“…The presidents of Azerbaijan, Georgia and Romania and the prime minister of Hungary signed a joint declaration Sept. 14 in Baku on the construction of a liquefied natural gas (LNG) transportation project, the Azerbaijan-Georgia-Romania Interconnector (AGRI). The proposed project would involve transporting Azerbaijani natural gas via pipeline to a 7 billion cubic meter (bcm) LNG export terminal on the Georgian coast and then shipping it via tanker to an LNG import facility on the Romanian coast. Once the Romania-Hungary interconnecting pipeline — the Arad-Szeged — is complete, the AGRI would also make Azerbaijan’s natural gas available to the wider Central European market.

The proposed LNG terminals are meant to alleviate Central Europe’s dependence on Russian natural gas and give Baku another export option aside from the current pipelines that allow it to export to Russia, Turkey and Iran. However, AGRI faces considerable infrastructural and political impediments, and likely is geared more toward achieving political ends. Rather than focusing on energy and export options, the countries involved in the project, particularly Azerbaijan, could be using AGRI to express their displeasure with Russia on several fronts. AGRI could also be a means for Azerbaijan to let Turkey know it is not happy about Ankara’s negotiations with Armenia and to remind Ankara that Baku has other energy transportation options.

Constraints to LNG on the Black Sea

The most obvious constraint to the proposed LNG project is material. The agreement among Azerbaijan, Georgia and Romania was very light on details, with no real explanation of where the projected $2-5 billion investment would come from. It is also not clear where the natural gas would come from, since Azerbaijan’s natural gas is already being sold to its neighbors, including Russia, which recently increased imports by 2 bcm at a premium price that it pays specifically to keep extra Azerbaijani gas off the market.

The project’s cost could be understated, considering that foreign involvement is necessary since none of the participating countries has the necessary LNG technological know-how. The Polish LNG import terminal at Swinoujscie, which Italy’s Saipem is to begin building, is expected to cost around $1 billion, while export LNG terminals can cost as much as $6 billion (or about half that, if indigenous technology is available). That already reaches the upper limit of the projected project cost and does not include cost overruns, or the cost of LNG tankers, or building new or upgrading old pipelines to supply the gas.

The project’s total cost, therefore, could be as much as $8-9 billion, which is a tall order for either tiny Georgia or the economically troubled Romania to take on. Azerbaijan has cash from its energy sales, but previously has passed on funding energy projects. If Baku paid for most of the AGRI project, it would be the first time Azerbaijan has funded something this significant. Therefore, attracting foreign investors would be central to the success of the project, especially since the only three companies currently involved are the energy companies of Romania, Georgia and Azerbaijan, each of which owns 33 percent of the project.

The project’s political constraints are even more significant. AGRI’s most important, and expensive, piece of infrastructure — the LNG export terminal — would be in perennially unstable Georgia, at the Azerbaijani-owned oil export terminal in Kulevi near Poti. Not only would this put the likely $6 billion facility 75 kilometers (slightly less than 47 miles) from the Russian-controlled breakaway republic of Abkhazia (where thousands of Russian troops are stationed), but it would make Georgia’s stability the key to the success of the entire project.

This is problematic for the project, considering Moscow’s penchant for sabotaging energy projects it opposes and oft-used tactic of cutting energy supplies. (For example, the Polish-owned Mazeikiu refinery in Lithuania — sold to the Poles against the Kremlin’s wishes in 2006 — has been troubled by a mysterious fire and a burst pipeline, both blamed on Russia.) It is therefore highly unlikely that foreign investors would want to bet on a multi-billion-dollar facility that is meant to provide an alternative to the Russian energy route but is located within what the Kremlin considers its sphere of influence — particularly not when the guarantor of the facility’s safety would be Tbilisi.

Also, the natural gas that is intended for the proposed LNG project would come from Azerbaijan’s Shah Deniz II natural gas project. The development of Shah Deniz II is years behind — the project currently is projected to become operational in 2018 — and $1 billion over budget. But the larger problem is that the natural gas from Shah Deniz II is already contracted — most will go to Turkey, and a small amount will go to Russia. It is unclear whether Azerbaijan plans to shift these supplies to Romania and Georgia should the LNG facility come online — something Ankara and Moscow would certainly not appreciate.

The Political Logic Behind the Project

Azerbaijan is known for its pragmatic approach to diversifying energy routes, with export options via Russia, Turkey and Iran. It is therefore unlikely that the difficulties associated with AGRI have somehow escaped Baku. Romania and Hungary are also aware of the obstacles the project faces, but from Bucharest and Budapest’s perspective building an LNG import facility on the Black Sea coast is not really dependent on the Georgian export facility. The Romanian import facility would be able to import natural gas from anywhere, allowing Romania to eliminate its dependence on Russian natural gas completely and giving Hungary the chance to tap into the LNG market, reducing its dependence on Russia.

Rather than a means of fulfilling energy needs, the AGRI project could be a way for the countries involved to put Russia on notice that they are looking at alternatives and that they are not pleased with Moscow’s recent political moves. Georgia’s participation is therefore obvious; Tbilisi takes every opportunity to showcase its anti-Russian attitude. Romania is displeased with Russia’s meddling in neighboring Moldova and the breakaway republic Transdniestria, to which Bucharest has cultural and historical links. Meanwhile, Azerbaijan is concerned by Russia’s extension of its lease on a military base in Armenia and the generally increasing military cooperation between Moscow and Yerevan, especially since Baku considers the Armenian presence in the breakaway province of Nagorno-Karabakh an ongoing irritation.

Azerbaijan could also be attempting to send a signal to Turkey. According to STRATFOR sources in the Turkish energy industry, Turkey is not in favor of the AGRI project. Turkey wants to tap into Azerbaijan’s Shah Deniz II natural gas field, and the last thing Ankara wants to see is an energy alternative that takes Azerbaijan’s gas to Europe via a non-Turkish route. Ankara would much prefer that Azerbaijan send its natural gas via either the Nabucco pipeline or the South Caucasus pipeline. Azerbaijan’s involvement in the AGRI project could therefore be a message to Ankara that it needs to invest in Shah Deniz II — and an expression of Azerbaijan’s displeasure about the Turkish-Armenian negotiations earlier in the year, which significantly hurt relations between Ankara and Baku.

Azerbaijan could be signaling to Russia that it is looking for alternative energy and political partners. That the signal entails a complicated project that might never get off the ground is beside the point. The real significance of the project could well be that Azerbaijan and Romania are willing to sit down with Russia’s enemy, Georgian President Mikhail Saakashvili, and get Georgia involved in a significant energy project whose main purpose would be avoiding Russian energy routes. The fact that Azerbaijan is leading the project and was willing to host the summit with Saakashvili and Romanian President Traian Basescu in Baku is certain to raise eyebrows and turn heads in the Kremlin. And that could very well have been the point of the Sept. 14 signing ceremony.