AGRI and a new energy future for the Black Sea region

2011 I was briefly involved in a project called AGRI – the Azerbaijan, Georgia, Romania Interconnector. I was intrigued because even if this project was daring and exotic, it had immediate appeal to me.

But I underestimated the signs of the time. Big-ticket pipeline projects were sucking off much-needed media exposure and political will. A sky-high oil price flooded the coffers of hydrocarbon-producing countries with copious cash reserves. Russia was still the darling of Europe and Putin was courted assiduously. Plus, LNG as a fuel was still a silly fad coming from those shale gas-totting Gringos.

Still, from a purely logical perspective, the project made a horrible lot of sense in 2011 already as it was the natural conduit for gas from the Caspian region towards a gas-hungry region of Europe, the Eastern Balkans. Contrary to conventional belief, this option would also have been cheaper as a transport solution than any of the pipeline options in mountainous Turkey.

But this would not have been the first project that makes sense and still does not get thumbs pointing up and it will sure not be the last.

How different things are today, a mere 4 years after my Black Sea days? The Ukrainian conflict has made Russia show its cards and that it would not hesitate to use the energy weapon if it thought it would suit its political aims. The gas lifeline of the European continent, the old Soviet pipeline system, was running through separatist territory now and they were threatening to blow it up at any time. It has exposed the fatal frailness of those steel arteries for the security of the continent’s energy supply.

But most importantly, Russia teams up with Turkey for an energy partnership that will surely squeeze everyone else out. This does not bode well for other energy producers – first of all – Azerbaijan.

I have already described this country’s options in another post but let’s slam the most important factors on the table. Azerbaijan is a landlocked country. Stop shouting – I know it’s on the Caspian Shore but let’s be frank. An inland water body, as large as it may be, has no connection to the world’s oceans and hence vessels in it remain stuck there forever. No connection to the marine trading routes of the world.

This means that the only way out for Azeri oil and gas is the steel-in-earth version. This limits the options for them as every single country on the route wants cash for the transit rights pushing up the price of transport. The longer the way, the more of those monsters linger and they want their stomachs filled. Limiting the voracious gobblers on the way is, therefore, paramount.

But as long as a sky-high oil price gave everyone the feeling that any otherwise unrealistic project would fly, down-to-earth options are not even on the table. When Azerbaijan had the feeling that there would be fierce competition for their gas, they gambled around. When Nabucco and other pipeline projects competed for their gas supply, they dithered and waited. When Romania and Bulgaria had the feeling that first Nabucco and then South Stream would anyhow take care of future supply security, why bother?

A project such as AGRI, however sensibly it would possibly be put together is not very sexy compared to those White Elephants – at least on first looks.

However, as I said above: Times have changed and the genie won’t go back into the bottle anymore. It always made good sense to think about regional stable alliances with physical markets that are close and similar for the Azeris – they just would not listen in the past. It always made good sense for Eastern Balkan markets to seriously develop supply diversification and a measure of lesser dependence on the Russian bear but as long as those pipeline monsters were there, they would not listen. As nobody would have.

The world over, scores of perfectly reasonable projects did not even stand a chance to be considered because the general madness and high prices made energy players hatch ever more grandiose projects and dreams, wagering that the market would remain stellar forever and swallow whatever folly came to be.

But it didn’t. As so very often those outrageous dreams are exactly this – outrageous.

Now, it’s back to the feasible, to the mundane, to the stuff that makes economic sense in a world with more sensible prices. But those projects are hard to find as many of the more sensible folks have either joined the bandwagon of those going for LaLa land or have gone disheartened as they could not afford to hold out against the unrealistic twinkle of the bubbleheads.

But that does not mean that they are not here anymore. AGRI may have had an overblown beginning as its first steps as a project were shrouded in some foolish expectations as well. But there is a solid core of economic good sense to it and we want to get it exposed.

One of the problems LNG always had is the colossal upfront investments necessary. Hardly anyone can afford them and it needs a very deep, strong, and growing international market to justify them. Those investments are so big because everything that happens in the supply chain is big – and I mean that in a very literal sense.

Vessels are big as distances are great so you want economics of scale to make them less daunting. Tanks need to be big as one will need to fill those huge vessels and liquefaction trains need to be big as those big tanks need rapid filling. Harbors have to be very deep as those super-large vessels have the draft of a multiple-story building and pumps have to be enormous as those vessels have to be turned over rapidly.

In the Black Sea, however, distances are not vast and vessels can be kept smaller which in turn leads us away from the monstrous vessels and from all the other big stuff. Because there is another world in LNG, where things are much more measured in size and hence much more manageable.

Mid-scale modular trains start at sizes about 10 times smaller than what one would normally find with the conventional type. They are modular so they are assembled at a workshop and put in operation as plug-and-play as the industry can imagine today.

A single 1 million-ton train on the Georgian coast would not be a huge investment. The ship transporting the LNG could be 5 times smaller than the conventional carriers and could stay away from expensive and hard-to-weld alloy membranes or even more expensive spherical tanks.

Processes would be simple and no complicated spiral wound heat exchange technology necessary and even the tank, a hugely expensive piece of equipment, could be much more measured in size.

A 1 million ton project on the Georgian coast would likely cost no more than 5 or 6 hundred million USD everything included (yes, this includes the regasification plant and the vessel).

And the best is that it could be fully operational at this scale and gradually be expanded by adding further modules and vessels. This would be significantly cheaper than the first train.

That’s 1,3 bcm for around 500 million CAPEX exposure. What is the cost of putting up a pipeline through Turkey and then the Balkans?

But it completely circumnavigates the Turkey issue as its territory will not be touched anymore.

And, it provides LNG on the other side which is better than just Natural Gas as it can do things that Natural Gas could hardly accomplish. It would be there as a liquid helping the heavy transport sector to make the switch from diesel to Natural Gas. This is on the agendas of the European Union in its Alternative Fuels Strategy and on a host of other EU agendas.

It would help kick start a Black Sea LNG bunkering market as there would be a reliable supply of LNG for those wanting to switch from diesel to this very clean fuel.

Romania and Bulgaria together could start developing a Danube LNG strategy on the lower reaches of the river barging parcels of LNG up the river as far as Serbia and opening up the Balkans to clean fuels.

AGRI could start quickly and grow with the market. It would start to develop some more independence from supply cuts for Balkan countries and who knows, Ukraine and Moldova might be interested in joining in and it would give Azerbaijan a much-needed safety valve for their gas volumes.

Crazy times are over – it’s time to come down to the down-to-earth business and do what makes sense for the region.