News.Az reprints from The Central Asia-Caucasus Insitite Analyst an article by Ariel Cohen and Gulmira Rzayeva.

On September 14, Presidents Ilham Aliyev of Azerbaijan, Mikheil Saakashvili of Georgia, Traian Basescu of Romania and Prime Minister Viktor Orban of Hungary gave new impetus to the realization of a revolutionary liquid natural gas (LNG) project. The high level attention to the project, named AGRI (Azerbaijan-Georgia-Romania Interconnector) is likely to attract other states to join. Experts say AGRI may be the most promising route for delivering LNG from the Caspian to Europe. It would connect existing and planned natural gas grids in Eastern Europe via Romania, Hungary, Bulgaria, and possibly Austria, as well as via an existing interconnector in Hungary.

Background: Facing a recognized need to boost gas exports through the Southern Corridor and a slow implementation of the Nabucco pipeline, Azerbaijan has launched a new LNG project: the Azerbaijan-Georgia-Romania Interconnector (AGRI), which will transport Azerbaijani gas by pipeline to a Black Sea port in Georgia for liquefaction and further transport to the Romanian Black Sea port of Constanta via tanker.

The gas will then be pumped through Romania's pipeline system further to the neighboring states. Thus, Caspian gas will be supplied to the European market. The project envisages the construction of a liquefaction plant for LNG export in the Azerbaijani-owned oil export terminal of Kulevi in Georgia, as well as the construction of a terminal for importing liquefied gas to a re-gasification plant in Romania.

The project is capable of handling 7 to 20 billion cubic meters (bcm) annually. The trilateral agreement was initiated by the Ministry of Economy, Commerce and Business Environment of Romania; the Azerbaijani Ministry of Industry and Energy; and the Ministry of Energy of Georgia.

According to preliminary estimations, the total cost of the project will range between € 1,2-4,5 billion, depending on the volume of transported gas, which will increase over the panned three phases, while the actual construction costs and export volume will be determined after the feasibility studies of a joint working group, which is to be established after the Baku summit.

AGRI gains new momentum after the summit in Baku on September 14, 2010, with the participation of the presidents of Azerbaijan, Georgia and Romania, as well as the President and Energy Commissioner of the European Commission, Jose Manuel Barroso and Guenther Oettinger. The signature of the Baku Declaration authorizes the launch of feasibility studies of the AGRI project and the establishment of a joint working group between Azerbaijan, Georgia and Romania. It is likely that after this high level meeting in Baku, other interested states will also join the project.

Implications: The selling point of AGRI is the speed of implementation, converting ideas into reality. Since the presidents of the three states singed the Memorandum of Understanding on supply of LNG to Romania via Georgia on April 15, the project is moving ahead. Its realization appears to be the fastest among the projects of the Southern Corridor (Nabucco, White Stream, Trans-Adriatic Pipeline (TAP) and the Interconnector Turkey-Greece-Italy).

Given Romania's vulnerability to the disruption of gas supplies via Ukraine, Bucharest signed the AGRI agreement in order to address Romanian energy problems and to improve the overall long-term energy supply of the EU. AGRI suits the gas supply sources and routes diversification policy of the EU, which is the best solution to achieve energy security.

From the Azerbaijani perspective, the AGRI LNG project is an excellent opportunity to enter the downstream market of southeastern Europe, including Hungary, Bulgaria, Macedonia, Slovakia, Serbia, Croatia, Albania and Kosovo. If AGRI is built, Azerbaijani gas will access Central European countries like Austria, the Czech Republic, and others, especially once the united EU gas grid system is built, which will also help to address emergency shortages.

Meanwhile, Yuriy Boyko, the Fuel and Energy Minister of Ukraine, has showed interest in the project and has expressed readiness to purchase 10 bcm of Azerbaijani LNG – 5 bcm in the first stage and 5 more in the second – once the LNG import terminal will be built in Odessa. According to Boyko, the overall financing of this profitable project is US $ 3 billion. Boyko stated that Kiev could save at least US $ 60 per tcm over imported Russian gas if it had an LNG import terminal.

The technical-commercial feasibility studies will be finished by the end of this year, using Azerbaijani experience from the construction of the Kulevi terminal. Today, gas from Qatar costs US $ 190 per tcm after re-gasification. If Ukraine joins the project, the price for Shah Deniz gas could be projected to cost US $ 190 per 1000 cubic meters, which is cheaper than the piped Russian gas.

Thus, the willingness of Ukraine to join the AGRI project and to build a LNG import terminal in Odessa is sending a strong message to Gazprom, making it aware that Kiev still has alternatives to choose from, and AGRI could be the trump card in its negotiations on the gas purchase-sale price with Gazprom.

AGRI could also be considered a more viable, faster and cheaper alternative to Nabucco, since Azerbaijan is ready to commit the gas originally earmarked for Nabucco, and fewer transit states are involved. After the feasibility studies and determination of the exact costs of the project, Baku might choose to go with the more commercially profitable project, thereby committing the entire remaining volume from Shah Deniz 2 to AGRI and leaving no spare capacity for Nabucco.

From Hungary, gas will be delivered to the Austrian hub Baumgarten by the pipeline connecting the two countries and from there distributed to markets in Western Europe. However, since gas prices in Western Europe are higher than in the Balkans, it will be more profitable for Balkan states to buy gas directly from Caspian suppliers.

Since Romania is the only East European country capable of supplying a large share of its internal consumption from its own resources, 3-4 bcm of gas annually will be delivered to Romania. As for Bulgaria, any imported volume of gas is important as Sofia is planning to set up a natural gas trade platform and expand its gas storage facilities in a similar fashion as the Central European Gas Hub (CEGH), of which 80 percent is owned by Austrian OMV. Bulgaria wants to replicate this Austrian venture and is keen to use any opportunity to increase its energy role in Europe.

Conclusions: AGRI adheres to the requirements of the Trans European Energy Network (TEN-E) guidelines as it will likely contribute to the EU's objectives and policies aimed at a secure and diversified energy supply and will be eligible for EU financial support. A the president and energy commissioner of the European Commission expressed strong support for the AGRI summit in Baku, the EU demonstrates support for the Caspian-to-Europe natural gas project and is actively engaged in its realization. This is despite the fact that Azerbaijan's potential commitment of gas for the AGRI route may diminish possible gas throughput volumes for Nabucco. As for Azerbaijan, once the project is operational, Baku will have a stake in the European market. This will primarily be true for Eastern Europe and the Balkan states in the short term, however, after the European united gas network is built this may well extend to Central and Western Europe. This will be a significant geopolitical achievement for Azerbaijan and its partners in the AGRI project.

Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Policy at the Heritage Foundation. Gulmira Rzayeva is Research Fellow in the Economic Analysis and Global Affairs Department at the Center for Strategic Studies under the Azerbaijani President.

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News.Az interviews Marcel Viëtor, Research Fellow for Energy and Climate at the German Council on Foreign Relations (DGAP).

Azerbaijan has an agreement with Russia about gas export. Don't you think that this agreement is a threat for gas cooperation between Azerbaijan and Europe? And some experts say that Azerbaijan itself doesn't have enough resources for Nabucco. Do you believe in Nabucco's future if Turkmenistan and Kazakhstan refuses to join the project?

It is very likely that the first gas shipped through Nabucco will be gas from Azerbaijan. But Azerbaijan has neither enough reserves to fill Nabucco alone, nor is it likely that it would slate all of its gas to the West. Diversification of exports is as wise for a country like Azerbaijan as diversification of imports is wise for the EU. But this is also the reason why Azerbaijan should be interested in participating in Nabucco, in order to have alternatives to its exports to Russia. The same applies for Turkmenistan, which until recently was heavily dependent on Russia as its main customer. Turkmenistan already benefits from its new export pipelines to China and Iran; the access to the attractive European markets via Nabucco would further enhance Turkmenistan's position. Then, European customers will have good chances to receive a sizable amount of Turkmen gas, since they pay good prices. On the other hand, gas from Turkmenistan would be well received by the Nabucco partners in order to add to the Azeri shipments after the initial stage. Turkmen gas, however, is not the only option for Nabucco, as some Nabucco partners are already developing gas reserves in Northern Iraq, and shipments from Qatar, Egypt or Iran are also possible if and when different obstacles are resolved.

How would you comment a gas agreement on Azerbaijan-Georgia-Romania Interconnector (AGRI, signed this week in Baku? What are the prospects of this project?

AGRI is a new interesting project within the Southern Corridor. Like Nabucco, its realisation would provide EU customers with additional gas from Azerbaijan. But in comparison to Nabucco, AGRI would probably not be able to tap into the broader gas reserves of the region, from Egypt to Turkmenistan. From an EU point of view, all pipeline projects in the Southern Corridor depend on their viability. Accordingly, AGRI will be realised if the partners involved decide that the project is technically feasible, economically viable and legally agreed upon between the countries involved. The picture might, however, change for all projects from an economic point of view when one of the other pipelines is built first. The success of AGRI might therefore depend on the question if it, as a relatively new project, can gain pace and be realized more quickly than Nabucco, which has been developed for quite some time already.

Are there political dividends for Azerbaijan in participation in the Nabucco or AGRI projects in terms of relations with Europe, less dependence from Russia, making the South Caucasus more secure.

It is for the Azeri themselves to decide, whether regard a participation in these projects as beneficial. At least from my point of view, Azerbaijan would benefit from participating in Nabucco and / or AGRI in different ways. First, it can diversify its export portfolio and thus improve its negotiation position with customers, inter alia regarding prices. Second, cooperation with EU partners in the energy sector can help intensify the overall cooperation between Azerbaijan and the EU and strengthen other joint initiatives such as the Eastern Partnership. Third, while disputes between Azerbaijan and Armenia or Azerbaijan and Turkmenistan might be regarded as obstacles to building the pipelines, the pipelines might on the contrary improve the relations between those states, since such large infrastructure projects necessitate better coordination and cooperation.

Aliyah Fridman

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