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02 October 2002

Global perspectives: Pipeline connections

By Cris Whetton

A ground-breaking ceremony took place in Baku, Azerbaijan, to mark the start of the construction of the Baku-Tbilisi-Ceyhan pipeline.

In attendance were Georgian president Eduard Shevardnadze and Turkish president Ahmet Necdet Sezer, both of whom also held talks with their Azerbaijani counterparts on oil and gas matters. The Baku-Tbilisi-Ceyhan pipeline, which will be 1,760 kilometers long, will carry oil from Azerbaijan and the Caspian region via Georgia to the Turkish Mediterranean port of Ceyhan. From there officials will transport it to European and world markets.

In Bulgaria, Russia's LUKoil will expand its gas transport network, according to an announcement made by Bulgarian president Georgi Parvanov at a joint press conference with the Russian president's Plenipotentiary for the Central Federal Region, Georgi Poltavchenko. They also discussed the question of exchanging Russian energy resources for Bulgarian construction services, manufactured goods, and food stuffs. The Bulgarian president also welcomed Gazprom's intention to develop cooperation with Bulgarian construction firms.

Ukraine said it will reexport gas from Turkmenistan in a move that could help that country return to European markets for the first time in a decade. However, the plan may mean no new profits for Turkmenistan and a potential conflict with Russia's Gazprom, which has previously tried to stop Ukraine's reselling of imported fuel.

Speaking on 5 September in Kyiv, Yuriy Boyko, the head of the state oil and gas utility Naftogaz Ukrainy, said the company plans to export "surplus" gas from Turkmenistan to Europe in 2003, adding: "We expect a gas surplus of about 6 billion cubic meters by the end of the year. It is Turkmen gas. This gas surplus will be sold onto foreign markets next year, and it will help improve the financial situation."

Such a plan to reexport Turkmen gas may raise several issues in relations with Russia. Firstly, Russia has effectively barred Turkmenistan from exporting gas to Europe since 1993. Frustrated by Russia's restrictions and profits from transport, the country now sells gas at its border instead of the destination. Ukraine has become the country's biggest customer in a deal that lets Kyiv pay for half the gas in goods and services at less than full cost. Ukraine may profit by selling the gas, although the plan may mean no new income for Turkmenistan.

A second problem is that reexports are anathema to Russia. Ukraine admitted two years ago that it had diverted some of Gazprom's gas from transit pipelines to Europe and sold it on the spot market. Gazprom officials became furious when they found out that Ukrainian traders were actually undercutting Russian gas prices on the spot market in Europe using diverted transit gas. An accord signed in June 2000 prohibited Naftogaz Ukrainy from reexporting without Gazprom's consent.

A third issue is whether Boyko's announcement represents a new plan for paying Ukraine's $1.4 billion debt. Last October, Naftogaz Ukrainy agreed to issue bonds as part of the debt restructuring plan, but Gazprom has held up the transfer for the past 11 months after discovering it would owe $700 million in tax to the Russian government.

Cris Whetton is InTech's European correspondent.