10.36172/EKONOMISTI.2023.XIX.02.ZURAB.GARAKANIDZE

Expanded Summary 

Global natural gas production increased by nearly 5 percent to reach a record 4.04 trillion cubic meters in 2021.  Russia currently ranks as the world’s second largest natural gas producer and is the leading exporter. In 2021, Russia’s natural gas exports were 202 billion cubic meters of pipeline gas, and 39.6 billion cubic meters of liquified natural gas (LNG). [Source: Russia struggles to make up for Europe's gap in natural gas exports. https://www.aa.com.tr/en/europe/russia-struggles-to-make-up-for-europes-gap-in-natural-gas-exports/2717651]. Since the war in Ukraine, Russia has cut natural gas exports to Europe, which previously relied on the country for 40 percent of EU's supply, resulting in skyrocketing energy prices in the Europe. Georgia, with its strategic location on the Black Sea’s eastern shore, has the potential of creating a LNG hub to transport gas to European markets bypass Russia - to use existing port facilities at Anaklia, Poti, Batumi. Kulevi (belongs to Socar BST Ltd.)

Recent developments show the interest of the Russian government in the idea of a Turkish gas hub. Late September 2022, two days after the explosion of the "North Stream 1 and 2" gas pipelines on the bottom of the Baltic Sea, Presidents R.-T. Erdogan and V. Putin agreed to add two more new gas pipelines along the "Turkish Stream", which is clearly a competing project of the EU's "Southern Gas Corridor" (SGC) passing through Azerbaijan and Georgia, since these two pipelines will enter the region of Europe where the European "corridor" is come - in South-Eastern Europe.

The natural gas has only recently, since the 70s of the last century, turned into one of the main types of fuel. At the beginning of this century, about 88-90% of natural gas was delivered by gas pipelines under long-term economic contracts directly from a specific supplier to a specific customer, the rest - by tankers, in the form of liquefied gas (LNG). In 2021, global LNG imports, according to the report of the International LNG Importers Group (GIIGNL), increased by 4.5% compared to the previous year and reached 513.7 billion cubic meters (372.3 million tons). The group's research notes that in 2021, the LNG already accounts for about 40% of the global gas market, with the rest coming through gas pipelines. In 2021, about 73% of the LNG (375 billion cubic meters, or 271.8 million tons) was imported by Asian countries. In addition, only 36.6% of the world's LNG volume was sold on the spot market, i.e. in small lots, - the rest was sold through long-term contracts, thereby neglecting the market mechanism of free price formation. Due to the Russia-Ukraine war, the European Union's gas supply from Gazprom's pipelines was interrupted and Brussels is desperately looking for alternative routes.

For the first time, the idea of such an alternative in the form of the "Trans-Caspian gas pipeline" was put forward by then US President Bill Clinton in 1996. However, due to the uncertainty of the status of the Caspian Sea and the lack of delimitation of its shelf boundaries, due to the conflicting position of Azerbaijan, Iran and Turkmenistan, this project was not implemented yet.

After the annexation of Crimea in 2014 by Russia, the construction of one of the components of the "Southern Gas Corridor" (SGC) supported by the European Union - the "White Stream" gas pipeline and the liquefied gas project AGRI(LNG) initiated in 2007 - "Azerbaijan-Georgia-Ukraine-Romania-Hungary Interconnector" was postponed for an indefinite time.  It should be noted that these were the most promising projects for Georgia and Azerbaijan, since both of them turned aside not only Russia, but also Turkey and, accordingly, neutralized its transit hegemony.

The Vice Prime Minister, Minister of Economy of Georgia, Mr. Levan Davitashvili, stated at a briefing held on November 21, 2022 that the Georgian government is working on a project to supply gas from the Caspian Sea shore of Azerbaijan to Europe through Georgia. According to Mr. L. Davitashvili the project, in which Azerbaijan, Romania and Hungary also participate, already have been started in 2015 and provides for a plan by which "... gas will be liquefied on the territory of Georgia, and then it will be re-gasified in Romania." Unfortunately, this project was stopped and had no further development", he said, adding that "... Europe is especially interested in alternative sources of gas supply, when everyone is talking about diversification of energy supply. This project has gained special relevance this year".

Mr. L. Davitashvili noted that the evaluation of the project and the infrastructure in the territory of Georgia-Azerbaijan is underway. "It won't happen in a day or a year," he said, adding that "...first, we need to depict a complete picture...then we need to formulate a detailed action plan...and start implementing this plan step by step, including attracting investments."

The inter-ministerial meeting of the participating states of the AGRI project (Azerbaijan-Georgia-Romania Interconnector, later joint Hungary) was held in Bucharest on June 24, 2015. During the meeting, the Ministers of the energy sector in charge of the liquefied natural gas project discussed the outcomes of the feasibility study and opportunities for financing. In conclusion of the meeting, the Minister of Industry and Energy of Azerbaijan, Natig Aliyev, the Minister of Energy, Small and Medium-Sized Enterprises, and the Business Environment of Romania, Andrei Dominic Gerea, the Deputy Minister of Energy of Georgia, Mariam Valishvili, signed a Joint Declaration on the AGRI project. Within the framework of the Joint Declaration, the countries-participants expressed their intention to consider the AGRI project as a part of the Southern Gas Corridor lobbied by the European Union. The member-states agreed to promote the AGRI project within the European Commission in order to submit it to the definitive list of projects that will be guaranteed to be financed by the European Fund for Strategic Investments.

From the very beginning, the AGRI project was launched to diversify both supply sources and transit routes of natural gas from the Caspian region to Europe. Briefly, the project envisaged transportation of the Azerbaijani gas via pipelines to the Georgian Kulevi port on the Black Sea coast, where the gas would be liquefied at a special terminal, after that, the tankers would be delivered to the terminal at the Romanian port, Constantsa. Further, the regasified gas would be transferred to other European countries.

In order to implement the AGRI initiative, Azerbaijan, Georgia, and Romania signed a Memorandum of Understanding (MoU) on the cooperation in the field of LNG and its transportation in Bucharest on April 13, 2010. On May 12, 2010, in Tbilisi, the project participants signed a Protocol regarding the establishment of the AGRI Project Development Company. During the first AGRI Summit, which was held in Baku, on September 14, 2010, the Republic of Hungary was officially invited to the AGRI project as a partner. At the end of the Summit two more documents were signed, namely, the Baku Declaration inked by Presidents of Azerbaijan, Georgia and Romania, and the MoU on association of the AGRI LNG Project Company, adopted by the Heads of the national energy companies – the State Oil Company of Azerbaijan, the State Oil Corporation of Georgia and the Romanian national company ROMGAZ. Therefore, since January 2011, the participants of the AGRI have launched the SC AGRI LNG Project Company SRL, which was registered in Bucharest and operated in accordance with the legislation of Romania.

On February 14, 2011, in Bucharest, at the meeting of the Ministers of Azerbaijan, Georgia, Romania and Hungary it was announced that Hungary’s accession to the AGRI project was accepted and Hungarian company MVM officially became the member of the project. According to the reached agreement, the member-countries of the AGRI project would have equal shares. In other words, the shareholders of the AGRI project (SOCAR, GOGC, ROMGAS, and MVM) own 25% each.

After establishing the necessary administrative infrastructure, the parties started the process of analyzing the technical and economic basis of the project, as well as other issues considered in this respect. The AGRI LNG Project Company launched an international tender for consultancy services related to the feasibility study for the AGRI project, which was won by the oil and gas engineering group, Penspen Limited. The contract for consulting services was signed on June 28, 2012. The Penspen provided the results of the report on the feasibility study of the AGRI to the Board of Directors of AGRI LNG Project Company after the 2-year period.

Despite the fact that the AGRI participants have already discussed the primary results of the feasibility study, there is still unclearness on the estimation of project costs and technically detailed projections. According to the estimative data, there are at least 3 options of the project costs and capacity, namely, €1.2 billion for a projected capacity of 2 billion cubic meters (bcm), €2.8 billion for a projected capacity of 5 bcm and €4.5 billion for a projected capacity of 8 bcm. In other words, the AGRI project is still facing a wide range of barriers and implementation difficulties.

For instance, there is still a lot of uncertainty regarding the AGRI project resource base. Azerbaijan has already signed a long-term agreement for supplying all forthcoming natural gas volumes produced within the second phase of the giant gas field Shah Deniz to the European countries via the Trans Anatolian Natural Gas Pipeline (TANAP), which would be connected with the Trans-Adriatic Gas Pipeline (TAP). Therefore, Azerbaijani officials should consider other sources of natural gas, which would be supplied over the Black Sea gas transportation corridor. Actually, the problem of natural gas shortage could be solved by joining of Turkmenistan to the AGRI project. The Turkmen gas could be transported via LNG tanker across the Caspian Sea to the Sangachal terminal in Eastern Azerbaijan, where it should be gasified and transmitted across Azerbaijan and Georgia to the Black Sea terminals. However, it definitely would cause necessity to construct additional LNG terminals on the Caspian Sea shore, which could lead to the dramatic increase in the total cost of the project.

On the other hand, in many respects, the AGRI proposal is similar to the proposed project to deliver compressed natural gas (CNG) from Azerbaijan to Bulgaria via Georgia and the Black Sea. The MOU of Azerbaijan, signed with Georgia and Bulgaria in the latter part of 2009, envisage the possible shipping of the Azeri compressed gas via Georgia and the Black Sea to Europe. In other words, in case if Azerbaijan manages to provide the necessary natural gas volumes for transportation over the Black Sea shipping route, Baku will possibly have to separate the high priority project from the lower priority one.

It also should be admitted, that according to the statements made by the high-ranked officials of the AGRI project, the realization of the idea of the project also depends on the implementation of the investments attraction strategy. Up to date, there are no new shareholders of the AGRI LNG Project Company, which could be interested in the construction of the LNG facilities on the Black Sea coast. Consequently, the project participants are looking forward to further extend the amount of the shareholders and to increase the share capital of the company. In this respect, it seems natural that after the meeting between the Minister of Mining and Energy of Serbia, Aleksandar Antic, and the Minister of Energy, Small and Medium-Sized Enterprises, and the Business Environment of Romania, Andrei Dominic Gerea, held in Belgrade on June 29, 2015, Serbia has received an offer to take part in the AGRI energy project. The Romanian Minister of Energy invited his Serbian counterpart to take part in a meeting with the AGRI participating countries, including Georgia, Azerbaijan, Romania, and Hungary, that will be held in September or October 2015.

Approving Serbia’s acceptance as a partner could give a new impetus to promoting the AGRI project. After Russia announced it would stop to deliver natural gas through Ukraine by 2019, Serbian Government started an active phase of the search for new sources of gas supply. Early in June 2015, Serbia and Bulgaria signed an agreement on the construction of a gas interconnection, which should give Serbia a possibility to receive certain quantities of gas flowing through the TAP and the TANAP. To ensure its energy security, Belgrade would consider the construction of a two-way gas interconnection with Romania with the annual capacity of at least 1 bcm. Therefore, in case if the established Joint Serbian-Romanian Working Group for the promotion of cooperation in the field of energy succeeds in defining technical parameters of the new gas pipeline, Serbia could almost certainly join the list of states involved in the implementation of the AGRI project.

In conclusion, it is obvious that in comparison with the TAP and the TANAP projects the AGRI project does not have enough capacity to significantly shift the energy geopolitics in the region. However, as a part of the EU’s energy diversification strategy, the AGRI project could play an important role in weakening Russia’s leverage over the natural gas imports in Central and Eastern Europe. Therefore, the AGRI project still has an opportunity to become the first LNG project to be developed in the Black Sea, aiming transportation of natural gas from the Caspian region to Europe.