TURKMENISTAN: EUROPEAN COMMISSION-FUNDED STUDY ON

UNCLAS SECTION 01 OF 06 ASHGABAT 001306

SIPDIS

SIPDIS

STATE FOR SCA/CEN AND EEB; STATE PLEASE PASS TO USTDA DAN
STEIN
ENERGY FOR EKIMOFF/THOMPSON
COMMERCE FOR HUEPER

E.O. 12958: N/A
TAGS: PREL EPET ECON ENRG TX
SUBJECT: TURKMENISTAN: EUROPEAN COMMISSION-FUNDED STUDY ON
TRANS-CASPIAN GAS CORRIDOR CONCLUDES PROJECT WOULD BE
FEASIBLE, WITH CAVEATS

REF: A. ASHGABAT 1252

B. ASHGABAT 1297


1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: The European Commission has concluded
from a just completed a study on establishing a gas transit
corridor from Kazakhstan to the EU region that the project is
feasible. The 400-page feasibility study looked at a variety
of options for transiting the Caspian Sea, as well as
weighing the various costs of a northern gas corridor through
the Black Sea and a southern corridor through Turkey. It
concluded that the most cost-effective option would be an
all-pipeline option carrying 50 billion cubic meters (bcm) of
gas per year from the Central Asia-Center pipelines at
Beynau, Kazakhstan under the Caspian and Black Seas to
European terminals, but caveated that judgment with the
recommendation that resolution of the Caspian Sea's
international legal status would help ensure the project's
stability. The study also looked at potential options
involving movement of compressed natural gas, which were also
judged feasible. The November 26 decision between Gazprom
and Turkmenistan increasing the price of gas by late 2008 to
$150 per thousand cubic meters (tcm) could encourage a
November 30 meeting of participants to closely look at these
findings. END SUMMARY.


3. (SBU) On November 28, the EU-TACIS office in Ashgabat
informally passed to the Embassy a copy of a feasibility
study requested and funded by the European Commission,
entitled "EU Feasibility Study of a Trans-Caspian Black Sea
Gas Corridor." The EC hired a joint Consortium -- Mott
MacDonald Limited, KLC Law Firm, Kantor Management
Consultants and Louis Berger -- to undertake the study to
investigate and assess the feasibility of a gas transit
corridor from Kazakhstan, across the Caspian Sea to
Azerbaijan and Georgia, through the Black Sea region to the
EU. The beneficiaries of the study are Azerbaijan, Georgia
and Kazakhstan, though the study also considered the
possibility of including Turkmenistan gas into the
arrangement at a later date. Embassy has e-mailed the entire
document -- approximately 400 pages -- to the Turkmenistan
desk officer in SCA/CEN.


4. (SBU) The objectives of the study, implemented under the
framework of INOGATE ("Energy cooperation between the EU, the
littoral states of the Black and Caspian Seas and their
neighboring countries"),included:

-- To examine non-pipeline options to transit the Caspian
Sea, including compressed natural gas (CNG),liquified
natural gas (LNG) and liquified petroleum gas (LPG);

-- To consider the existing infrastructure from Azerbaijan
through Georgia and to investigate whether upgrades or even
complete replacement would be necessary;

-- To review and analyze all options to transit the Black
Sea, including a pipeline and CNG.

In addition to an executive summary, the study contains
economic and financial, legal and environmental sections. As
noted ref A, the EU expects to discuss the findings of the
study in Brussels November 30.


5. (SBU) The study's key findings include:

Technical
--------------


ASHGABAT 00001306 002 OF 006


-- According to preliminary analysis, the most appropriate
non-pipeline option is CNG. LPG is inappropriate, since it
can not be a substitute for methane except for very small
localized volumes.

-- After examining a wide range of onshore pipeline options,
the study concludes that transportation of 30, 50 and 70
billion cubic meters (bcm) of gas is feasible, including in
both onshore and offshore options.

-- There appear to be sufficient proven gas reserves in
Azerbaijan, Kazakhstan and Turkmenistan to meet the 30 and 50
bcm -- but not the 70 bcm -- scenarios. This analysis took
into account existing and likely future export commitments to
other countries, including Russia and China.

-- A new transit pipeline route is required to deliver 30, 50
and 70 bcm of gas to the European Market.

-- New compression, pressure-control and gas purification
facilities will be required for pipeline and non-pipeline
options.

-- The existing Central Asia-Center (CAC) pipelines in
Kazakhstan can be used as tie-in points to deliver 15, 30 and
45 bcm of gas across the Caspian Sea.

-- Shipyards are available in the Caspian Sea region which
could, with modifications, potentially construct CNG and LNG
vessels.

-- Two underground gas storage facilities in Azerbaijan
(Garadag and Galmaz) can be used to store gas for the CNG
option or as buffer storage for a pipeline. Both storage
facilities require upgrading.

-- LNG, although proven technology, will be too costly in
terms of both capital and operating costs to provide a viable
alternative to a pipeline crossing.

-- CNG or its derivative, adsorbed natural gas (ANG),are as
yet unproven for gas transportation across a sea, but could
offer a feasible alternative to pipeline gas transport across
the Caspian Sea.

-- Rail transportation of any form of natural gas requires
too much in the way of logistics, space and investment to be
a viable alternative to pipelines.

-- For all the gas volumes examined, both the capital and
operational costs to reach Europe via the Black Sea are lower
than the onshore route through Turkey.

Legal
--------------

-- In legal terms, it has not yet been clearly and
unambiguously agreed upon whether the Caspian Sea is a lake
or sea. The legal classification of the Caspian Sea depends
greatly on geopolitical -- and not purely legal -- factors.
And, although the Caspian Sea littoral states agreed to
increase economic cooperation at the October 17, 2007 Caspian
Summit in Tehran, no agreement was reached on delimitation
and associated rights.

-- In the Caspian Sea, each state has already unilaterally
started exploration work within its "own" sector, and this
could be considered, at least within the respective 12-mile
zones, as having established a well-settled customary
practice.

ASHGABAT 00001306 003 OF 006



-- Environmental considerations as a legal foundation for the
view that all littoral states must agree on the creation of a
pipeline -- either genuine or used as a pretext -- could
seriously impact projects to construct off-shore pipelines in
the Caspian Sea.

-- Construction of a pipeline in the Caspian raises legal
questions and is politically sensitive, thereby introducing a
degree of uncertainty and advocating the exploration of
alternate options, at least until the political and legal
situation is further clarified.

-- In the Black Sea, virtually all coastal states in the
Black Sea have enacted legislation regarding the extent of
their territorial sea, contiguous zone, exclusive economic
zone and continental shelf. It follows that an underwater
pipeline could be laid within the territorial sea, contiguous
zone and exclusive economic zone (and continental shelf) of
any of these states.

-- However, in the Black Sea, a number of sea boundaries
remain unsettled. Any pipeline across the Black Sea would
need to be routed with due consideration for these boundaries
and disputed areas.

-- No national law or public international law considerations
are believed to impact the laying, operation and maintenance
of a submarine pipeline in the Black Sea.

-- In the Bosphorus Straits, the legal regime of the Straits
in principle allows the unimpeded transport of LNG-LPG by
vessels through them, but poor weather conditions and
increasing congestion cause delays resulting in economic loss.

-- Given the likelihood of maritime accidents in the
Bosphorus, delays and/or pollution can be expected.

-- Turkey's attempts to gain absolute control over the
Straits generate further operational uncertainty over
transportation of LNG or LPG by vessels through the Straits.

-- There appear to be no legal "project breakers" from the
standpoint of domestic legislation of the states involved.

-- A transportation project involving several states and
various modes of transport requires an advanced degree of
coordination between its various components and the actors
involved. An appropriate institutional platform exists under
the INOGATE Umbrella Agreement, to which all the states
involved in the project are signatories.

-- Efficiency and effectiveness suggest that a common
operator would be required for the envisioned project.

Commercial
--------------

-- The study assumed a base cost to European consumers of
$250 per thousand cubic meters (tcm) of gas.

-- Between 45 and 65 bcm per year could be supplied by the
three Caspian countries (Azerbaijan, Kazakhstan and
Turkmenistan) to European markets from 2015 onwards. This
should be sufficient to meet the 30 and 50 bcm, but not the
70 bcm, scenarios.

-- There will be a gas shortfall of between 40 and 80 bcm per
year in the EU that could be met by the Caspian countries.


ASHGABAT 00001306 004 OF 006


-- The "delivery point" countries and other potential markets
are likely to be able to absorb significant proportions of
the 30 and 50 bcm scenarios (40% and 25% respectively) from
the outset of the project. The remainder of the gas could be
consumed in other EU countries.

-- For each gas corridor -- through either the Black Sea (the
"north" corridor) or Turkey (the "south" corridor) --
pipelines throughout the gas transport corridor and the
option of using CNG ships for the Caspian Sea segment and
pipeline thereafter were the least expensive. These were,
therefore, selected for detailed financial analysis.

-- The all-pipeline option always has more attractive netback
prices than the CNG scenarios, as it is a cheaper solution
and thus has lower tariffs for the same throughput levels.

-- The southern (Turkey) corridor has lower netback prices
than the northern (Black Sea) corridor for all comparable
scenarios due to its higher investment costs.

-- The most "competitive" tranport routes (from most to least
competitive) are:

o All-pipeline option, 50 bcm, northern corridor (netback
price=$162/tcm of gas)
o All-pipeline option, 50 bcm, southern corridor (netback
price=$150/tcm)
o CNG case, 50 bcm, northern corridor (netback
price=$144/tcm)
o All-pipeline option, 30 bcm, northern corridor (netback
price=$139/tcm)
o CNG case, 50 bcm, southern corridor (neback price=$135/tcm)
o All-pipeline option, 30 bcm, southern corridor (netback
price=$117/tcm)
o CNG case, 30 bcm, northern corridor (netback
price=$112/tcm)

-- The CNG 30 bcm scenario for the southern gas corridor
appears to be uncompetitive.

LPG
---

-- The main destination markets for Kazakhstan and Azerbaijan
are likely to be those of Turkey, Central/Eastern Europe and
possibly the south Asian markets. Turkmenistan is likely to
continue exporting mainly to markets in its region (primarily
Iran and Afghanistan) but is also likely to seek other export
outlets.

-- With an FOB Black Sea price of $450/ton, Kazakh and
Turkmen LPG producers can achieve a netback price of
$337/ton. The netback price for Azeri producers is $395/ton.

Environmental
--------------

-- Given the size and nature of the potential developments,
environmental and social impacts are inevitable. Both
onshore and offshore routes will present significant
environmental challenges, which may be manageable. The cost
implications of appropriate mitigations may impact the
overall economic feasibility of the project.

-- Given the environmental sensitivity of the area and public
concerns about energy installations, the highest
environmental, social and safety standards will have to be
met or bettered.


ASHGABAT 00001306 005 OF 006


-- Gas transmission will require large amounts of energy with
a high cost and carbon footprint. A sensitivity analysis on
the 50 bcm case gave a fuel cost range from $100-200
million/year, and a shadow carbon values range from $47-235
million/year.

-- Using offshore single point moorings (SPMs) instead of
jetties allow shipping to be segregated, which is safer and
prevents unacceptable crowding of shipping or marine
infrastructure. If future work shows that SPMs are not
viable, there is plenty of land available on both shores for
alternative sites, but few sheltered marine locations.

-- On the Black Sea coast in Georgia and Romania, there is
less land and much more tourist activity, so suitable sites
for plant and pipeline landfalls are scarcer, but there may
be suitable locations near Supsa and to the south of
Constanta.

-- Further work is required to determine the extent of water
as a limiting factor on large LNG regasification plants,
because of the environmental impacts of thermal pollution and
possible damage to plankton, fish larvae and juvenile fish.
This work should also look at turning these threats into
opportunities by filtering the plankton biomass and using it
as a feedstock -- perhaps for aquaculture. Likewise, it may
be possible to use heat loss from regasification as a colling
medium for freezer plant.

-- Air cooling has been specified for intermediate pipeline
compressor stations. Further work is required to see if sea
water cooling may be used for plants with access to large
quantities of water.

-- From a scientific perspective, there are no apparent
environmental or safety barriers that should prevent the
construction of offshore gas pipelines in the Black Sea or
the Caspian Sea.


6. (SBU) Although the consortium laid out a number of risks
and recommended that resolving the Caspian Sea's
international legal status would help cut the risks to laying
a subsea pipeline, it nonetheless concluded that the concept
of a gas corridor is feasible. Key next steps include:

-- Resolution, if possible, of the legal/political impasse
over the status of the Caspian Sea, as a pipeline crossing
remains the most cost-effective solution for transporting
natural gas.

-- Detailed study of the underlying cost estimates and the
feasibility of the use of CNG ships for transporting large
volumes of gas.

-- Coordination of efforts and sharing of information with
other parties that are considering the feasibility of
supplying Europe with Caspian gas (NOTE: i.e., the United
States. END NOTE.).

-- The commitment of the various project stakeholders and the
establishment of an operational framework and procedures to
progress to a detailed feasibility study.

-- Clarification of the business concept and the roles,
contributions and undertakings of the various parties.

-- The development of the commercial and legal arrangements
to ensure that the project can attract financing from
international financial institutions and other financiers.


ASHGABAT 00001306 006 OF 006



7. (SBU) COMMENT: Promising as this evidence is that the EU
is finally beginning to focus on a viable energy policy, it
still has a long way to go if it is to bring this project
from this first step to fruition. As the European Commission
moves ahead with efforts to gain EU buy-in to the proposal,
time will remain of the essence. Indeed, the November 26
news that Gazprom and Turkmenistan have agreed to raise gas
prices to $150/tcm by the end of 2008 (and that Gazprom is
planning on passing on the higher cost to consumers, rather
than decrease its own profit margin) undermines somewhat the
study's basic assumptions -- that any price over $100/tcm is
competitive, and that a pipeline will enable Europeans to
keep the base price they pay as consumers to $250/tcm.
CURRAN