IEA Releases Energy Survey of Black Sea Countries

The International Energy Agency today released its Black Sea Energy Survey. Most export routes for Caspian oil and gas to Europe – both existing and proposed – cross the Black Sea or some of its riparian states. This new study analyses how economic and energy developments, and in some cases the complex political and economic situations, of the Black Sea countries could affect the flow of Caspian oil and gas to world markets.

World oil and gas demand are expected to continue to grow. The Caspian Sea region is emerging as a significant supplier of oil and gas – not nearly so large as the Middle East, but possibly comparable to the North Sea over time. How the riparian states resolve the problem of energy through and along the coast of the Black Sea will be of high importance to Europe and the world over the next few decades. The study attempts to outline the possible developments of export routes through the region, a topic of renewable importance as news emerges about a potentially vast oil strike offshore Kazakhstan.

The survey describes the extreme variety of the energy sectors and policies in the states involved – from rapidly-growing and gas-hungry Turkey, which appears determined to reform its energy sector to align it with EU accession conditions, to oil-rich Azerbaijan. Bulgaria and Romania, together with the three Caucasian republics of the Former Soviet Union, are still undergoing the difficult transition from planned to market economy. But each of them also faces specific problems, such as the closure of a nuclear plant in Bulgaria, massive coal sector restructuring in Romania, or extreme reliance on energy imports in Armenia. All countries need foreign investment to support the expensive energy projects before them. Several have yet to create the stable and predictable investment climate needed to attract investment.

Regulatory reform has advanced at various paces in the five transition economies of the region. EU accession is a powerful motivation for Bulgaria and Romania – as well as for Turkey. Azerbaijan sees little urgency in regulatory reform, given the massive foreign investment flowing into its oil and gas sector. The electricity sector is perhaps the one which has undergone the most reform, although foreign investment has remained relatively low, including in Turkey and Greece.

State ownership of the energy industry is still the general rule in Black Sea transition economies, although the governments have expressed their intention to privatise their energy assets to varying degrees. The Bulgarian and Romanian governments have begun to privatise the refining sector. In all countries there is agreement (partially) to privatise electric utilities. Georgia has already privatised large portions of its electricity distribution. The largest assets slated for privatisation in the region are Romania’s oil company Petrom and its electric utility Conel. One of the major hurdles to attracting private capital is a system at very low electricity tariffs that are only slowly being hiked up to cover costs. Low collection rates are another headache.

Bulgaria and Romania depend on Russia for all their gas imports. Gazprom, the Russian energy giant, aims to expand its hold on transit countries and on distribution. It seeks to increase exports to Southeastern Europe, mainly to Turkey and Greece, and to safeguard against gas-on-gas competition from Azerbaijan. Russian gas exports to Turkey will probably more than double in the coming years, with the expansion of the overland pipeline through Romania and Bulgaria and the laying of the “Blue Stream” line across the Black Sea.

Georgia has gained significant importance as a transit country for both oil and gas. The Baku-Supsa oil pipeline has allowed oil companies in Azerbaijan to diversify their export routes since April 1999. The Northern route from Baku to Novorossiysk, although now enhanced by a rapidly built pipeline bypassing Chechnya, is likely to remain the least-favoured route with foreign companies. The legal framework is being laid for the construction of a main export pipeline from Baku to Ceyhan, but proven reserves large enough to finance such a project are yet to be found offshore of Azerbaijan and Kazakhstan. Armenia has been unable to capitalise on its transit potential because of political tensions.

There is a potential for the development of regional electricity markets in Southeastern Europe and the Trans-Caucasus. Recent studies are encouraging about the prospects of interconnecting Bulgaria, Romania and Albania with West European transmission system operators in Southeastern Europe.

The energy profiles of the seven countries presented here are very diverse: Bulgaria, Romania and Turkey are trying to reduce their heavy reliance on domestic coal by increasing gas imports. Azerbaijan relies almost totally on oil and gas. It is also the only net energy exporter in the region. All the other countries are net importers, ranging from Romania, which imports 39% of Total Primary Energy Supply, to Georgia (80%) or Greece (92%). Romania and Bulgaria have introduced competition in the downstream petroleum sector, but low domestic demand has discouraged major Western investment.

With the exception of Romania, which has significant resources of its own, natural gas consumption in the Black Sea countries is still low. The collapse of industry and the absence of natural gas in the residential sectors of both Armenia and Georgia, and the underdeveloped gas market in Bulgaria, limit the interest of the gas industry to transit and – in the medium term – to generate power.

Armenia’s only domestic “resource” is its nuclear power plant, which, like Bulgaria’s four older reactors, will be closed because of safety issues. Romania and Bulgaria will continue to rely on nuclear energy. Turkey plans to build a nuclear plant as well.

This study is a follow-up to the IEA’s 1998 study, Caspian Oil and Gas, which highlighted the Caspian Sea’s potential as a major energy source for both Europe and Asia.