In this second article of our four-part series, we delve into how Russia’s war in Ukraine has sparked a major reconfiguration of the Eurasian gas market. With energy security - defined by the International Energy Agency (IEA) as the “uninterrupted availability of energy sources at an affordable price” - now at the forefront of European policy, we examine the crucial role the Transcaspian Region plays in this transition.
Through a detailed analysis of these gas market reconfigurations and their inherent risks, we underscore the critical role the Transcaspian Region will play in shaping the energy security strategies of both European governments and businesses. A nuanced understanding of these dynamics is vital to addressing the vulnerabilities that went partly unnoticed in the case of Russia, and to fostering a more resilient, forward-thinking approach to managing future energy dependencies.
Outlook
While energy security involves a range of primary energy sources, this article focuses specifically on the gas market for several critical reasons.
Firstly, although the Transcaspian Region is rich in oil reserves, the most significant shifts in EU energy relations have occurred in the gas sector. Unlike oil, which is globally traded and easily transported, natural gas is more dependent on regional infrastructure and geopolitical considerations. The Transcaspian Region’s proximity to Europe makes it a strategic partner in the gas trade, where supply routes and political alliances play a decisive role.
Secondly, while the region’s potential in renewable energy and rare earth minerals is undeniably important for the future of Europe’s energy landscape, these projects are still largely in their infancy and will take years, if not decades, to fully mature. In contrast, the changes in the gas market are happening now, with immediate consequences for Europe’s energy security. This urgency makes it essential to focus on gas, as it is the sector where the most pressing challenges and opportunities lie.
The European Union's Gas Dilemma: Navigating a New Energy Landscape
For years, the European Union's energy landscape was marked by a heavy reliance on Russian gas, which once held a dominant share of the market. The onset of Russia's war in Ukraine, however, resulted in a sudden and dramatic shift in this reliance, a transformation that is expected to shape the region's energy strategy for the foreseeable future.
The rigid structure of the global gas market presented substantial challenges for EU member states as they sought to replace Russian supplies without causing economic disruption. Unlike oil, which is easily traded on global markets, natural gas faces unique logistical hurdles. It must be transported either via extensive pipeline systems or as liquefied natural gas (LNG), requiring specialised and costly infrastructure. Pipelines are efficient only over shorter distances, while LNG facilities demand advanced technology and significant financial investment. These factors have considerably limited the EU’s options within their shift away from Russian Gas.
Despite these constraints, the EU has managed to diversify its energy sources. LNG imports, particularly from the US, have surged - tripling between 2021 and 2023 - and Norway now supplies 30.3% of the EU’s gas needs. In addition to these efforts, the Transcaspian Region has emerged as a key player in enhancing energy security by further reducing the Union's dependence on Russian gas.
The Southern Gas Corridor: Azerbaijan’s Crucial Contribution to Navigating the EU's Energy Dilemma
A pivotal initiative in the European Union's transition away from Russian gas is the Southern Gas Corridor (SGC), which significantly enhances energy security by integrating increased LNG imports with pipeline gas primarily sourced from the Transcaspian region. This project positions Azerbaijan as a crucial supplier, making the region an important pillar of European energy security. Serving as a cornerstone of the European Commission’s RePowerEU plan, the corridor aims to replace Russian gas with supplies from alternative sources. Through this diversification, the EU seeks to bolster its energy security and reduce its vulnerability to geopolitical tensions.
In this context, the European Commission has reinforced existing contracts and, in July 2022, secured a landmark agreement to double Azerbaijani gas exports to the EU to 20 billion cubic meters (bcm) by 2027. This annual supply positions Azerbaijan to become the EU’s fourth-largest gas supplier, surpassing Qatar, although still trailing behind Norway, the US, and North Africa. This development is particularly vital for South and Southeastern European countries, which are directly connected to this gas supply and will be its primary consumers.
Since late 2021, Azerbaijan has been supplying over 8 bcm annually to Greece, Bulgaria, and Italy through the Southern Gas Corridor. To meet future import targets of 20 bcm annually, significant infrastructure upgrades are essential. This includes expanding the Trans Adriatic Pipeline (TAP) and, depending on demand, enhancing the Trans-Anatolian Natural Gas Pipeline (TANAP) and the South Caucasus Pipeline (SCP). Currently, the Southern Gas Corridor significantly benefits Azerbaijan, as it stands as the sole supplier of gas to the project.
Expanding the Southern Gas Corridor: The Potential of a Transcaspian Initiative
The SGC holds significant potential to evolve into a robust Transcaspian initiative, with a planned extension to include Turkmen gas. This evolution would necessitate the construction of the Trans-Caspian Gas Pipeline (TCGP), designed to connect Azerbaijan and Turkmenistan across the Caspian Sea, thereby expanding the project's scope and impact on Europe’s energy landscape
Turkmenistan boasts 13.6 trillion cubic meters of proven natural gas reserves - accounting for 7.2% of global reserves - currently supplies the majority of its gas to China. However, the ongoing reconfiguration of the global gas market, exacerbated by Russia's efforts to boost exports to China while recovering lost revenue from European markets, has prompted Turkmenistan to seek diversification. The country is now exploring avenues to export its gas to European markets, aiming to reduce reliance on a single customer and broaden its market presence.
What was once considered a distant possibility is now gaining momentum. On May 14, Turkish and Azerbaijani officials signed an agreement to collaborate in the natural gas sector, including the export of Central Asian gas to Turkey. Furthermore, on March 1, Ankara and Ashgabat signed preliminary agreements for Turkmenistan to supply natural gas to Turkey and, ultimately, Europe. While significant momentum exists to transform the Southern Gas Corridor into a truly Transcaspian initiative, substantial hurdles remain.
Barriers to Expansion: Navigating the Challenges of Central Asian Gas
While significant momentum exists to transform the Southern Gas Corridor into a truly Transcaspian initiative, the reality of Central Asian gas supply presents complex challenges. Among the region's states, Turkmenistan stands out as the only viable potential supplier for European markets. It is important to note that among the Central Asian states, only Turkmenistan is a viable potential supplier. While Kazakhstan and Uzbekistan have significant gas reserves, neither is expected to play a role in European gas supply in the foreseeable future due to both natural and political limitations.
The energy crisis of winter 2022/2023 highlighted that both Kazakhstan and Uzbekistan’s gas outputs are insufficient to meet rapidly growing domestic demands alongside export obligations, a situation which is likely to persist. Uzbekistan in particular faces a decline in gas production, with a reserve life of less than 18 years and no prospects for major new discoveries. This crisis led Kazakhstan and Uzbekistan to seek Russian support, culminating in the establishment of the Trilateral Gas Union, which grants Russia substantial geopolitical leverage. As a result, Kazakhstan and Uzbekistan are effectively disqualified as potential gas suppliers to the EU for political reasons.
Moreover, the method of delivering Turkmen gas remains uncertain, as the Trans-Caspian Gas Pipeline (TCGP) has stalled due to the EU’s reluctance to fund the project and objections from Iran and Russia, which are nominally based on environmental concerns but are, in reality, driven by geopolitical considerations. Consequently, with the TCGP unlikely to be constructed, Turkmen gas exports would likely require Iran as a transit country or swap partner, further diminishing the prospects of Turkmenistan becoming a major supplier to the EU.
The risks ahead
As the Southern Gas Corridor evolves and expands, it stands as a pivotal component in Europe’s strategy to replace Russian gas and diversify its energy supply. However, this ambitious project also presents certain risks for European businesses and governments.
Firstly, Azerbaijan’s central role as the current sole supplier and potential hub for future expansion into Central Asia grants it considerable geopolitical leverage. If not managed carefully, this could pose significant political risks. The deteriorating relations between Azerbaijan and France - driven by France's support for Armenia and allegations of Azerbaijani involvement in smear campaigns and the 2024 New Caledonia riots - illustrate the geopolitical complexities tied to this project. These developments underscore that the Southern Gas Corridor is not merely an economic initiative but also a strategic and geopolitical endeavour.
Secondly, the potential future expansion of the Southern Gas Corridor into Central Asia carries its own set of risks. This expansion would primarily focus on Turkmenistan, given the inability of Uzbekistan and Kazakhstan to contribute. This creates several concerns: for an EU that consistently emphasises values in its foreign policy and accession talks, closer cooperation with Turkmenistan - a highly centralized regime with a troubling human rights record - could be perceived by other partners as hypocritical. Additionally, there is the risk of Turkmenistan's reliability as a supplier, given its history of supply disruptions due to technical issues and unmet export obligations.
Thirdly, the Southern Gas Corridor's expansion would establish Turkey as a key gas hub. While this enhances its strategic importance, it also elevates Turkey's geopolitical leverage. Despite being a crucial EU partner, Turkey’s relationship with the EU is often marked by fluctuations and tensions. This dynamic must be carefully managed. As Turkey gains more influence through its central role in gas transit, it is essential for the EU to navigate this relationship judiciously, ensuring that the benefits of diversification do not come with unforeseen geopolitical complications. In conclusion, while the Southern Gas Corridor is critical for diversifying Europe’s energy supply, it also introduces new geopolitical and operational risks. These can be mitigated with careful planning, strategic diplomacy, and robust contractual agreements.
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