Caspian Report - Issue: 07 - Spring 2014

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