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Azerbaijan Boosts JVs With Ukraine As Kiev Plans LNG; Nabucco Option Upheld.

Diversifying its energy export partners and adding to its discoveries of offshore natural gas, Azerbaijan has agreed to a set of partnerships with Ukraine. These will include gas supplies to Ukraine and a stake for Baku in an LNG import terminal venture Kiev is proposing to build on its Black Sea coast.

From Kiev's standpoint, a rapid diversification of its sources of natural gas is prompted by Russia's projects to move the bulk of its gas exports directly to Europe through two offshore pipelines: the 55 BCM/year Nord Stream to the North-West European markets and the 63 BCM/year South Stream to Southern and Central European markets. These will obviate Russia's heavy dependence on Ukraine. Nord Stream is already under construction and South Stream should be completed in 2015 (see gmt9RusGasExprtAug30-10 & gmt10RusOverseas-Sep6-10).

Azeri exports and the proposed LNG import/regasification terminal will reduce Ukraine's dependence on gas imports from Russia, which has cut off gas supplies to its southern neighbour three times in the past five years. The first phase of the LNG project is proposed to have a capacity of 5 BCM/year. This is expected to reach 10 BCM/year at a later stage. Ukraine produces about 20 BCM/year of natural gas and imports about 35 BCM/year from Russia.

Azerbaijan exports natural gas to Turkey and Russia and has the prospect of feeding the EU-planned and US-backed Nabucco pipeline venture through Turkey to Central Europe. Baku has also promoted projects for export of LNG as the Azerbaijan-Georgia-Romania Inter-Connector (AGRI) from the Georgian Black Sea coast to Romania, a gas project now in the feasibility-study stage, and the export of compressed natural gas (CNG) to Bulgaria. These are in addition to such European-driven projects as the Italy-Turkey-Greece Inter-Connector (ITGI) and the Trans-Adriatic Pipeline (TAP).

Ukraine now imports about three-fifths of its domestically consumed gas from Russia, which continually forces the price upwards. That in turn increases the production cost of industrial goods in Ukraine, making them uncompetitive. The project's head, Petro Miroshnikov, has recently told Reuters the planned LNG terminal's capacity is equivalent to almost 20% of Ukraine's gas balance, representing a "serious diversification of our gas import system". Miroshnikov mentioned a cost of about $4bn for the LNG project, for which a tender would soon be announced. Bloomberg News cited a cost of $1.3bn but that would seem to cover only the first phase.

The LNG project is a serious move by Ukraine to limit its gas dependence. The Kiev government recently signed an MoU with TNK-BP to spend $1-2bn to increase exploration for shale gas (gas trapped in layered rock) in eastern Ukraine; the technology is also gaining favour in other Central and East European countries such as Hungary. If successful the shale gas project could end up producing 5 BCM/year.

Other potential sources of natural gas for the LNG terminal, besides Azerbaijan, include Algeria, Egypt, Libya, Qatar, and Abu Dhabi. However, gas from Azerbaijan would travel the shortest route (one-third the distance from Abu Dhabi, for example).

Possible locations for the terminal include Feodosia in Crimea and Ochakov in the Mykolaiv region, but now planners say the most likely site for it is the Yuzhnyi port near Odessa, not far from the south-eastern terminal of the Odessa-Brody crude oil pipeline.

In October, Azerbaijan President Ilham Aliyev declared his government's interest in assisting Ukraine to decrease its gas dependence. More recently, Aliyev and Ukrainian President Viktor Yanukovych agreed in Kiev to establish a joint working group to draw up a strategic agreement to increase oil and gas supplies from Azerbaijan to Ukraine. Aliyev said Azerbaijan had already supplied over 50m barrels of crude oil to Ukraine this year, "and we expect to increase supplies in the future".

Yanukovych stated his interest in filling the Odessa-Brody Pipeline (OBP) with Azeri crude oil being pumped from the Black Sea to the Polish border. He said "all of our subsequent steps will be aimed at filling the Odessa-Brody Pipeline and having it operate" in the originally south-east-to-north-west direction.

(Since its construction, the OBP has either lain empty or operated in the opposite direction for internal Ukrainian transportation, filled with Russian crude oil).

OBP's integration into a Euro-Asian Oil Transportation Corridor (EAOTC), with the participation of Georgia, Lithuania, and Poland, was a project which the previous presidential administration of Viktor Yushchenko (with the agreement of then-PM Yulia Tymoshenko) had initiated. In 2008, Tymoshenko had successfully blocked what she called the "shadowy privatisation" of the OBP. Yanukovych has not said so, but under the new parliamentary majority, and with the reversion of the political structures back to a president-centred rather than parliament-centred system in view of a recent Constitutional Court decision, he may plans again the OBP's privatisation.
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Comment:Azerbaijan Boosts JVs With Ukraine As Kiev Plans LNG; Nabucco Option Upheld.
Publication:APS Review Gas Market Trends
Geographic Code:9AZER
Date:Nov 8, 2010
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