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“Regional Energy Projects: TGI”
Remarks by Economic Counselor Clark Price
The Black Sea Energy Policy Conference
October 9, 2008
Ladies and Gentlemen: It is apleasure for me to speak about a regional energy project, the Turkey-Greece-Italy Gas Interconnector (TGI), which my country views as having tremendous potential to contribute to European energy security. I'm particularly honored to sit on a panel with such distinguished colleagues, all of whom are noted experts in the energy field. I myself am a diplomat, and anything but an expert in the field, so I hope you’ll bear with me. But what I hope to show you today is just how important TGI is to Europe and how important a role Greece is playing by supporting it. Finally, I want to address head on the number one question people have on their mind viz-a-viz TGI: is there enough Caspian gas to fill it.
To make a long story short, the United Statesstrongly supports TGI. We support it not only because it makes commercial sense – strong commercial sense at that! – but also because the Greek government, the Turkish government and the Italian government support it! We admire the Greek Government’s far-sighted policy over many years of turning TGI into a reality. I want to stress that we do this for policy – not commercial -- reasons. As I think everyone in the audience is aware, no U.S. company is involved in TGI. Rather, we support this pipeline because we believe it will improve European energy security through enhancing supply diversity. Secretary of Energy Bodman has noted, "Energy diversity is good for both consuming and producing nations. It inherently improves energy security by reducing dependence on any one type of energy; it reduces pressure on traditional energy markets, and it’s good for the environment, by increasing the sustainability of the world’s natural resources."
As you all know, Greece is undertaking a major effort to transition itself away from being purely a consumer country of hydrocarbons to being a transit country as well. It is therefore a country whose policy decisions will increasingly affect not only itself, but the broader European market at large. Its moves on TGI will do so in a particularly major way.
To put the significance of TGI into some broader perspective, let’s take a look at where we are now. What we see today in Europe’s gas market is an enormous system of gas infrastructure that largely leads from Western Siberia and Central Asia to Europe. As you all know, this is the Gazprom network. It is operated relatively reliably, depending upon which country you have lived in for the last few decades. Without it, Europe's energy situation would be a lot more difficult.
However, as the Siberian fields that Russian producers have exploited for the last few decades deplete, we believe the next major source of gas for Europe is likely going to come from the Caspian region. One of the ways that gas is going to be delivered to Europe is through the Gazprom network, including the new North Baltic Pipeline. But the other way that Caspian gas can move to European markets is from Azerbaijan, across Georgia and Turkey to the European Union. It makes sense, doesn’t it? Two different routes from two distinct supply sources!
And that is the route that Greece is doing so much to realize through its support for, and participation in, the Turkey-Greece-Italy gas Interconnector, or TGI. As of last November, with the linking of the Turkish and Greek gas grids, this became the first corridor bringing Caspian gas directly to Western markets. It is already giving Western consumers new choices. It is bringing competition. Most importantly, it is directly supporting greater energy security and diversity for Europe. This is huge.
I don’t want to pretend that the TGI enterprise is a simple project. Let’s be honest: any billion dollar plus project involving a 1000 kilometer pipeline and involving the range of companies and governments that TGI does will take time and patience. Let me be crystal clear: Fulfilling TGI’s promise will require patience as this region's huge supplies gradually come on line, as technical problems are overcome. It will require a tremendous degree of cooperation and coordination between many countries, as well as financial creativity.
For the Southern Corridor to realize its potential, the Governments of Azerbaijan, Georgia, Turkey, Greece and Italy will have to continue their close cooperation to overcome the many sorts of obstacles that all complex energy projects confront. I do not want to underestimate these challenges, but where there's a will, there's a way. As you know, the United States strongly supported the creation of the Baku-Tbilisi-Ceyhan oil pipeline, which came on line in 2006 and which is making such a major contribution to global energy security. BTC was a difficult project, unprecedented in many ways, just as TGI is today. Yet it is now a reality.
And let me highlight the tremendous boost Greece has given to this project. As you know, Prime Minister Karamanlis has repeatedly expressed his support for TGI. He has discussed it with President Aliyev, and explored ways for the two countries to enhance their cooperation on it. Minister of Development Folias has traveled on to Baku on more than one occasion, and has come up with a number of creative approaches to advancing this pipeline. Of equal importance, Greece’s Natural Gas Company, DEPA, works hand in glove with its counterparts in Azerbaijan, Ankara and Italy. The United States does not take these efforts for granted.
Before proceeding, let me take issue with a story line that frequently appears in the Greek press that we are against Gazprom, and against Gazprom gas. This could not be more untrue. This one company already supplies 80% of non-European imported gas into the European Union and has proved itself over time to be a reliable and committed – not to mention, necessary absent competition -- supplier to most countries. But competition is important, and new sources of supply are even better. Within the European context, in particular, where Gazprom is by far the single most important gas supplier, it is important to develop and bring to market key alternative sources of energy. That is what Greece is doing now.
The fact is, for an economist such as myself, it is clear that Europe’s gas market is a bit dysfunctional. If you look at the purchase price of gas that Europe’s single largest supplier – Gazprom -- pays in Central Asia, it is significantly below the price at which it is selling this gas in Western markets. In fact, this price differential cannot be accounted for purely by transit or other technical costs.
How was Gazprom able to do this? Simple: As a monopsonist in the Caspian, Gazprom was essentially dictating an unnaturally low purchase price, while as a monopolist in Europe, it was dictating a high selling price, leading to tremendous markups over the past years of up 165 to 200 dollars per thousand cubic meters. There is no reasonable argument in terms of economic efficiency to justify that sort of enormous price differential.
Now what TGI, Nabucco – the entire Southern Corridor enterprise – seeks to do is to create real markets in both the Caspian and in Europe. I would argue we’re already having success in this area: you may have noticed that Gazprom has claimed that it would begin paying the Caspian suppliers global market prices. While it remains unclear how the firm plans to implement this promise, I would argue this step is a direct result of market broadening in the Caspian.
Of course, monopolies do not operate on the basis of market economic logic, which is why both European and U.S. commercial law aims to prevent their creation, or dismantle them if they already exist. I will be happy to speak a bit more about U.S. anti-monopoly law if you wish. TGI – by allowing Caspian producers to access Western markets directly and, conversely, by allowing Western consumers to access Caspian gas directly – directly address this counterproductive situation.
Let me turn to the initial source of TGI’s gas: Azerbaijan. I can’t tell you how many times I have heard the following two questions: Does Azerbaijan have enough gas and even if it does, will it send it westward. There is a simple answer to these questions: yes and yes!
First, let me turn to the question of political will. The Azerbaijani leadership – at the very highest level -- has made a strategic decision to take the steps necessary to make TGI, and other Caspian Sea – Western European gas pipelines, a reality. President Aliyev has made it clear that he will do what it takes to work with his partners in TGI to make that pipeline a true alternative pipeline bringing a whole new source of supply to Western Europe. For his part, what President Aliyev is looking for is a strategic partnership with Europe that builds a real bridge between his country and the West. And he views his country’s natural resources as one very important element of that bridge.
Now let me turn to the supply question. The latest estimates of Azerbaijani gas supply show that, in spite of what many claim, there is more than enough gas for TGI. Let me share with you some publicly available estimates of Azerbaijani reserves: British Petroleum has published estimates showing that Azerbaijan has at least 1.5 trillion cubic meters of proven reserves, while IHS Energy refers to 2 tcm of recoverable resources. Other estimates go even higher. As you know, international gas companies are now at the stage of developing Azerbaijan’s gas reserves, but last November, the Shah Deniz consortium drilled its fourth exploration well, SDX-4, which found some very promising information about the size of a very deep reservoir underneath what was already know about Shah Deniz. It’s at about 7000 meters depth, one of the deepest wells ever drilled, and it has become one of the most prolific gas wells anywhere. So we now believe as an official U.S. Government view, that Azerbaijan has enough gas to fill TGI, to launch Nabucco and perhaps even to fill Nabucco.
Then there is Turkmenistan and Iraq [why important? Sources of gas for TGI/Nabucco?]. International estimates place Turkmenistan's proven natural gas reserves among the highest in the world and figures of upwards of 3 tcm are mentioned frequently. Turkmenistan remains the second-largest gas producer in the former Soviet Union after Russia. Production figures have been consistently climbing since 1998 when Turkmenistan was virtually cut off from all outside markets by Russia. Turkmenistan's 2007 output was an estimated 72 bcm; the bulk of which,50 bcm, went to Russia. In other words, there is no doubt that Turkmenistan has tremendous production potential. To pin down just how much potential, President Berdimuhamedov has ordered a new assessment of his country’s vast hydrocarbon resources.
Our goal now with Turkmenistan is to help that country think its way forward about how it wishes to develop multiple options to export its gas, just as we seek to help our NATO ally, in this case Greece, to have multiple options to buy gas.
Iraq also has significant gas export potential. According to the Oil and Gas Journal, Iraq’s proven natural gas reserves are 112 trillion cubic feet (Tcf). Probable reserves have been estimated at closer to 275-300 Tcf and work is currently underway by several IOCs and independents to accurately update hydrocarbon reserve numbers. Iraq’s proven gas reserves are the tenth largest in the world. We are now working intensely with the Iraqi government and regional authorities to finalize a legislative framework that will allow the equitable development of these resources. Once this is achieved, a clear way forward will be available to export this gas, with Europe being a key potential consumer.
In closing, let me again stress one key point: TGI makes commercial sense. It is moving forward because it is the most competitive way to move Caspian gas and potentially Iraqi gas into Europe. We believe that if you focus only on the raw economics of this pipeline versus others, you will see that gas will be moving across the Caspian, through Turkey and into Greece and Italy because this is the most commercially logical thing to do. And the beauty is that the commercial logic, the free market approach, will additionally help put our ally Greece into the strongest possible commercial and strategic energy position.
Thank you.