Europe pins hopes on opening Southern Gas Corridor

By Ian Simm

The European Union has made no secret of its desire to reduce its dependence on Russian gas imports, and the opening of the Southern Gas Corridor is seen as pivotal to weaning the bloc off Gazprom’s teat.

EU Energy Commissioner Guenther Oettinger last week said that opening the corridor was a priority and that 2013 would see a final decision made about the pipeline’s route as well as the final investment decision (FID) on the entire project.

Oettinger told Azeri news agency Trend: “The aim of the Commission has always been to open the Southern Gas Corridor for the EU in order to link directly and physically the EU gas market to the largest deposits of gas in the world in the Caspian Sea Basin and the Middle East.”

The plans currently centre on transporting gas from the second stage of Azerbaijan’s offshore Shah Deniz field (SD2) to Europe by pipeline.

Pipeline planning

The plan is first to pipe the gas through Turkey and to the doorstep of Southeast Europe via the Trans-Anatolian Gas Pipeline (TANAP), which has an initial capacity of 16 billion cubic metres.

From there it will be piped into the heart of Europe; however, the decision has yet to be made about the route it will take. A decision is expected to be made by June, but Trend has reported that Shah Deniz gas may not reach Europe until 2019.

BP, the operator of Shah Deniz, has identified the Nabucco West and the Trans Adriatic Pipeline (TAP) – each designed to carry 10 bcm per year of gas – as the final candidates for deliveries to European customers. It is expected to select one of these shortlisted routes later this year.

In a recent interview with Bloomberg, Alasdair Cook, BP’s vice president for Shah Deniz development, said his company was dedicated to the TANAP project. He said that BP would sign a commercial agreement in the next few months.

Cook also indicated that BP’s entry into TANAP was part of a wider US$40 billion investment programme focused on SD2. In addition to this upstream development project, BP will also work to open a corridor for SD2 gas exports.

According to Cook, the super-major will oversee the expansion of the capacity of the South Caucasus Pipeline (SCP), which is currently pumping Shah Deniz Stage 1 (SD1) gas, from 9 bcm per year to 25 bcm per year. This will cost around US$25 billion.

The company will also participate in the construction of TANAP and a connecting pipeline into Europe. The governments of Azerbaijan and Turkey recently ratified an agreement on TANAP, which is set to carry a price tag of around US$10 billion. The pipeline project is currently split as follows: the State Oil Company of Azerbaijan Republic (SOCAR), the project’s operator with 80%; Turkey’s state pipeline operator Botas, with 15%, and Turkish Petroleum (TPAO), with 5%.

SOCAR has invited other members of the Shah Deniz consortium to join TANAP. It has offered 12% to BP – which the super-major announced in late January that it intended to buy – and hopes to transfer another 12% to Norway’s Statoil, which is in charge of marketing Shah Deniz gas. Meanwhile, it also intends to sell 5% to France’s Total.

These firms have also struck agreements with Nabucco Gas Pipeline International (NGP), the group backing the Nabucco West route for SD2 gas shipments to Central Europe, and TAP, which hopes to pump the gas across northern Greece and Albania into southern Italy. BP, Statoil and Total may eventually take as much as 50% in either pipeline, depending on which of the two wins the contract to transport gas from SD2 to Europe later this year.

BP and its Shah Deniz partners have promised to make a final decision on the issue in the second half of 2013. Gas from SD2, which will see output peak at 16 bcm per year, is now scheduled to flow in 2018.

The next phase of development will see the Azeri field produce an additional 16 bcm per year, bringing total output up to around 25 bcm per year. Around 10 bcm per year of SD2 output is slated for delivery to Europe – not enough to fill both Nabucco West and TAP.

However, it is not guaranteed that 10 bcm of SD2 gas will be available for Nabucco West/TAP owing to increasing Turkish demand.

Euro-Russian relations

Oettinger told Trend that the European Commission was neutral as to where the gas is piped to in Europe, adding that it equally supported both projects.

He said: “Our policy remains that we firstly want to see a dedicated pipeline to be built outside the EU, and if its capacity is limited at the start, it should be ensured [that it] legally and technically [can] increase [its] capacity to transport higher volumes at a later stage when these become available; and secondly, we want a clear and transparent legal framework for the pipeline, which would ensure uninterrupted gas supply to the EU.”

This brings us back to the EU’s issue with dependence on Russia. With the bloc in economic disarray, the sense of continuing to rebuff an increase in trade with Russia could be questioned.

Trade between Russia and Europe is currently worth more than 300 billion euros (US$393 billion) per year and Russia supplies Europe with around 20% of its gas.

In October 2012, former German Chancellor Gerhard Schroeder, the chairman of the Nord Stream gas pipeline consortium, was quoted by Deutsche Welle as saying: “If Europe wants to assert itself in global competition, this won’t work without Russian gas in particular”.

Nord Stream is a twin pipeline system that runs from Vyborg in Russia to Lubmin in Germany through the Baltic Sea. The pipelines cross the exclusive economic zones (EEZs) of Russia, Finland, Sweden, Denmark and Germany. Completed in April last year, the twin 1,224-km pipelines have a total capacity of 55 bcm, and will pipe gas to Europe for at least 50 years.

But there have already been reports that levels of Russian gas coming into Europe have not risen since Nord Stream’s inauguration, suggesting that the gas is being sent through Nord Stream instead of via Ukraine, where disputes over back payments have still to be fully resolved.

However, with Gazprom currently facing an anti-trust investigation from the EU regarding competition, it seems unlikely that the union will be in any hurry to strengthen ties.

When contacted about creating distance from Russia, the European Commission told me: “Russia will continue to be our partner in the future. Gas imports from Russia are not likely to decline in absolute numbers. We would like to diversify supply (more sources); this is why in addition to Russian partners it is our priority to get gas from Azerbaijan via TAP/Nabucco/TANAP.”

The Commission added: “Gas consumption in the EU will increase in the medium term – also as a back up or in addition to renewable energy because gas power plants can be turned on or off easily on demand. Gas from the Caspian region should cover this increase of demand.”

Russia’s answer to the SD2 pipe options, South Stream, is envisioned to pump Russian natural gas to Europe via the Black Sea and Balkans, bypassing transit countries like Ukraine. A rival to the Nabucco West and TAP projects, the US$39 billion venture will have an annual capacity of 63 bcm per year of gas. At the request of Russian President Vladimir Putin, Gazprom held a groundbreaking ceremony on Russia’s Black Sea Coast for the first link in the pipeline in December.

Putin has prioritised the project despite consensus among energy experts that it is too expensive and unnecessary, and he appears to be the driving force behind the project, with Gazprom signing related deals with other Balkan countries in recent months.

The EC told me: “South Stream has started construction on Russian territory only. On the EU territory, there is no final route decided and vital environmental impact assessment studies, which might take years, have not been carried out yet. South Stream is not a priority for the EU because it would most likely re-route Russian gas that currently is delivered via Ukraine.”

On February 25, Matt Bryza, director of the International Centre for Defence Studies (ICDS) and former US ambassador to Azerbaijan, told New Europe: “I think strategically knowing the people I do in Brussels and elsewhere that they would like it to be Nabucco. Nabucco was the flagship EU project. TAP wasn’t, Nabucco was. And there are other reasons why I think the EU overall people maybe on balance favour Nabucco West.”

“For example, the markets served by Nabucco West will be the ones that are most heavily dependent in Southeast Europe on one major supplier. That said, I also think the European Union will be absolutely fair, [and] will not pressure anyone on this.” The Shah Deniz consortium’s decision is eagerly awaited by both politicians and energy institutions throughout the region.

Both Brussels- and Moscow-backed projects for the Southern Gas Corridor are shrouded with at least some uncertainty. As the EU moves to make its energy ‘greener’, gas will play a pivotal role, and thus the demand for the new imports is likely to be there. However, with LNG export projects from major new gas discoveries – notably those in the Eastern Mediterranean and Mozambique, as well as Australia’s plethora of gas export facilities and ever increasing US unconventional output – there are plenty of options. It remains to be seen how competitive the price of gas transported through the Southern Corridor projects will be, but as the EU sees it, Europe needs secure supply of gas from non-Russian sources to protect it from geopolitical concerns about Gazprom’s role in Eastern Europe. Can you put a price on that? Brussels would apparently argue not.