Giorgi Vashakmadze, Director, Corporate Development, GUEU White Stream

The topic today is really acute and it would be very interesting to cover all of its aspects but we are limited in time. I will try to highlight some aspects which were less discussed. Let us try to go back for 10-12 years. What we had at that time?

There was an emerging interest in the Caspian, with the United States being the pushing party. At that time people were very skeptical about the possibilities of building Transnational pipelines like Baku–Jeyhan. It was considered as something impossible. However, with gas things were much more advanced. There was a lot of progress made on Turkmenistan. For example, Shell actually established a very strong office in Turkmenistan, spent a lot of money and was very confident of the possibility of producing gas in the region. The discussions about the transportation were going ahead quite productively. And if you would feel the atmosphere of that time on the oil and gas society, the perception that Trans-Caspian would happen was there. There was much more skepticism about the Blue Stream that just emerged at that time and people would call it the Blue Dream. But we know what happened actually.

The Blue Dream became a reality. And the prospects of exploring Turkmenistan have been postponed for many, many years. Let’s try to see actually what happened at that time. Maybe, it would help us to avoid mistakes this time. And we also need to take in account that although now we see development of projects like Nabucco, like the White Stream, something that is extremely difficult but at that time there were no less difficulties. Experience shows that everything is possible if the attitude is good. But with Trans-Caspian, there was a factor which at that time was not understood correctly. And this was the factor of what the host country would feel into getting engaged in this kind of business. At that time many of you remember that Turkmen-bashi came with proposal of the necessity of the bridging fund. The figure was discussed, initially it was half a billion dollar. And then it came down to 300 million. But by many parties involved this was rejected as something impossible. Although, in business it is not unusual, a kind of a bonus payment of region funds if you can name it as you like. But the point of Turkmen-bashi at that time was that: “Well. I have three questions. One question is that how much money I will receive?” We cannot compare e.g. Turkmenistan, especially at that time, with Ukraine, where problems might be similar, but Ukraine has much more diversified economy. But with Turkmenistan gas revenue was something for survival and the question that was put forward was “how much I will receive?” “Will this be sufficient for me to survive if other parties will stop paying? Second question was “when I will receive this money?” whether there is a number of years when, e.g. Gasprom would stop paying Turkmenistan, there would be years of zero revenue. And the third question was “how this going to be transported.” And this was related with scheme starting from Turkmenistan and finishing to the final market from where take or pay guarantees would come. Unfortunately, all these three questions remained unanswered. Otherwise, we would have possibly developed Trans-Caspian at that time. The first issue was related to volumes.

Gas price was not that high at that time but to make higher revenue you should export more volumes. The issue of volumes became very sensitive when, on one hand, Gasprom suggested to Turkey to build Blue Stream and asked for commitments of the gas volumes. On the other hand, Azerbaijan had very promising discovery of Shakh-Deniz. And Turkey one day became not only oversubscribed but with a potential Turkey could not respond. So, this caused the limitation on how much gas could Turkmenistan possibly sell to the West. And when this big figure appeared less than it was necessary for survival it was actually the first nail into the coffin covering the Trans-Caspian. Next thing was that timing, and the issue of transportation was left unanswered. The typical attitude when discussing this issue was “Ok, let’s start and then we will see”. Yes, this is a legitimate approach. Somebody who wants to build a house may say: “What I would do first is I to buy bricks, and then I will start building and then I will decide, maybe I will do two stories or three stories”. It’s possible. But if we tried to put ourselves in the situation of Turkmenistan at that time, maybe nothing really has changed, if not it’s not more aggravated today. Unless they can see the whole building upright, there will be very difficult to take a decision. And what is the decision? The decision at that time, which Shell would want, would be a production-sharing agreement would have given clear terms of exploration production. The same is today.

There is no single contract with Turkmenistan with any of Western companies. And the question is – why? Some time ago people would argue: “Do you think there is real gas?” My answer would always be: “Why would Shell spend money in Turkmenistan? Don’t you trust people like this?” So, if we expect Turkmenistan and today even Azerbaijan to go into the contracts with Western countries, in other words this means to allow Western companies for exploration production, they need to see the whole picture. They need to have answers to all these three questions. Now Gasprom has lot of advantages: Gasprom can act as a corporation, Gasprom can act as a private party which can open unlimited financing on whatever it could see as beneficial. The Blue Stream example: Gasprom wanted to kill three birds with one stone, and it was successful. First, it built the Trans-Caspian. Second, it created the cloud over Georgia, that any gas-cut would be possible because it would not cause really interruption with supply to Turkey, and Armenia has some storage which would make it safe. And third, Gasprom increased its presence on the Turkish market at the expense of Turkmen gas. So, the same kind of ability to play interest against each other, we have today; and Mr. Nemtsov raised a very interesting question about the South Stream. Exactly, South Stream is an instrument. It may not be a real goal.

And real goal could be to take over Nabucco. To control Nabucco is much more interesting thing for Gasprom than building South Stream, because controlling Nabucco will mean much stronger leverages in Turkey and more sure isolation of Caspian from Europe. I would stop here but what I wanted is to look deeper into the things, because when we are talking about Nabucco and Mr. Boyden Gray, Special Envoy on energy issues of President Bush, has said very precisely: “Nabucco is a metaphor”. We need to understand the difference between the goal and the instruments. And the goal is to link Caspian with Europe to make Western companies get to the Caspian region, not only Turkmenistan and Azerbaijan and Kazakhstan, because that is what Foreign Minister of Azerbaijan actually was talking for long time, this should be a complex resolution, this should be a team work of the Caspian countries. Thank you very much.