope
Given the slow world economic recovery and
unexpectedly low growth rates in India and
China, lower oil prices would seem a certainty.
with an extended price drop below
$100. Most need an oil price of $90
or greater to cover current government
spending, with the IMF forecasting
fiscal deficits in nearly all of
the region’s oil-exporters by 2015 in
the event of a major price drop. Even
at $100 per barrel, public spending
is expected to slow down in the region.
These countries have grown
dependent on their high oil rents,
spending huge sums on unrealistic
energy subsidies to domestic consumers
and failing to invest in future
generations. Even Iraq, despite
experiencing the region’s largest
spike in domestic production, is running
up an ever-mounting deficit as
government spending outstrips expanded
revenues. Last year’s budget
reached $119 billion, a whopping
six-fold increase on 2004 spending
levels, while the government is
expected to spend upwards of $150
billion this year. While oil production
in Iraq is at its highest level in
decades (3.5 million barrels a day
in February, with some 2.8 million
destined for export ), increased revenues
are entirely dependent on
high oil prices. Any drop in prices
means that Iraq’s deficit - perpetually
hovering at around 17% would
spiral out of control. Worse, operating
costs for Iraq’s oil industry are
rising faster than its oil income, leaving
fewer and fewer funds for capital
investment, desperately needed
for true economic development. A
sharp drop in prices threatens political
stability in much of the Middle
East while potentially undercutting
the growing petroleum industry in
the United States. Yet higher prices
are also a threat to world economic
stability. In 10 out of the 11 US recessions
since World War II, according
to a study by economist James Hamilton,
economic downturns were
preceded by oil price hikes. Above all,
excessive price fluctuations interfere
with consumer’s spending plans and
producer’s business strategies alike.
Currently, OPEC is attempting serve
its economic interests by regulating
the market with its combined 30
million barrels per day in produc-

tion, with Saudi Arabia taking on the
role of swing producer. The question
is how long the Kingdom can sustain
this role when faced with increasing
demand at home and potential budget
deficits. While Iraq has the potential
to be a swing producer of the future,
for the time being it seems the
best course of action would be for
both the major producers and consumers
to come together to regulate
supply and price.
To protect themselves from fluctuating
prices, members of the International
Energy Agency and many
other non-OPEC producers have
been stockpiling energy reserves.
Given the increased volatility in
price witnessed between 2000 and
2010 and the subsequent turmoil in
Middle Eastern geopolitics, it seems
sensible to call for market intervention
with the goal of price stability.
Working in concert, OPEC, the most
powerful oil producers’ association,
and the IEA, the largest energy consumers’
organization, could achieve
this. In June 2011, for example, the
IEA released 60 million barrels of
energy reserves in response to the
disruption of oil supplies from Libya.
However, greater cooperation is
needed between the two organizations
- together. Together, IEA and
the OPEC have the capacity to devise
a suitable intervention model in the
common interest of price stability.
Price stability would benefit the
oil-dependent economies of OPEC
and major African producers, stabilizing
national incomes, supporting
current government spending
plans, and allowing states to plan
for the future via the creation and
expansion of wealth funds. International
oil companies would be able
to take a more secure view of their
investments, supporting longerterm
projects in infrastructure development
and energy production. It
would remove speculation from the
market. A stable price of $100 per
barrel would give certainty to the
market and to world energy policies.
Prices at this level would also have
positive side-effects for the global
energy regime: they would encourage
the development of alternative
energy sources such as wind and solar
power, promote increased energy
efficiency, and encourage major oil
companies to invest in more efficient
technologies and remoter locations.
Contrary to popular wisdom, a lower
oil price would only damage the economic
prosperity of the U.S. and the
major oil-producing nations, most
of whom are developing nations
acutely vulnerable to the damaging
aspects of oil price volatility, which
slowed their economic development
to date. Critics might argue that such
a high, stable price would slow down
economic growth and recovery but
in the long run it would do much to
moderate the boom and bust aspects
of the economic cycle, and reducing
the risk to future, necessary capital
investment. Building economic
recovery on unrealistically cheap
energy sets the system up for even
greater failure when inevitable price
shocks occur. What the global economy
needs are stable, sustainable
prices that can provide the basis for
effective planning.
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CASPIAN REPORT, SPRING 2014

emın akhundzada
110
Turkey as an Energy
Hub: Opportunities
and Challenges
EMIN AKHUNDZADA
ACADEMICS AND RESEARCH COORDINATOR, HASEN

Natural gas dependency in Europe is
increasing rapidly. According to current
estimates, the natural gas dependency of
the EU and Turkey is expected to increase
significantly over the coming years.
Turkey is located between the Middle
East and the Caspian Region
on the East, which hold 75% of the
world oil and natural gas resources,
and the European Union on the West,
which is the largest consumer of
these reserves. This strategic location
provides crucial advantages to
Turkey. Ankara is building on this
natural advantage by bringing supply
and demand together through its
unique geostrategic location.
Natural gas dependency in Europe is
increasing rapidly. According to current
estimates, the natural gas dependency
of the EU and Turkey is expected
to increase significantly over
the coming years. Given the increasing
demand for natural gas together
with decreasing domestic production,
experts predict that Europe will
need to import 80% of its natural
gas by 2030, compared to 64% today.
Europe urgently needs to locate alternative
sources and suppliers, and
it is here that Turkey can take on a
key role. If Turkey can effectively utilize
its position, it stands to become
a major European energy hub. One
component of being an energy hub
is having a sufficient energy supply.
Turkey is lucky in this regard. If it implements
the right energy policies, it
can ensure around 100 billion cubic
meters of natural gas inflow within
ten years, which would transform
Turkey into an energy hub.
So, where can Turkey obtain this volume
of natural gas
Azerbaijan: Azerbaijan holds
around 3.2 trillion cubic meters of
proven natural gas reserves, and
7 trillion cubic meters of potential
reserves. Azerbaijan is one of Turkey’s
main political and economic
partners in the region, and Baku’s investments
in Turkey are expected to
reach 20 billion USD by 2019. Azerbaijan
has been exporting 6.6 billion
cubic metres per annum (bcm/a)
from Phase I of its giant Shah Deniz
gas field through the Baku-Tbilisi-
Erzurum pipeline since 2007.
As part of the Shah Deniz Phase II
Project, 16 bcm/a natural gas will be
exported through TANAP, of which
6 bcm/a will remain in Turkey and
the rest will be sold to European
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CASPIAN REPORT, SPRING 2014

emın akhundzada
112
markets. Given that additional natural
gas will be produced from other
proven fields owned by Azerbaijan,
production is estimated to increase
to approximately 55-60 bcm/a by
2025. Thus Azerbaijan will have
more natural gas to sell in the future.
Israel: There is huge natural gas
reserves in the offshore area of the
Eastern Mediterranean - almost 1
trillion cubic meters of natural gas
reserves in Israel’s Leviathan and
Tamar fields, as well as a likelihood
of additional reserves to be discovered
in the near future. Experts have
pointed out that there are 10 trillion
cubic meters of potential natural gas
reserves in the Eastern Mediterranean.
This provides a further major
advantage for Turkey: the most economical
export route from Israel to
Europe is by pipeline through Turkey.
However, along with the economic
feasibility of any project, the prevailing
political conditions must also be
evaluated.
Political tensions between Turkey
and Israel have remained an issue
since the 2010 Mavi Marmara crisis.
Though these tensions have dissipated
following apologies and Israel’s
provision of compensation to the
Mavi Marmara victims, there are still
significant problems to be addressed.
One of Turkey’s three conditions is
that Israel must remove the Gaza
blockade; this has not been resolved
and remains a source of disagreement.
It is expected that the parties
will come together in the near future
and solve this problem through diplomatic
negotiation. Thus, it is likely
that Israel can supply 10 bcm/a natural
gas to Turkey in the short term.
Iraq: According to the International
Energy Agency (IEA), Iraq has the
13 th largest natural gas reserves in
the world, with 3,4 trillion cubic
meters of proven reserves. However,
according to energy experts,
Iraq’s potential natural gas reserves
are even higher, and so its reserves
could easily double once it begins
the exploitation process. Iraq has
Experts have pointed out that there are
10 trillion cubic meters of potential
natural gas reserves in the Eastern
Mediterranean.
the potential to export around 20
bcm/a to Turkey by 2020. If political
stability achieved, Iraq’s natural gas
production is expected to reach to 90
bcm/a. But internal political instability
prevents Iraq from achieving its
potential vis-à-vis its natural gas
production. The dispute between
Baghdad and Arbil concerning revenue
sharing is fairly entrenched. In
this context, Turkey should undertake
a constructive mediation role
to help resolve the internal political
issues between Baghdad and Arbil
to overcome this problem as soon as
possible. Otherwise, given that the
internal instability in Iraq benefits
no one, production will decline and
the exploitation of new fields will be
delayed. If political conditions improve,
20bcm/a natural gas can be
exported from Iraq to Turkey.
Turkmenistan: Turkmenistan has
the world’s fourth largest natural
gas reserves, with approximately
20 trillion cubic meters. Currently it
exports natural gas to Russia, China,
Kazakhstan and Iran. With the con-

Prime Minister
of Turkey Recep
Tayyip Erdogan
and President of
Azerbaijan Ilham
Aliyev after a
meeting during
Aliyev’s official visit
to Turkey in 2013.
struction of the Trans Caspian Pipeline
(TCP) it can join the Southern
Gas Corridor and sell its natural
gas directly to Europe and Turkey.
Currently, Iran buys Turkmen gas
fairly cheaply, and then sells it on
at a more expensive price to Turkey,
which is damaging to Turkey’s
energy bill. Through the TCP, more
than 30 bcm/a natural gas can be
transported to Europe and Turkey,
of which 16 bcm/a would remain in
Turkey. But there have been no tangible
steps toward the realisation of
this project. Though it is associated
directly with the legal status of the
Caspian Sea, the pipeline can be realised
if it becomes political feasible
and the parties can reach agreement.
gas to Turkey and Europe through
Azerbaijan. To do this, Kazakhstan
has numerous options. First, it can
lay pipeline from Aktau port to Baku
beneath the sea and join the South
Caucasus Pipeline in Baku. Or, it can
construct overland pipeline from Kazakhstan
to the Turkmenbashi port
and join the planned Trans Caspian
Pipeline. Third, it could export its
reserves as Liquefied Natural Gas
(LNG) and Compressed Natural Gas
(CNG).
Kazakhstan holds 3 trillion cubic meters
of proven and 5-6 trillion cubic metres of
potential natural gas reserves.
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CASPIAN REPORT, SPRING 2014
Kazakhstan: Kazakhstan holds 3
trillion cubic meters of proven and
5-6 trillion cubic metres of potential
natural gas reserves. It is estimated
that Kazakhstan can produce 75
bcm/a natural gas in the midterm,
of which 40 bcm/a can be exported.
Thus, Kazakhstan can sell its natural
In addition to the above mentioned
resources, natural gas flow can also
be imported from Uzbekistan and
Iran if political conditions improve
in both countries. However, in order
to utilize its geostrategic advantage
and become an energy hub, Turkey
needs to take several steps.

emın akhundzada
114
First, it should speed up reforms
in the energy market and invest in
natural gas infrastructure. The market
was controlled entirely by the
state-owned company BOTAS until
2001. With the enactment of Law
No. 4646 in 2001, four more companies
entered the market, leading
to a degree of market liberalisation.
However, the contract transfers have
not reached the target anticipated
by the Law no. 4646. In fact, 80% of
the market is still being controlled
by BOTAS and the rest is not fully
independent. The fact that BOTAS
determines the prices prevents the
creation of a competitive environment
and creates a monopolistic
structure. At this point, it is crucial to
reduce BOTAS’s share in the market
through various methods, to liberalise
imports and to evaluate the developments
related to LNG activities
in the transition to a more competitive
structure. Reforms to be made
in liberalisation period will not only
create competition in the domestic
market, but also strengthen Turkey’s
position in terms of international
natural gas markets.
Second, one of the necessary conditions
of becoming an energy hub is
constructing large natural gas pipeline
networks. Currently Turkey has
a high pressure natural gas transmission
network of around 15,000
km, and the household penetration
rate is approximately 50-55%. Furthermore,
pipelines in Turkey are
only laid down in one direction, and
it is not possible to reverse the flow
of natural gas when the need arises.
For comparison, the state of Texas
has a 50,000 km pipeline network.
The US as a whole has 850.000 km.
In this regard, Turkey should build
interconnected pipelines in different
directions and spread this pipeline
network across all of its territory.
At the same time, there should
be a single pipeline regulatory system
that should be administrated
transparently.
Third, Turkey’s underground natural
gas storage facilities are still insufficient.
Although Turkey’s growth rate
of natural gas consumption is the second
highest in the world after China,
in terms of natural gas storage capacity
against consumption volume
it lags far behind other countries in
Europe. Natural gas storage facilities
are critically important. Buying and
storing surplus natural gas enables
countries to continue uninterrupted
natural gas transmission when the
demand is high and supply is problematic.
Although Turkey ensures
44% of its electricity generation by
natural gas and imports 98% of its
natural gas consumption, natural gas
storage capacity only meets 5% of
annual consumption, risking the interruption
of electricity supply during
the cold winter months where
demand is higher. At the moment,
Turkey has 2.6 bcm usable storage
capacity and 1 bcm is in the process
of construction. This capacity should
be increased to 10 billion cubic meters
in the short term and 20 billion
cubic meters in the midterm. In addition,
storage facilities should not be
constructed only in certain regions;
they should be built across multiple
locations parallel to the pipelines,
both large and small. This will enable
natural gas flow from the places
where demand is low to the places
where the demand is high.

Fourth, the private sector should be
encouraged to build storage facilities.
Currently, storage facilities in Turkey
belong to the government and therefore
there is a capacity shortage.
Fifth, the country should establish
an Energy Stock Exchange. The Stock
Exchange will liberalise the pricing
structure, and pave the way for a
supply and demand balance.
To sum up, if Turkey makes effective
use its geopolitical position, it can realise
its vision of becoming an energy
hub. To achieve this aim, it must:
hasten its energy market reforms;
pave the way for the development of
a liberal market structure; enlarge
pipeline network system; and invest
more in natural gas infrastructure.
115
CASPIAN REPORT, SPRING 2014

FatIh Ozbay
116
Discussions
about Violation
of the Montreux
Convention and the
Future of Turkish-
Russian Relations
Fatih Ozbay
SENIOR FELLOW, CENTER ON FOREIGN POLICY AND SECURITY,
HASEN

Today, the Black Sea basin experiences its
fourth and the most important transformation
with the alterations and developments
which are shaped around Ukraine and
Crimea.
The developments occurred after
the Cold War brought the Black Sea
and the associated extensive basin
to the center of geopolitical discussions.
After the end of the Cold War
and dissolution of the Soviet Union,
geopolitical and geostrategic balances
changed to a great extent with
the emergence of new independent
states in the region. As a result of the
changes in the international system
after the Cold War, the Black Sea was
no longer a sea in the sphere of interest
of only the regional countries, it
turned into a sea that is important to
international actors and open to international
interactions. Now, it does
not only appeal to a single power, but
also to Turkey, Russia, NATO, EU, and
USA.
The Black Sea basin constitutes the
energy and transit corridor which
links the Euro-Atlantic system to
Eurasia, Caspian energy resources,
and Central Asia states. The proximity
of the Black Sea basin to areas
with rich energy resources, and its
strategic location for the transportation
of these resources to the West
increase the importance of region.
All of these factors increased the
geopolitical importance of the Black
Sea basin and turned it into a key geography
which international actors
consider to restructure.
But, all these developments made
the Black Sea basin a sensitive and
fragile region. After the Cold War, the
basin entered into a fast transformation
process which occurred one
after another. It experienced its first
transformation after the dissolution
of the Soviet Union in 1991, and the
second transformation happened
due to the Euro-Atlantic world’s efforts
to penetrate into the region
after September 11, 2001. The third
transformation started with the Russian-Georgian
War in August 2008.
Today, the Black Sea basin experiences
its fourth and the most important
transformation with the alterations
and developments which are
shaped around Ukraine and Crimea.
With these events, the region became
the center of the most serious
crisis between the West and Russia
after the Cold War period.
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CASPIAN REPORT, SPRING 2014

FatIh Ozbay
118
The Black Sea is a significant factor
for the development of relations between
Turkey and Russia after the
Cold War. Turkey and Russia are no
doubt the most important powers of
the Black Sea region. Success of regional
cooperation policies depends
on two major countries in the Black
Sea region; Turkey and Russia. Both
of these countries regard the Black
Sea as a region of vital importance,
and the relations based on mutual
respect and trust between these
countries are very important. After
the collapse of the Soviet Union, USA
claimed that there is a security gap
in the Black Sea basin, and American
military should exist in this region
in order to eliminate this security
gap as in other regions of the world.
When USA brought forward this
discussion, both Turkey and Russia
felt a need to take some steps in the
Black Sea. One of the most strongly
agreed item in the relations between
Turkey and Russia is the need to protect
the Black Sea from turning into a
new area of struggle for global powers.
Firstly, this approach brought
Russia and Turkey together in the
context of defending the Black Sea’s
current status and the Montreux
Convention. Both countries frequently
express that the Montreux
Convention should not be changed,
the issues related to the Black Sea
should be resolved by coastal states
in cooperation, and foreign powers
should not be involved.
With the changing international
system after the Cold War, we see
that two more major powers want
to enter the Black Sea basin. One of
them is the European Union which is
now a coastal state to the Black Sea
with the enlargement, and the other
one is the USA which wants to be a
permanent power in Black Sea in
the perspective of its global policies.
Black Sea is one of the limited open
seas that USA cannot sail freely because
of the 1936 Montreux Convention.
The Convention limited number
One of the most strongly agreed item in the
relations between Turkey and Russia is the need
to protect the Black Sea from turning into a new
area of struggle for global powers.
of non-regional countries’ warships
allowed in the Black Sea with a total
of 45.000 tonnages and for 21 days.
But USA still wants to exist in the
Black Sea despite it regards the Black
Sea as international water and complies
with the Montreux Convention.
USA’s geopolitical plans toward the
Black Sea disturb Russia to a great
extent. Against the restrictions of
Montreux, USA has developed a
strategy to constantly keep a striking
naval force in the Black Sea to
balance Russia’s Black Sea fleet by
sticking to the 21-day rule. USA’s desire
to be a permanent power in the
Black Sea by asserting that there is a
power gap in terms of security and
military power is needed to fill this
gap within the frame of NATO, have
been a concern for Russia from the
very beginning, which already believes
that it is being surrounded by
the USA. The possibilities such as
supporting anti-Russian movements
in Ukraine, Georgia, and Moldavia
together with US ships, encouraging
the opposition, further integrating
the countries in the region which is
traditionally regarded as its sphere

Georgians
protesting a
Russian army
encampment in
western Georgia.
of influence and ‘backyard’, deployment
of the US military at the heart
of the region where energy and
transportation lines pass through
and new lines are being planned,
and the presence of NATO warships
in the Black Sea are among the greatest
concerns for Moscow.
Russia which regards these developments
as a threat against its interests,
have preferred to use the Black Sea
and Montreux factors as important
components in its relations with Turkey
after the end of the Cold War due
to some objective reasons. Following
the collapse of the USSR, Russia’s military
power decreased in the Black
Sea because of financial difficulties,
sharing of the Russian fleet, and
disabling a great amount of Russian
ships in the Black Sea fleet. However,
Turkey became the most powerful
naval force in the Black Sea region.
As a result, Turkish fleet became
the most powerful fleet in the Black
Sea region. In a sense, Turkey filled
the naval power gap emerged in the
Black Sea after these developments.
Russia, unavoidably, had to admit
this in the first years. On the other
hand, it was a wise choice for Russia
to cooperate with Turkey because
it was not sure what would happen
if the Montreux Convention is abolished
or amended and which new
conditions would it bring. Turkey’s
firm attitude during the Russian-
Georgian War in August 2008 about
the US warships’ strict compliance to
the Montreux Convention prevented
any change in the balances related to
the Black Sea and the Straits which
Russia was highly sensitive about.
Turkey’s policies and attentiveness
about the Montreux Convention in
the 2008 War considerably pleased
Moscow.
Russia has been frequently making
official declarations that Montreux
Convention is being violated. In the
declarations, Turkey was accused
of not implementing the Montreux
Convention properly. At this point,
some questions emerge: How did
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CASPIAN REPORT, SPRING 2014

FatIh Ozbay
120
these two countries become the parties
of an intense discussion about
Montreux while they were definitely
on good terms in this regard until
five years ago We can find the answer
in the traditional attitude of
Russia; it prefers to achieve its interests
with bilateral or multilateral
relations when it feels weak, and it
prefers unilateral policies when it
feels strong. Russia, which gained
its self-confidence with economic
and political steps taken by the Putin
government in domestic and foreign
policy, pushed its limited for the first
time in the 2008 War and became
stronger with the policies it adopted
about Syria. Then, it has become
even tougher and stronger both on
the basis of action and discourse by
annexing Crimea from Ukraine. Besides,
Russia renewed and strengthened
its Black Sea fleet in this period.
Ukraine-centered developments in
the region have brought the world
to the brink of a huge crisis for the
first time in the post-Cold War era.
Moscow believed that its red lines
were violated when the government
fell with pro-EU protests began in
Kiev streets after the suspension
of Ukraine-EU negotiations by pro-
Russian Yanukovych administration.
After that, Moscow’s Ukraine
policy unexpectedly changed. The
existence of Russian military in the
Ukraine border, then Ukrainian autonomous
republic Crimea’s joining
Russia via independence and referendum,
and now the turmoil caused
by pro-Russians living in the Eastern
part of Ukraine have raised the temperature
in Black Sea waters.
In this process, the presence of US
ships in the Black Sea has started
to disturb Moscow to a great extent.
Russia claimed that US warships extended
their duration of stay in the
Black Sea by violating the Montreux
clauses two times on April 3, 2014.
In the last declaration made by the
Russian Ministry of Foreign Affairs
on April 10, it was indicated that
Ukraine-centered developments in the
region have brought the world to the brink
of a huge crisis for the first time in the post-
Cold War era.
“USS Taylor” named warship of the
USA stayed in the Black Sea for more
than 21 days. In the declaration, it
was noted that “USS Taylor” sailed
into the Black Sea on February 5,
but left on March 9. Thus, US warship
had stayed in the Black Sea for
11 days more than allowed in the
Montreux Convention. USS Taylor
warship entered the Black Sea for
ensuring security during the Sochi
Olympics, but then its propeller
broke when it came into the Samsun
Harbor for refueling. In other words,
USS Taylor warship came to ensure
the security of the Olympics, not to
help Ukraine, and Russia did not object
to the entry of the ship. Russia
must be definitely informed about
the ship’s 11-day late exit because
of the accident. However, Russia
claimed that they were not informed
about this event. Turkish Ministry of
Foreign Affairs made a declaration
on April 12 as an answer to Russia,
stated that the Russian Federation
and other parties of the Montreux
Convention were all informed, and
determinately refused the claims
about violation of Montreux.

Black Sea.
The situation got really strange.
Firstly, Russia gave a reaction after
one month on April 10 for US warship’s
11-day late checkout on March
9. On the top of it, if the 11-day late
exit is also taken into consideration,
Russia felt a need to react with a
considerable delay, 41 days later in
total! As it will be logical to say that
Russia made a miscalculation or was
late to give a reaction, the only logical
explanation could be: Moscow
approached the announced accident
with suspicion. All of the USA ships
went in and out of the Black Sea on
time except for USS Taylor warship
which had an accident and had to
be pulled by the a towboat as the efforts
to repair the ship failed. Russia,
which wants to put Turkey in a difficult
position by bringing the violation
claim to the agenda for no reason,
is actually turning the Montreux
Convention into a discussion topic.
This is a development which neither
Turkey nor Russia wants. So, why is
Russia doing this We can briefly and
clearly say that Russia is disturbed
by the entry of the US ships to the
Black Sea although it is in compliance
with the Montreux clauses, and
it uses the stay of USS Taylor warship
as an excuse. Russia is sending
implicit warnings primarily to Turkey
and then to the USA with these
statements.
The changing balances in the Black
Sea are the basis of Russia’s intention
to bring Montreux to the agenda.
The 2008 War proved that it was a
right decision to limit the entrance
of non-regional actors to the Black
Sea. Turkey’s Montreux policy was
appreciated particularly by Russia.
Russia’s annexation of Crimea and
its Ukraine policy have changed not
only the balances but also the discussions
in the Black Sea. Russia, in
a sense, announced its dominance
in the Black Sea with the Crimea
move. However, we can say that in
the view of Russia which is now face
to face with economic and political
sanctions due to this move, the possibility
of changing the policies about
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CASPIAN REPORT, SPRING 2014

FatIh Ozbay
122
Montreux is quite stressful in an environment
where close combats are
seen probable between the parties.
If the parties decide to change their
position about Montreux, the Black
Sea will undoubtedly turn into an
area of struggle for global powers.
Such a situation could turn upsidedown
Moscow’s post-Cold War plans
for the Black Sea. In consideration of
this case, Russia gives warning to the
USA and Turkey as an early precaution
by using USS Taylor warship as
an excuse. Moreover, the reconnaissance
flights of Russia’s military aircrafts
parallel to Turkish coasts over
the Black Sea since last October are
also quite remarkable in this regard.
If any tension in the Black Sea turns
into a close combat, it will potentially
have a negative and direct effect on
the relations between Turkey and
Russia. During the 2008 War, Turkey
managed to get out of the tension between
Russia and the West with the
least damage. This current crisis is
much more serious and significant
between the parties. If the crisis
which has emerged between Russia
and the West as a result of the developments
about Ukraine and Crimea,
start to pressure the Montreux Convention
which is in effect since 1936
without any amendment, Turkey
may have to make a tough choice. At
this point, Russia takes the biggest
part. If Russia’s policy goes beyond
Turkey’s red lines, it may force Ankara
to take the Black Sea in a different
format between two countries
but this time at a global level rather
than regional. If Russia chooses to
follow a policy deepening the crisis
in Ukraine, and if this policy leads
to war between the West and Russia,
which is the worst-case scenario,
Turkey will have no alternatives. In
this case, some serious difficulties
may come up in the bilateral relations
between Russia and NATO
member Turkey. If a mutual decision
is made, acting in collaboration
with NATO will become a vital issue
If the crisis which has emerged between
Russia and the West as a result of the
developments about Ukraine and Crimea,
start to pressure the Montreux Convention
which is in effect since 1936 without any
amendment, Turkey may have to make a tough
choice.
for Turkey. As a result, two countries’
policy to keep foreign powers out of
the Black Sea and resolve problems
among coastal states will inevitably
fail, and even they may get up
against each other. The first negative
consequence for Turkey will be
the irrecoverable damage to the relations
that were developed in the
post-Cold War era. It will also allow
non-coastal states to take initiatives
on the grounds of ensuring security,
which will almost inevitable lead to a
new alignment in the Black Sea.
The Black Sea has been an area of
competition between Turkey and
Russia and the source of bloody
wars for hundreds of years. Maybe
for the first time in history after the
Cold War, two countries have found
a chance to establish close relations
in the Black Sea. Any step taken by
Russia, Turkey or any other state,
which may damage these relations,
will launch the worst-case scenario
for both countries. Thus, attitudes
or policies which may open the

Pro-Russian
Ukrainian activists
holding anti-NATO
placards.
123
Montreux Convention to discussion
are for the interest of neither Russia
nor Turkey. Turkey should continue
to pursue its policy for sticking
to the Convention and avoid any
amendment under all circumstances.
And Russia should not pave the way
for opening Montreux to discussion
with accusatory discourses which
arise from the tension arose due to
its aggressive policies.
CASPIAN REPORT, SPRING 2014

MUbarIz Hasanov
124
Some Remarks on
Economic Benefits of
TANAP for Turkey
MUbariz Hasanov
SENIOR FELLOW, CENTER ON ENERGY AND ECONOMY, HASEN

Projected investment cost of TANAP is
around USD 12 billion. Turkish companies
are expected to be granted works worth
some USD 5-6 billion for supply of pipes and
construction works.
May 30, 2014 was remarked as an
important date in the Turkish energy
sector. Turkish national petroleum
company TPAO took over Total’s
10% stake in the Shah Deniz Consortium
and thus increased total share
to 19%. On the same day, Turkey’s
national pipeline operator BOTAŞ increased
her share in TANAP to 30%.
These developments will certainly
contribute to Turkey’s long-standing
quest to become a regional energy
hub and bring significant economic
gains. In this note we focus on importance
of the TANAP for Turkish energy
market and economic benefits
of the project for Turkey.
Income and Employment
Effects of TANAP
Projected investment cost of TANAP
is around USD 12 billion. Naturally,
domestic companies will be involved
in implementation of works under
this project. Turkish companies are
expected to be granted works worth
some USD 5-6 billion for supply of
pipes and construction works. In addition,
according to some estimates
about 15.000 direct and tens of thousands
of indirect jobs will be created
during the construction phase. Furthermore,
the project will create permanent
direct jobs throughout life of
the pipeline.
Turkey will also have permanent
steam of income from operation of
the pipeline as state-owned BOTAŞ
holds 30% share in TANAP. Assuming
that transmission capacity of
TANAP reaches to 31 bcm/year by
2026, total net income of BOTAŞ
from operation of the pipeline may
reach to USD 17 billion in real terms
till the period 2045.
These are direct and observable
benefits of the project for the Turkish
economy. Such a huge infrastructure
investment will definitely generate
enormous economic activity
throughout construction phase and
will contribute to permanent economic
growth of Turkey in the long
run through the multiplier effect. According
to our preliminary estimates,
the TANAP project may increase
gross domestic product (GDP) of
Turkey by approximately USD 37 billion
by 2029. This implies that GDP of
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CASPIAN REPORT, SPRING 2014

Turkey will be USD 37 billion higher
each year starting from 2029 when
compared to levels which would be
attained without implementation of
the project. Naturally, this increase
in GDP will also contribute to employment
as well. Our calculations
suggest that the TANAP project may
create up to additional 279.914 permanent
jobs in Turkey in the long
run.
Effects of TANAP on Turkish
Natural Gas Market
Opening of TANAP will increase supplies of
natural gas to Turkey and hence increase
competition in the market.
MUbarIz Hasanov
126
Turkey will purchase additional 6
bcm of natural gas per year from
Azerbaijan via TANAP. Currently, Turkey
imports natural gas from Russia,
Iran and Azerbaijan via pipes and in
the form of LNG from various countries.
Although import prices are
not disclosed officially, according to
some estimates import prices are
around USD 480 per tcm for Iranian
gas, USD 400/tcm for Russian gas
and USD 340/tcm for gas from Azerbaijan.
Therefore, by importing more
natural gas from Azerbaijan, Turkey
will be able to reduce total gas import
bill.
However, the difference between
import prices does not provide the
full picture of total economic benefits
of Turkey from importing more
natural gas from Azerbaijan. Opening
of TANAP will increase supplies
of natural gas to Turkey and hence
increase competition in the market.
Once TANAP becomes operational,
Turkey will increase her bargaining
power against other suppliers as the
Turkish natural gas market will become
more competitive. Therefore,
other suppliers will be forced to cut
their prices when TANAP opens. Our
calculations suggest that even if all
suppliers charged the same price for
natural gas, extra supply of 6 bcm
per year via TANAP would reduce
total import prices by around USD
38-57 per 1 thousand cubic meter.
This implies around USD 1.6-3.3 billion
reduction in total expenses on
imports of natural gas per year starting
from 2018. Reduction in import
bill will depend on actual import volumes.
Gains of Turkey will be much
higher in the following years as it is
expected that import of natural gas
will increase continually. Total gains
of Turkey during the period till 2045
may reach to USD 94.8 billion in real
terms.
In addition, unlike other gas-import
agreements, Turkey will have the
right to re-export natural gas imported
via TANAP. Therefore, Turkey
will have the opportunity to earn
extra income by re-exporting this
volume of natural gas to European
countries.
Importance of TANAP for
Turkey’s Ambition to Become
an Energy Hub
Turkey has a long-standing ambition
to become a regional energy
hub. TANAP represents opening of
the Southern Gas Corridor (SGC)
that will deliver natural gas from
the Caspian Basin and Middle East

Signing ceremony
of TANAP project.
to European Countries. Although
only Azerbaijan has committed to
supply natural gas through TANAP
at the present time, this route provides
the most cost-efficient way of
delivering natural gas from this region
to Europe. Therefore, it can reasonable
be expected that other gasrich
countries in the region, namely
Turkmenistan, Iran, Iraq and Israel
will consider to use this corridor for
transmitting natural gas to Europe.
As the European Commissioner
for Energy Gunther Oettinger once
stated, total transmission capacity
of the SGC may reach to 100 bcm per
year in the future. Thus, TANAP may
transform Turkey to main transit
country.
As we mentioned above, Turkish
state-owned oil company TPAO increased
its stake in the Shah Deniz
Consortium to 19%. In addition,
considering the fact that Turkey
will have the right to re-export the
volume of natural gas supplied under
TANAP, total volume of natural
gas that Turkey can export will rich
to 10.75 bcm by 2026. Therefore,
TANAP gives Turkey not only the opportunity
to become a major transit
country, but a major player in the big
energy game in the European market.
Conclusions
In this note we briefly discussed
importance and economic benefits
of TANAP for Turkey. TANAP opens
the SGC which will be a major transit
corridor for delivering natural gas
from the Caspian Basin and Middle
East to Europe. Thus Turkey will
have the opportunity to become a
major transit country as well as a significant
player in the European energy
markets. Our analysis suggests
that TANAP will not only increase
strategic importance of Turkey but
will also bring enormous economic
benefits for Turkey. Therefore Turkey
must give full support, i.e., political,
economic and public support to
implementation of the project.
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