AGRI LNG: From Turkmenistan to Europe

The Azerbaijan-Georgia-Romania-Hungary Natural Gas Interconnector (AGRI) plans to transport natural gas for Turkmenistan via LNG tanker across the Caspian to the Sangachal Terminal in Eastern Azerbaijan.  From there the LNG will be gasified and transmitted across Azerbaijan and Georgia to the planned Kulevi Terminal on the Black Sea where it will be re-liquefied for a second round of LNG tanker transport to Romania where it would be re-gasified and pumped on to Hungary through the Arad-Szeged Romania-Hungary Interconnector and on to Europe.  Ukraine, eager to find alternatives to Gazprom’s erratic supplies, is also building a LNG terminal near Odessa. 

The AGRI agreement could draw a stark, and very interesting contrast, between the current monopolistic natural gas economics in Eurasia and a more competitive LNG market with greater contract, and therefore, price as well as supply flexibility. As noted by Dmitry Shlapentokh of the Central Asia Caucasus Institute regarding the development “…gas delivery by pipeline also has serious economic and geopolitical setbacks. Not only does it limit the room for maneuver of customers who currently depend on only a few sources of gas; it also creates a serious problem for suppliers who need to secure long-term contracts to compensate for the huge investment in constructing the pipelines.”

Pipeline siting and financing face a classic project dilemma in which many parties benefits from the project’s completion (all downstream consumers as well as upstream suppliers), but it is unclear at the time of siting exactly who should pay for how much of the project or which specific parts.  Long-term contracts help reduce risk, but also handcuff consumers and suppliers into prices that may turn out to be much higher or lower than true market prices in the future.  Further confounding matters is the inability of upstream providers to even guarantee production in the future, as has been a commonly cited concern with the Nabucco Pipeline.  In many cases uncertainty and risk lead to an unwillingness to invest.  A similar problem exists in siting disputes for international (or in the case of the US, interstate) electricity commerce.    

Despite the investment hurdles associated with developing LNG liquefaction terminals (US EIA puts the cost at $1.5 – $10 billion in the States and estimates rest around $1 billion for construction in the Caucasus) and the price of LNG tankers (slated to hit $220 million in 2013), LNG avoids these pitfalls.  While rates for LNG differ significantly around the world, market forces of supply and demand do weigh into prices unlike under a point-A-to-point-B pipeline regime.  Rather than binding countries together by piping and contracts, LNG transporters can reroute supplies to capture appealing market rates. 

If successful, AGRI will significantly weaken Russia’s leverage over both gas exports from Turkmenistan and its downstream customers in Central and Eastern Europe.  Currently, 20% of all of Europe’s gas comes from Russia via Ukraine.  Europeans well remember the long cold winters of 2006 and 2009 when Russia cut off natural gas supplies through Ukraine due to ongoing debt disputes are likely to prefer some supply insurance in the future. 

Upstream, Turkmenistan would be able to export its abundant natural gas to thirsty European markets without traversing Kazakhstan, Russia or Iran.  This could be considered a benefit for the developing Central Asian nation, however, it also will provide a greater cushion for President Berdimuhamedov to uphold the human rights violations started under Niyazov. 

British-owned oil and gas consultancy Penspen was due to produce analysis of the gas market and gas supply, an economic and financial analysis, an engineering concept for the necessary pipelines and LNG terminals, risk and environmental impact assessments of the project in November 2012, but has slipped behind schedule.  If the numbers line up, geopolitics in the region could shift significantly in years to come as LNG erodes Russia’s middleman status.  


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