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ARTICLE IN PRESS

Energy Policy 34 (2006) 16711680


www.elsevier.com/locate/enpol

An assessment of the natural gas supply potential of the south energy


corridor from the Caspian Region to the EU
Dimitrios Mavrakis, Fotios Thomaidis, Ioannis Ntroukas
Energy Policy and Development Centre (KEPA), National and Kapodistrian University of Athens,
KEPA Building Panepistimiopolis, 157 84 Athens, Greece
Available online 9 February 2005

Abstract
Security and diversication of EU energy supply underlines the importance of an energy corridor bridging the natural gas reserves
of the broader Caspian Region with the EU consumption centers. This paper examines the supply potential of this corridor, the
major natural gas elds and the already existing networks. An assessment of the supply cost up to the Turkish borders is carried out,
while the case of Egypt as a future supplier is also investigated. Conclusions review the prospects for the construction of the
considered energy corridor.
r 2005 Elsevier Ltd. All rights reserved.
Keywords: Caspian region; Energy corridors; Supply potential

1. Introduction
The energy consumption of the European Union
(EU-15) countries is expected to continue increasing
until 2020 with an average growth rate of 0.7% per
annum (EC, 1999). The recent enlargement (EU-25)
does not alter signicantly the dependence on external
energy sources, which is estimated to reach 70% by 2030
(EC, 2001).
Natural gas will expand its share in the European
energy market, from 22% in 2000 to 29% in 2030
(EC, 2001). Until now the main EU suppliers for
this fuel are Russia, Algeria and Norway. Fig. 1
presents the forecasted increase in the EU natural gas
consumption and the needed additional supplies to be
dened.
Security of supply necessitates new sources and
diversication of their routes. The Caspian Region is
Corresponding author. Tel.: +30 210 727 5836;
fax: +30 210 727 5828.
E-mail addresses: epgsec@kepa.uoa.gr (D. Mavrakis), fthom@
kepa.uoa.gr (F. Thomaidis).

0301-4215/$ - see front matter r 2005 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2004.12.015

examined in this paper as an alternative natural


gas supply potential, due to its abundant gas reserves
and its proximity to the huge reserves of the Persian
Gulf.
The paper aims to assess the supply potential of a
south energy corridor connecting the broader Caspian
Region with the EU consumption centers, through
Turkey. An indicative routing is shown in the map of
Fig. 2. The regions countries with adequate natural gas
reserves to supply the corridor are Azerbaijan, Turkmenistan, Iran and Iraq. Another potential gas supplier is
Egypt though it currently focuses on LNG exports to
the European markets. Section 2 describes the broader
Caspian Regions gas reserves, major elds and existing
or planned transmission systems. Section 3 includes
estimations for the natural gas supply cost from the
regions largest elds to the Turkish borders through
ve different routes. The methodology used for the
calculation of the supply cost is quoted. Section 4
examines the case of Egypt as a potential supplier of the
energy corridor. Finally, Section 5 concludes the
prospects for the implementation of the suggested
energy corridor.

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D. Mavrakis et al. / Energy Policy 34 (2006) 16711680

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ADDITIONAL SUPPLIES TO BE
DEFINED
NET CONTRACTED IMPORTS
INDIGENOUS PRODUCTION
500

400

Mtoe

300

200

100

0
2002

2005

2010

2015

2020

Year

be recovered in the future from known reservoirs under


existing economic and operating conditions (BP,
2004a). BP estimated the proven reserves at the end of
2003 and ENI in the beginning of 2004. Similarly,
probable reserves are dened as those unproved
reserves which analysis of geological and engineering
data suggests that are more likely than not to be
recoverable (MMS, 1998). Possible reserves are those
unproven reserves which analysis of geological and
engineering data suggests that are less likely to be
recoverable than probable reserves (MMS, 1998).
The proven natural gas reserves of Azerbaijan,
Turkmenistan, Iran and Iraq range from 33.97 Tcm
(ENI, 2004) to 34.07 Tcm (BP, 2004a) while probable
and possible reserves add 10.05 Tcm more (EIA, 2003).
Table 1 presents the proven, probable and possible
natural gas reserves, production and consumption of the
four studied countries. Fig. 3 shows the broader Caspian
Regions largest natural gas elds that can supply the
suggested south energy corridor.

Fig. 1. EU natural gas demand and supply outlook to 2020 (Source:


Eurogas, 2003).

Fig. 2. The suggested south energy corridor.

2. Supply potential
2.1. Natural gas reserves
Natural gas reserves are dened as the part of the
reserve base that could be economically extracted or
produced at the time of determination (USGS, 1996).
In this section, the natural gas reserves data were
provided from the BP Statistical Review of World
Energy 2004, ENI World Oil and Gas Review 2004
and EIA Country Analysis Briefs. The proven reserves
denitions for the three organizations coincide. They are
considered as the quantities, geological and engineering
information indicate with reasonable certainty, that can

2.1.1. Azerbaijan
Azerbaijan has 1.37 Tcm (BP, 2004a; ENI, 2004) of
proven natural gas reserves and the possible reserves are
estimated at an additional 1 Tcm (EIA, 2003). About
90% of the proven reserves are located in the Caspian
Sea. The country until recently was a natural gas net
importer with a slight decreasing production against an
increasing consumption (Fig. 4). Fig. 5 shows a high and
a low case scenario for Azerbaijans estimated natural
gas production and consumption up to 2020, based on
the study Caspian Oil and Gas by the International
Energy Agency (IEA, 1998). According to these estimations, production is expected to overlap consumption in
the following years.
The Shah Deniz associated natural gas eld, discovered in 1999, is located in the South Caspian Sea,
100 km southeast of Baku, between Mobils Oquz,
Chevrons Asheron and Exxons Nakhchivan oil elds.
The development contract of the Shah Deniz eld was
signed in 1996. The involved companies are BP (25.5%),
Statoil (25.5%), State Oil Company of the Azerbaijan
Republic (SOCAR) (10%), NICO (10%), TotalFinaElf
(10%), LUKAGIP (10%) and TPAO (9%). The
contracted area covers approximately 860 km2, with
water depths that range from 50 to 500 m, while the
main reservoir rocks are estimated at a total depth of 5
to 6.5 km (BP, 2002; Offshore Technology, 2004a). The
elds natural gas reserves are 0.42 Tcm1 (Kelly, 2003)
and the elds development lifetime will be at least 30
years.
1
Recent drillings show that the Shah Deniz gas reserves are 100 Bcm
greater than initially supposed. The total estimated reserves are
0.63 Tcm (Petroleum Economist, 2004b).

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Table 1
Supply sources of the suggested energy corridor
Country

Proven reserves (Tcm)

Probable reserves
(Tcm)

Possible reserves
(Tcm)

Production in 2003
(Bcm)

Consumption in 2003
(Bcm)

Azerbaijan
Turkmenistan
Iran
Iraq

1.37
2.9
26.526.7
3.13.2

N/Aa
N/A
N/A
4.25

1
4.5
0.3b
N/A

4.8
55.1
79
2.35c

8
14.6
80.4
N/A

Sources: BP, 2004a, ENI, 2004, EIA 2004a, 2003.


a
N/A Not available.
b
Only in areas near the Caspian Region.
c
Iraq production in 2002.

Azerbaijan
35
30

Bcm

25
20
15
10
5
0
Low case scenario
2010 Production
2010 Consumption

High case scenario


2020 Production
2020 Consumption

Fig. 5. Forecast of natural gas production and consumption in


Azerbaijan (Source: IEA, 1998).

and the gas exports are expected to start in the fourth


quarter of 2006. The average natural gas production
from the eld during the rst stage will be 8.4 Bcm/yr,
while the full production potential, 16 Bcm/yr, can be
reached in later development stages. The total investments for Stage 1 will rise to $3.2 bn (Enterprise Center
Azerbaijan, 2003).

Fig. 3. Broader Caspian Regions studied gas elds.

Bcm

Azerbaijan
9
8
7
6
5
4
3
2
1
0
1996

1998

2000
Year

Production

2002

2004

Consumption

Fig. 4. Natural gas production and consumption in Azerbaijan


(Source: BP, 2004a).

Shah Deniz is scheduled for a four-stage development.


Stage 1 was approved in February of 2003. Turkey has
already signed a contract for 6.6 Bcm/yr (BOTAS, 2004)

2.1.2. Turkmenistan
According to British Petroleum and ENI, Turkmenistans proven natural gas reserves come up to 2.9 Tcm
(BP, 2004a; ENI, 2004). Possible reserves are 4.5 Tcm
(EIA, 2003). Natural gas production has increased in the
last years, while consumption has remained almost
constant (Fig. 6). The country is a natural gas net
exporter, producing 55.1 Bcm and consuming 14.6 Bcm
in 2003 (BP, 2004a). Gas is currently exported to Iran
and mainly through the Russian pipeline network to
Europe. Fig. 7 shows a high and a low case scenario for
Turkmenistans estimated natural gas production and
consumption up to 2020 (IEA, 1998). Both scenarios
indicate that the country will remain a net gas exporter
for the following years.

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Turkmenistan

60

Iran
100

50

80
Bcm

Bcm

40
30
20

40

10

20

0
1996

1998

2000

2002

2004

Year
Production

140

Consumption

Turkmenistan

120
100
80
60
40
20
0
Low case scenario
2010 Production
2010 Consumption

0
1996

1998

2000

2002

2004

Year

Fig. 6. Natural gas production and consumption in Turkmenistan


(Source: BP, 2004a).

Bcm

60

High case scenario


2020 Production
2020 Consumption

Fig. 7. Forecast of natural gas production and consumption in


Turkmenistan (Source: IEA, 1998).

Turkmenistan has two giant natural gas elds in the


Amu-Daria basin, east of the Caspian Sea, Shatlyk and
Dauletabad-Donmez. These two elds are at depths of
about 3 km.The Shatlyk eld with current reserves of
1 Tcm was discovered in 1963 and its production started
in 1973. The Dauletabad-Donmez eld, discovered in
1974, has remaining reserves of 1.2 Tcm, while its
production potential is estimated at 15 Bcm/year for
more than 30 years (Dyman et al., 1999; Olcott, 2004).
2.1.3. Iran
This country has the worlds second largest natural
gas reserves, after Russia, ranging from 26.5 Tcm (ENI,
2004) to 26.7 Tcm (BP, 2004a) of proven reserves. Iran
does not have signicant proven reserves in the Caspian
Region. However there are promising prospects for
possible reserves of about 0.3 Tcm in that area (EIA,
2003). Natural gas production and consumption have
increased signicantly during the last decade (Fig. 8). In
spite of the countrys huge natural gas reserves, gas is
imported from Turkmenistan to cover the increasing

Production

Consumption

Fig. 8. Natural gas production and consumption in Iran (Source: BP,


2004a).

consumption, especially in the northeast region where


no adequate pipeline network exists to transport gas
from the rich elds located in western Iran. In 2003, 79
Bcm of gas were produced, while 80.4 Bcm were
consumed (BP, 2004a). No data for future natural gas
production and consumption prospects are available.
Irans largest natural gas eld is South Pars, the
northern extension of Qatars North Field, located in
the Persian Gulf, 100 km from Asaluyeh at the Iranian
south coast. It is the largest gas eld in the world with
estimated reserves of 12.3 Tcm. It covers an area of
1295 km2 and is located 3 km below the seabed at a
water depth of 65 m. The full-scale development of
South Pars requires up to 30 phases. The rst ten
development phases have already been contracted. The
rst phase has a total output of 28 Mcm/day of gas and
40.000 b/day of condensate, while most of the other
phases have a planned production capacity of 56 Mcm/
day of gas and 80.000 b/day of condensate (Offshore
Technology, 2004b; Petroleum Economist, 2004a).
2.1.4. Iraq
Iraqs proven natural gas reserves come up to
3.13.2 Tcm (BP, 2004a; ENI, 2004), while the countrys
probable reserves are estimated at 4.25 Tcm (EIA,
2004a), 70% of the reserves are associated with oil.
Increase of the countrys oil production affects the gas
sector, since associated gas is often ared off or
reinjected in the eld to enhance oil recovery. In 2002
Iraq produced 2.35 Bcm of natural gas (EIA, 2004a).
After the 2003 war, gas gathering and treatment
facilities in the southern regions deteriorated with most
of the produced gas being ared off. Non-associated
natural gas production, that reaches 2.1 Bcm/yr, comes
from the Al-Anfal eld in the northern part of the
country. This eld has a total of 0.13 Tcm of natural gas
reserves (EIA, 2004a). No historical data or future
forecasts for Iraqs natural gas production and consumption are available.

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2.2. Natural gas transmission systems


2.2.1. Azerbaijan
The 48 ins high-pressure transmission system in
Azerbaijan has a total length of 4500 km and a capacity
of 30 Bcm/yr (IEA, 1998). On 12 March 2001 Azerbaijan and Turkey signed a long term natural gas purchase
and sell contract. Gas deliveries to the Turkish border
will commence at the fourth quarter of 2006, starting at
a minimum of 2 Bcm/yr and then rising to 6.6 Bcm/yr
(BOTAS, 2004; Kelly, 2003). However there is skepticism concerning the ability of the Turkish economy to
absorb these quantities unless the proposed energy
corridor to EU is operational. Gas will be transported
through the currently under construction South Caucasus Pipeline (SCP), from Sangachal terminal (south of
Baku) to the Turkish border via Tbilisi of Georgia. The
SCP will have a potential transported volume of
7.3 Bcm/yr and its length up to the Turkish border will
be 690 km (BP, 2004b). In Georgia, the new pipeline will
be constructed parallel to the BakuTbilisiCeyhan
(BTC) oil pipeline. The 42 ins diameter SCP will be
248 km long in Georgia, and 442 km in Azerbaijan
(Enterprise Center Azerbaijan, 2003). The Azeri gas will
reach Erzurum in eastern Turkey covering additional
280 km through the Turkish gas distribution system.
The SCP consortium consisted of the same seven
companies involved in the development and exploitation
of the Shah Deniz gas eld. Namely, they are BP,
Statoil, SOCAR, NICO, TotalFinaElf, LUKAGIP and
TPAO. The project cost is estimated at $1 bn (EBRD,
2004). The SPC pipeline will have excess capacity to
transport natural gas from Turkmenistan if the proposed Trans-Caspian Gas Pipeline is constructed.
2.2.2. Turkmenistan
The country operates 7330 km of gas transmission
pipelines (IEA, 1998). Until the mid 90s there was only
one gas export line, which was routed through Russia.
In 1995 Turkmenistan and Iran signed a gas supply
contract. The project came online in December of 1997,
with a 40 ins diameter, 200 km long pipeline, linking the
Korpedzhe gas eld in western Turkmenistan, to KurtKui in northeastern Iran. The Korpedzhe-Kurt Kui
pipeline was the rst natural gas export pipeline in
Central Asia not passing through Russia, with a
capacity of 8 Bcm/yr, which can be extended to
13 Bcm/yr. The construction cost was $190 million,
nanced mainly by Iran. According to terms of the 25year contract between the two countries, during the rst
three years, 35% of the transported gas was allocated as
repayment for Irans contribution to the project (Olcott,
2004). Up to 2001 Turkmenistan supplied Iran with
12.1 Bcm of natural gas (NIGC, 2004). In Kurt-Kui the
pipeline is connected to the Iranian natural gas network.
Thus Turkmenistan is able to deliver gas to Turkey

1675

through an existing pipeline system and to Armenia


through a pipeline currently under construction. In
December 2001 Turkmenistan and Armenia, reached an
agreement for the supply of up to 2 Bcm/yr to Armenia
through the KorpezheKurt Kui pipeline (EIA, 2002).
With an expected cost of $220 million ($120 million for
the Iranian part and $100 million for the Armenian part)
the 140 km, 20 ins pipeline will interconnect Iran with
Armenia (Petroenergy Information Network, 2004). The
implementation of this project was stalled for years due
to disagreements over natural gas prices and the exact
routing of the pipeline, but an agreement was nally
reached and construction of the Iranian part began in
July of 2004.
Recently, Turkmenistan has also investigated alternatives to bypass Russias natural gas network. Such a
proposed project is the 1640 km long Trans-Caspian
Gas Pipeline (TCGP) (EIA, 2002), transporting gas
from Turkmenistan under the Caspian Sea to Azerbaijan, through Georgia, and nally to Turkey. The TransCaspian Gas Pipeline project, a joint venture between
Shell and PSG (formed by Bechtel and General
Electric), aims to open a new export line towards
Europe through Azerbaijan. An agreement was signed
in 1999 between Turkey and Turkmenistan to support
this project in order to export 30 Bcm/yr to Europe of
which 16 Bcm to Turkey (EIA, 2002). In November
1999, Azerbaijan, Georgia, Turkey and Turkmenistan
signed an intergovernmental declaration regarding the
principles for the implementation of the TCGP. The
estimated cost of the TCGP line to Baku is $2.5 bn
(Bechtel, 1999). After the Shah Deniz eld discovery in
1999 however, Azerbaijan requested a higher percentage
of the available pipeline capacity, than the originally
agreed. Another complication to the implementation of
the project is the opposition of several Caspian states to
the TCGP on environmental grounds. Finally there is
dominant scepticism over Turkeys economy to absorb
the rather overcontracted natural gas supplies from its
neighbours.
2.2.3. Iran
Irans gas pipeline network remains small compared
to the countrys huge natural gas reserves, due to the
lack of access to large consumption markets. In the past,
two export pipeline systems had been built, IGAT-I and
IGAT-II, planned to export Iranian gas to Azerbaijan,
Georgia and Armenia, but they are currently used to
meet domestic demand. IGAT-I, completed in 1970, is
1100 km long and links the large southern gas elds,
Agha Jari, Marun and Ahwaz, to Astara, on the
IranianAzeri borders. Its designed capacity is 19 Bcm/
yr but its operational capacity is only 10 Bcm/yr. IGATII, with planned capacity of 28 Bcm/yr, runs from
Kangan to Astara (OME, 2001). Another pipeline
system currently covering the domestic natural gas

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needs is the 56 ins IGAT III that transports gas from the
South Pars eld to the northwestern region of the
country. Iran aims to sell gas to Europe through Turkey.
On August, 1996 Turkey and Iran signed a 25-year
natural gas supply agreement, starting at a volume of
3 Bcm/yr to reach 10 Bcm/yr up to 2007 (NIGC, 2004).
The natural gas delivery started in December of 2001,
through the 1174 km long Eastern Anatolia Natural Gas
Transmission Line linking Dogubayazit on the TurkishIranian border with Ankara (BOTAS, 2004), but due to
oversupply of the Turkish market, the transported
volumes were signicantly decreased (6.44 Bcm has been
imported by Turkey up to August of 2004 according to
NIGC) and prices are re-negotiated. The country has
also reached an agreement with Armenia to export
36 Bcm of gas in a 20-year period, from 2007 to 2027,
through the aforementioned IranArmenia pipeline
(Petroenergy Information Network, 2004). As payment
for the gas, Armenia will export electricity to Iran.
2.2.4. Iraq
Iraq and Turkey signed a frame work agreement on
December 1996 in Ankara for the delivery of 10 Bcm/yr
of gas to Turkey. Natural gas was planned to be
transported from the countrys elds to the Turkish
market through a 1380 km pipeline (IEA, 1998). The
Iraqi gas is evaluated as more competitive, in cost terms,
compared to gas from the traditional players (Azerbaijan, Turkmenistan, Iran, and Russia) of the Caspian
Region. This plan has not been implemented, due to the
sanctions inicted at Iraq until recently. The Caspian
Regions main gas export pipelines are presented in
Table 2.

3. Supply cost
3.1. Methodology
The total supply cost of a natural gas transportation pipeline is calculated by the equation
TSC PC+TC+TF (1), where TSC denotes the total

supply cost, PC the production cost, TC the transport


cost and TF the transit fee.
The rst term of this sum (PC) varies depending upon
several factors such as: eld size, associated or nonassociated gas, on-shore or off-shore eld, production
prole, climatic and environmental conditions, drilling
depth, water depth (if the eld is off-shore), well
productivity, gas constituents, existing oil and gas
infrastructure and skilled workforce in the region.
Observatoire Mediterraneen de l Energy has assessed
this type of cost taking into account the aforementioned
factors. The production cost of the Broader Caspian
Region elds was estimated at 0.5 $/MBTU for Shah
Deniz and 0.4 $/MBTU for Shatlyk, South Pars and
AlAnfal (OME, 2001). These costs are similar to those
given from World Bank; 0.5 $/MBTU for Turkmenistan
and 0.4$ to 0.6$/MBTU for the Middle East (Kubota,
1996).
The natural gas transport cost (TC) depends on
pipeline construction, operational and maintenance
costs. The international natural gas pipeline projects
are characterized by high infrastructure construction
cost and a relatively low operational and maintenance
cost (Zhao, 2000). The calculation of the transport cost,
which is expressed in $/MBTU, includes pipeline
investment, operation, maintenance and management
costs and uses the learning curve function. The function,
which describes unit costs decline with cumulative
production (Zhao, 2000), is considered to have the
linear form y ax b (2), where y is the transport cost
per natural gas caloric value, x is the natural gas
volume transported through the pipeline each year, a is
the cost reduction rate, when transported natural gas
quantity through the pipeline is increased and b is the
xed capital cost.
Factor b depends on the technical characteristics of
the pipeline; the pipeline capacity, operating pressure
levels and construction material. Three different proles
of steel can be used for pipeline construction; steel X70,
X80 or X100. Steel X70 is widely used in on-shore
pipelines and allows operating pressure levels of
approximately 75 bar, with a maximum of 100 bar. Steel
X80 allows pressures that surpass 140 bar. The increased

Table 2
Caspian Region main gas export pipelines
Name/Location

Route

Natural gas capacity


(Bcm/yr)

SCP

Azerbaijan via
Georgia to Turkey
Turkmenistan via
Azerbaijan to Turkey
TurkmenistanIran
IranTurkey

7.3

TCGP
KorpezheKurtKui
Eastern Anatolia
Natural Gas
Transmission Line

Length (km)

690

Cost estimate ($
billion)

Status

Under Construction

1630

1640

2.5

Under Negotiations

813
310

200
1174

0.19
N/A

Operational
Operational

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Transport Cost (1000 km)
0.8
0.7

$/MBTU

0.6
0.5
0.4
0.3
0.2
0.1
0

10

15

20

25

30

35

Bcm
X70

X80

X100

Fig. 9. Transport cost versus transported natural gas volume for three
types of steel (for 1000 km).

pressure levels, compared to steel X70, allow more


natural gas to be transported through the pipeline and
reduce the compression cost due to reduced friction
losses. As a result, although steel X80 usage results in a
slight increase of the capital cost compared to X70, the
total average transport cost is reduced about 10%. Steel
X100 has not yet been used in international natural gas
pipeline projects, however it is estimated that its
transport cost is reduced 20% compared to the X70
pipelines (Cayrade, 2004; OME, 2001).
The learning curve function is presented in Fig. 9, as a
diagram of the transported natural gas volume versus
the transport cost, for a distance of 1000 km and for the
three types of steel. This diagram is based on transport
cost data from World Bank for X70 pipelines (Kubota,
1996). The steel X80 and X100 pipelines transport cost
has been calculated as 90% and 80% of the X70
transport cost, respectively.
Factors a and b of function (2) are calculated using
the diagrams of Fig. 9, after selecting the pipeline
construction material. The transport cost can be
calculated when the transported natural gas volume
and the pipeline length are known.
The transit fee (TF) depends on the gas reserves of the
transit country and the pipeline length. The transit
country has no reason to facilitate the transportation of
gas in case it has reserves of its own, thus the exporting
country is obliged to pay a higher tariff. Additionally, as
the distance covered by the pipeline through the transit
country is increased, the transit fee per 1000 km is
reduced, so that the total supply cost remains competitive compared to that of other routes.
3.2. Supply cost up to Turkey
In this section, supply costs from the Shah Deniz
(Azerbaijan), Shatlyk (Turkmenistan), South Pars (Iran)
and Al-Anfal (Iraq) elds to the Turkish borders, until

1677

2010, are calculated based on Eq. (1). Steel X80 is


considered as the pipeline construction material (Europipe II was the rst pipeline to use steel X80, while the
Alaskan Highway Pipeline and the Mackenzie Valley
Pipeline in USA have been designed to use the same
material). This assumption is based on X80s higher
economical efciency compared to steel X70 (10%
lower transport cost, because of the higher pressure
conditions it can endure). Steel X100 can lead to even
lower transport costs, but was not selected for this
assessment due to its limited usage in international
projects. For steel X80 as the construction material,
factors a and b of the transport cost function (2), are
a 0.0151 and b 0.684, derived from the linear
diagram of Fig. 9.
Azeri natural gas transport to the west follows a route
through Georgia that acts as a transit country. In
November 2001 the two countries signed a gas agreement, according to which Azerbaijan has to pay 0.07 $/
MBTU for the rst ve years of the contract and 0.14 $/
MBTU for the following 20 years as a transit fee or to
supply 5% of the transported gas volume to Georgia
each year in lieu of payment (Alexanders Oil Gas
Connections, 2001). Taking this into consideration, the
transit fee, up to 2010, is set to 0.07 $/MBTU for the
248 km the pipeline covers in Georgia, or respectively,
0.28 $/MBTU per 1000 km. The distance from the Shah
Deniz eld to the GeorgianTurkish borders is 740 km
(50 km underwater to the Sangachal terminal, 442 km to
the AzeriGeorgian borders and 248 km to the Georgian-Turkish borders). The off-shore pipeline is considered to have twice the cost of the on-shore one
(OME, 2001). The Shah Deniz production cost is 0.5 $/
MBTU (OME, 2001), while the export potential of
Azerbaijan until 2010 is assessed at 7 Bcm/yr. The total
supply cost from the Shah Deniz eld is calculated at
1.027 $/MBTU.
Natural gas from Turkmenistan can be transported to
the European markets by two alternative routes, one
off-shore through the Caspian Sea and one through
Iran. The production cost of the Shatlyk eld is 0.4 $/
MBTU (OME, 2001) and Turkmenistans export
potential until 2010 is considered 16 Bcm/yr. In the rst
case, through the Caspian Sea, the supply cost is
increased by the transit fee through Azerbaijan and
Georgia. The transit fee for Georgia, has already been
set at 0.28 $/MBTU per 1000 km. The tariff for
Azerbaijan is estimated three times higher (0.84 $/
MBTU per 1000 km), since the country is a natural gas
producer. Thus Azerbaijans transit fee is 0.37 $/MBTU
for 442 km. The total distance from the Shatlyk eld up
to the GeorgianTurkish borders is 1710 km (840 km to
Turkmenbashi, 240 km underwater to the Sangachal
terminal, 442 km to the AzeriGeorgian borders and
248 km to the GeorgianTurkish borders). The total
supply cost is calculated 1.729 $/MBTU. In the case of

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Iran acting as a transit country, the transit fee is 1.5


times the fee of Georgia (0.42 $/MBTU per 1000 km),
since Iran is also a natural gas exporter but the distance
through Iran is so large that setting the tariff of
Azerbaijan would make the transported gas noncompetitive compared to other routes. Thus the transit
fee is 0.77 $/MBTU for the 1830 km the pipeline covers
in Iran. The distance up to the IranianTurkish borders
is 2080 km (250 km to the Turkmen-Iranian borders and
1830 km to the IranianTurkish borders) and the supply
cost is estimated at 2.091 $/MBTU.
The supply cost from Iran does not include transit
fees. The production cost from the South Pars eld is 0.4
$/MBTU (OME, 2001) and the distance up to the
Turkish borders is 1550 km. Irans export potential until
2010 is assessed at 15 Bcm/yr, so the total supply cost is
calculated 1.109 $/MBTU.
AlAnfal natural gas eld of Iraq is located 380 km
from the Turkish borders. With production cost of 0.4
$/MBTU (OME, 2001) and export potential of 4 Bcm/yr
up to 2010, the supply cost is 0.637 $/MBTU.
Table 3 presents the total supply cost of the ve
studied pipelines. Fig. 10 shows a map of the Caspian
Region, with the export potential and the supply cost of
each pipeline.

4. The case of Egypt


The recent discovery of natural gas reserves provides
Egypt with the potential to supply gas to the south
energy corridor. Egyptian gas can be transported

Fig. 10. South energy corridor supply costs to the Turkish borders.

Table 3
Calculation of the supply cost
From

Azerbaijan
Shah Deniz
Sangachal
Terminal
AzeriGeorgian
borders

To

Distance (km)

Transit fee ($/


MBTU)

Production cost ($/ Transport cost ($/


MBTU)
MBTU)

Total supply cost


($/MBTU)

Sangachal
Terminal
AzeriGeorgian
borders
GeorgianTurkish
borders

50 (u/w)

0.5

0.058

0.558

442

0.256

0.814

248

0.07

0.143

1.027

840
240 (u/w)

0.4

0.372
0.212

0.772
0.984

442

0.37

0.196

1.55

248

0.07

0.109

1.729

250

0.4

0.111

0.511

1830

0.77

0.81

2.091

IranianTurkish
borders

1550

0.4

0.709

1.109

IraqiTurkish
borders

380

0.4

0.237

0.637

Turkmenistan (through Caspian Sea)


Shatlyk
Turkmenbashi
Turkmenbashi
Sangachal
Terminal
Sangachal
AzeriGeorgian
Terminal
borders
AzeriGeorgian
GeorgianTurkish
borders
borders
Turkmenistan (through Iran)
Shatlyk
TurkmenIranian
borders
TurkmenIranian
IranianTurkish
borders
borders
Iran
South Pars
Iraq
Al-Anfal

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D. Mavrakis et al. / Energy Policy 34 (2006) 16711680

through Jordan and Syria to the Turkish borders and


further to Europe.
Egypts proven natural gas reserves range from
1.66 Tcm (ENI, 2004) to 1.76 Tcm (BP, 2004a), while
the probable reserves are 3.34 Tcm (EIA, 2004b). Gas
has been used in the countrys energy market since 1975,
when the Adu Madi eld came on line. Production has
more than doubled during the last six years, from
12.2 Bcm in 1998 to 25 Bcm in 2003 (BP, 2004a).
Consumption followed the same trend, increasing from
12 Bcm in 1998 to 24.6 Bcm in 2003 (BP, 2004a).
Most of Egypts natural gas elds are gathered in the
Nile Delta and the Western Desert regions. The Scarab/
Saffron eld, located in the off-shore Nile Delta region
120 km north of Alexandria, is the largest gas eld
developed in Egypt (BG, 2003). It was discovered in
1999 and has been operational since March of 2003. Its
exploitation has been assigned to the Bullurus Gas
Company consortium, consisted of the BG Group
(25%), which is the operator of the project, Edison
Co. (50%) and the Egyptian General Petroleum
Corporation (EGPC) (25%). The eld has gas reserves
that exceed 0.11 Tcm and produces 15 Mcm/day (Offshore Technology, 2004c). Other recently discovered
elds include Port Fuad, South Temsah, and Wakah in
the Nile Delta and the Obeiyed eld in the Western
Desert.
The country plans to become a natural gas exporter in
the near future. Two LNG projects are currently
underway. One LNG plant is constructed at Idku,
50 km east of Alexandria. This project, called the
Egyptian LNG Project (ELNG), has been assigned to
the Egyptian LNG Company, a consortium of EGAS
(12%), EGPC (12%), BG (35.5%), Petronas (35.5%)
and Gaz de France (5%) (EGAS, 2004). The plant is
designed for two trains. The rst, with a capacity of
3.6 Mtons/yr, will commence operation in mid-2005,
exporting gas to France. Its total cost is estimated at
$1.12 bn (EGAS, 2004). The second train, with the
same LNG output will be put on stream in mid-2006,
aiming to ship LNG to Italy and USA (EGAS,
2004). The second LNG project, the Spanish Egyptian
LNG Project Damietta, will be completed in late
2004, with designed capacity of 7.56 Bcm/yr. LNG
from this project will be exported to the Mediterranean energy markets and mainly to Spain for
power generation.
Gas will also be exported via pipeline to Jordan. The
EgyptJordan pipeline project, also known as Arab Gas
Pipeline, includes two phases. The rst phase was
completed in July 2003, with the construction of a
264 km pipeline linking Al Arish in north-eastern Egypt
to Al Aqabah in the EgyptianJordanian borders
(EGAS, 2004). The second phase aims to distribute the
exported gas throughout Jordan. Completed in mid
2005, a 370 km long, 36 ins diameter pipeline will

1679

transport gas from Al Aqabah to Rehab in the


JordanianSyrian borders. The pipelines maximum
capacity is 10 Bcm/yr (EGAS, 2004). Development of
the second phase has been awarded to the Egyptian
consortium, consisted of EGAS, Enppi, Petrojet and
GASCO. In the future this pipeline can be extended to
deliver gas to Syria and Lebanon, thus enabling
connection to the Turkish gas system.

5. Conclusions
The broader Caspian Region includes signicant
natural gas elds and the existing or planned pipeline
systems can supply the European Unions energy
markets through the south energy corridor with
adequate gas, contributing thus to the security and
diversication of its natural gas supply. The elds of
Shah Deniz in Azerbaijan, Shatlyk in Turkmenistan,
South Pars in Iran and AlAnfal in Iraq have a total
supply potential of 13.85 Tcm. Moreover, the Eastern
Anatolia Natural Gas Transmission Pipeline, the under
construction South Caucasus Pipeline, the under
negotiation Trans-Caspian and IraqTurkey pipelines outline a pipeline network capable of facilitating
the transportation of the regions natural gas to the
West.
The proposed energy corridors supply costs are
competitive to those of the existing European Unions
external natural gas sources. Natural gas from Shah
Deniz (1.027 $/MBTU), South Pars (1.109 $/MBTU)
and AlAnfal (0.637 $/MBTU) is more cost effective
compared to Russian gas from the Volga Region
through the Blue Stream pipeline (1.58 $/MBTU up to
the Turkish borders (OME, 2001)). Additionally, gas
from the Shatlyk eld transported through the Caspian
Sea (1.729 $/MBTU) is in the same order of magnitude
as the Russian gas (Table 3).
Azerbaijan and Iran are the most attractive natural
gas suppliers of the proposed south energy corridor.
Both countries have low supply costs and existing or
under construction export pipeline networks. Turkmenistan apart from its traditional Russian buyers, on the
other hand, is burdened by expensive transit fees
through either Iran or Azerbaijan. Finally, due to lack
of the appropriate infrastructure, Iraqs ability to supply
the energy corridor is impeded, despite the low supply
costs.
Egypt emerges as a potential gas supplier. The latest
discovery of new natural gas elds, converts the country
to a gas net exporter. Currently, Egypt focuses mainly
on shipping LNG to the Mediterranean energy markets.
However, there are prospects for the extension of the
Arab Gas Pipeline, allowing gas exports to Turkey and
further to the European Union.

ARTICLE IN PRESS
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D. Mavrakis et al. / Energy Policy 34 (2006) 16711680

Acknowledgement
Mr Eotios Thomaidis is under DEPA S.A. scholarship.
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