Report on the Caspian Development Corporation

April 19, 2011 | 00:00

Report on the Caspian Development Corporation

Europe's growing dependence on imported fuels is evident in the gas sector. The Southern Corridor would be – after the Northern Corridor from Norway, the Eastern corridor from Russia, the Mediterranean Corridor from Africa and besides LNG – the fourth big axis for diversification of gas supplies in Europe.

Diversification of sources generally improves competition and thus contributes to market development. At the same time, it enhances security of supply: as seen also in the January 2009 gas crisis, the most severely affected countries were those relying on one single import sources. However, often the defensive attitude of gas producers and incumbent players in monopolistic markets hampers diversification. The implementation of the Southern Corridor requires close co-operation between several Member States and at European level, as no country individually requires the incremental gas volumes (new gas) sufficient to underpin the investment in pipeline infrastructure. Therefore, the European Union must act to promote diversification and provide for the public good of security of supply by bringing Member States and companies together in order to reach a critical mass. This is the underlying principle for the EU Southern Gas Corridor strategy. Its importance was underlined in the Commission’s Second Strategic Energy Review of November 2008, which was endorsed by the European Council of March 2009.

The aim of the Southern Corridor is to directly link the EU gas market to the largest deposit of gas in the world (the Caspian / Middle East basin) estimated at 90.6 trillion cubic meters (for comparison, Russian proven reserves amount to 44.2 tcm). Furthermore, the gas fields are geographically even closer than the main Russian deposits.

The key potential individual supplier states are Azerbaijan, Turkmenistan and Iraq; yet, if political conditions permit, supplies from other countries in the region could represent a further significant supply source for the EU. The key transit state is Turkey, with other transit routes being through the Black Sea and the Eastern Mediterranean. The strategic objective of the corridor is to achieve a supply route to the EU of roughly 10-20% of EU gas demand by 2020, equivalent roughly to 45-90 billion cubic meters of gas per year (bcma).

The operational objective for the development of the Southern Corridor strategy is that the Commission and Member States work with gas producing countries, as well as those countries which are key for transporting hydrocarbons to the EU, with the joint objective of rapidly securing firm commitments for the supply of gas and the construction of gas transportation infrastructures (pipelines, Liquefied/Compressed Natural Gas shipping) necessary at all stages of its development.

The key challenge for the future is to ensure that gas producing countries become ready to open towards exporting gas directly to Europe, which for them may often imply accepting high political risk linked to their geopolitical situation. The Commission, in cooperation with the Member States involved in the Southern Corridor, needs to further emphasize its engagement to build long term relations with gas producing countries in this region and provide them with a stronger link to the EU.

In the light of that, the Commission, with the aid and support of the World Bank, has proposed the creation of a commercial vehicle to assume risks and supply guarantees to Turkmenistan that gas volumes will be lifted and that contracts will be honoured. The Caspian Development Corporation is a concept that has been designed with these aims.

To read the full report, click here.

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