Shah Deniz Consortium choose Trans Adriatic Pipeline

After two years of deliberation, the Shah Deniz Consortium (BP, Statoil, Socar, Lukoil, Nico, Total ) has decided to connect the Trans Anatolian Pipeline (TANAP) to the proposed Trans Adriatic Pipeline (TAP), instead of the longer Nabucco West pipeline.  TAP will carry Caspian-origin natural gas through Greece and Albania to Italy.  Nabucco West had planned to carry the gas northward to Baumgarten, Austria.  Speaking on behalf of the consortium, BP's regional director Gordon Birrell made the announcement to journalists in Baku on June 28, 2013.

The decision appears to have been made based on a number of factors such as  lower construction costs because of a shorter pipeline route, and  higher gas prices in Southern Italy.  Andrew Neff, an analyst with the Moscow market research firm IHS, said that a tipping point may have been the State Oil Company of Azerbaijan (SOCAR)'s purchase one week earlier of a majority stake in the Greek gas company Desfa.  "This gives Azerbaijan a direct supply relationship with Greece," he commented.

The government of the United States welcomed the announcement.  A statement issued by the US State Department called the choice "another important step in the process of advancing Europe's energy security and promoting competition in the supply of energy resources."  European Commission President Jose Manuel Barroso also expressed pleasure.  "This is a shared success for Europe and a milestone in strengthening the energy security of our Union," he stated.

Western support has little to do with the amount of gas that will be delivered to Europe.  At 6 bcm per year, TAP will only carry about 1% of European gas consumption.  The financial rating company Fitch Ratings commented that the limited capacity meant TAP would probably not contribute any downward pressure on gas prices.

Rather, the importance of TAP, and the TANAP line to which it will be connected, is that it challenges Russia's hold on natural gas exports to Europe.  US Heritage Foundation analyst Ariel Cohen called TAP an achievement, especially for Azerbaijan.  "This is the first gas pipeline from the former Soviet Union that is not controlled by Russia," he said.  "This is a precedent and a model for Europe to get gas by pipelines from the Caspian region or from other regions without the Russian control."

A country that will benefit substantially from the new pipeline is economically beleaguered Greece.  Prime Minister Antonis Samaras said the decision to use his nation as a transit zone was a vote of confidence in his country.  Samaras issued a statement that TAP would invest 1.5 billion euros (approximately $2 billion dollars) in Greece to construct the pipeline, would generate 2,000 direct jobs, and an additional 10,000 jobs in companies that would be supporting the project.  "After the TAP announcement, the 'disaster scenarios' for Greece and its exit from the euro definitely stop," he said.

Trans Adriatic Pipeline Takes the Lead

With only weeks to go before the Shah Deniz consortium chooses which route will bring Caspian gas to Europe, the Trans Adriatic Pipeline (TAP) has taken a commanding lead.  The decision is supposed to be made by the end of June, according to the director of the State Oil Company of the Azerbaijan Republic (SOCAR) Rovnag Abdullayev.  "At present, the work is under way to choose a route of transporting Azerbaijani gas to Europe," he told Trend.  "The final decision will be made at the end of the month."

TAP has a number of advantages over Nabucco-West, its rival for the fuel that is scheduled to be delivered to the western border of Turkey by the Trans Anatolian Pipeline (TANAP).

• It is shorter.  TAP will extend 800 km, while Nabucco West will stretch 1300 km.
• It is cheaper to build.  Because of the shorter distance covered, TAP is estimated to cost $500 million less. 
• It has political support along the route.  Greece, Albania, Croatia, Montenegro and Bosnia-Herzegovina all support construction.  The Baltic countries hope to gain access to the line through an  Ionian Adriatic Pipeline.
• Azerbaijan stated in February they prefer TAP.  One possible reason is that TAP will not cross directly through former Eastern bloc countries, and Azerbaijan might want to avoid antagonizing Russia.
• Europe has approved TAP.  In May, the European Commission granted TAP the Third Party Access exemption, giving TAP permission to offer capacity for export of gas for the next 25 years.  Previously, the Europeans had given their backing to the Nabucco project.
• TAP will strengthen the Greek economy by providing transit revenues to the beleaguered nation.
• Israel could use TAP to ship its new-found gas to Europe.  Valeria Termini, vice president of the Council of European Energy Regulators, has held talks with senior Israeli officials on the project, according to Platts.

Despite all the advantages to the TAP route, there is still backing in some quarters for the Nabucco-West route to Austria. "Both have advantages and disadvantages," said Gulmira Rzayeva of the Azerbaijani Center for Strategic Studies.

Trans Adriatic Pipeline Receives Funding Commitment

The Trans Adriatic Pipeline (TAP), the southern competitor for carrying Caspian gas from the Turkish border to Europe, has received an economic boost.  British Petroleum and Total have signed an agreement with the State Oil Company of Azerbaijan (Socar) to fund the pipeline, designed to bring natural gas to Italy.   (The proposed Nabucco West would carry gas from the Turkish border to Baumgarten, Austria).  "These funds will contribute toward continued work in several important areas during the period running up to the final routing decision, expected in 2013," said a TAP spokesman.

Kjetil Tungland, TAP's managing director, issued a statement, "The signing of this agreement is a significant vote of confidence in the quality of TAP's technical and commercial solutions from key industrial players, and underpins the cooperation agreement that was signed between TAP and Shah Deniz in June."

While the Shah Deniz consortium has not yet decided between TAP and Nabucco West, TAP's chances have been improved by both the funding, and by the pipeline obtaining government support.  Both the Greek and Italian governments have agreed to support the pipeline, something they previously had not done.  According to the Greek Foreign Ministry, Greek Deputy Energy Minister Makis Papagergiou and his Italian counterpart reached a "close cooperation agreement" to support the pipeline.  The Italian Foreign Ministry added, "Athens and Rome have decided to back the project after Aszerbaijan's Shah Deniz 2 consortium chose TAP to transport gas to western Europe.  Nabucco West remains an alternative..."

With the Shah Deniz consortium sitting on the fence, other interested parties are also trying to cover all their bets.  the European Commission, which had previously said that Nabucco was a priority European project, has backed away.  It now says that it does not favor any project or route over another, as long as it carries Azeri gas, would diversify EU supplies, and would reduce EU dependence on Russian resources.  Similarly, BP is trying to support both TAP and its rival, Nabucco West.  "Our aim is to be involved in all aspects of the project so the aim is to be involved in Nabucco and TAP as well, and this is still being negotiated," BP spokesman Toby Odone said.

Nabucco West Wins Semi Finals

Nabucco West, the European remnant of the EU supported Nabucco pipeline, has been chosen by the Shah Deniz 2 consortium as their potential northern route.  The original Nabucco pipeline, now known as Nabucco classic, was shorn of its length in Azerbaijan and Turkey by the intergovernmental approval of the TANAP pipeline.

The victory of Nabucco West is not a small one.  The lead investor in Shah Deniz 2 is British Petroleum, and BP had their own pipeline proposal:  the South East Europe Pipeline (SEEP).   Nabucco West was probably able to secure the consortium's support because it has transit approvals from the countries through which it would run; SEEP had not advanced beyond the concept page.

"The Nabucco West project, with a route running from the Turkish-Bulgarian border to Baumgarten (in Austria) has been selected as the single pipeline option for the potential export of Shah Deniz Stage II gas to Central Europe,"  BP announced.

Nabucco welcomed the news.  Reinhard Mitschek, managing director of Nabucco Gas Pipeline Internation, issued a statement that, "This decision is an important milestone for the Nabucco project and a major step towards the final investment decision."

While Nabucco West has been chosen as the consortium's choice for a route to Central Europe, the consortium has also picked the Trans Adriatic Pipeline (TAP) as their choice for a delivery route to Southern Europe.  Nabucco will chose in 2013 whether the gas will go north or south.  So, the semifinals in this competition are over, and the final competition will face off Nabucco West and TAP.

EU Energy Commissioner Guenther Oettinger did not take a position on which route was preferable.  "With this pre-selection, we are a step closer to getting gas directly from Azerbaijan and other countries in the Caspian region.  Whatever the final decison on the whole route from the eastern part of Turkey to Europe, Azerbaijani gas is certain to come to Europe," he wrote.  "This is a success for Europe and for our security of supply."

Nabucco Reduced to Rump Project

With the announcement of the proposed Trans Anatolian Natural Gas Pipeline (TANAP) in December 2011, Nabucco has recreated itself as a pipeline proposal that begins at Turkey's western border.  Instead of being the European Union's premier pipeline project in the Southern Energy Corridor, it is now a regional competitor to the Trans Adriatic Pipeline (TAP) and the Interconnector Turkey Greece Italy (ITGI).

The weakness of the original Nabucco proposal could never be overcome:  there was no source for the natural gas that the pipeline was supposed to carry.  In January Sergey Pravosudov, Director of the Russian Institute of National Resources, said, "Europe has long been discussing supply alternatives.  However, nothing is being done in their main project Nabucco.  Europeans themselves admit that the more time passes the fewer chances remain to breathe life into Nabucco."

Because of this inaction, Turkey decided it could not wait for the European actors to get their act together, and Azerbaijan did not want their market to be limited to Russia.  According to a report in Hurriyet Daily News, a Turkish Foreign Ministry official stated, "With the economic slowdown that will reflect in the use of natural gas, Europe put the breaks on."  A Turkish Energy Ministry official added, "Azerbaijan wanted to sell the gas that it will produce from Shah Deniz 2 gas fields.  It did not want to sell it to Russia and did not have the time to wait for the EU to decide."  Azerbaijani parliamentarian Valeh Alasgarov characterized Europe's approach as indifference.  "No one takes care of this project," he said.  The result was TANAP, an abridged Nabucco to carry 16 bcm of natural gas from the fields.  Turkey would consume 6 bcm themselves, and pass 10 bcm to its Western border for onward movement to Europe.

Mark Adomanis, a contributor to Forbes magazine, declared Nabucco a failure.  As a project to demonstrate European unity against Russian energy policy, the pipeline showed the European Union as "almost comically incompetent and incapable."  Adomanis noted that in 2012 Gazprom was arguably more deeply entrenched in Europe than it ever had been.  Jamestown Foundation's Vladmir Socor noted that while the Nabucco shareholders would never leave the consortium, there were chinks in the armor.  German shareholder RWE was making overtures to TANAP, and the Turkish government (owner of the shareholder Botas) was prioritizing TANAP which was "easier to implement" than Nabucco. Hungary's MOL went on record that as long as there was no definite source of natural gas supply, no final investment decision could be reached on the project.   Julian Lee, an analyst at the Center for Global Energy Studies, declared the project dead.  "I think that Nabucco in the way that it was originally envisaged as a pipeline running from Turkey's eastern border all the way to Europe...is probably over.  I don't think that is going to happen.

In April, Hungary's Prime Minister Viktor Orban met with Gazprom CEO Alexey Miller.  Less than a week later, he announced that MOL would leave Nabucco in favor of South Stream.  In an email, they held out hope that they could rejoin a Nabucco in a different format.  MOL cited "uncertain costs and gas sources and, with the current structure and project management, the implementation of the Nabucco project is not secured.  We believe in the South Corridor concept, that could eventually also include a re-considered Nabucco."  

Austrian shareholder OMV began to consider a Bulgaria to Austria version of Nabucco.  It would use the intergovernmental agreements and regulations that had been negotiated for the original Nabucco, and would cost considerably less since the distance would be shorter.  The consortium submitted the modified proposal for a 1,300 km pipeline to the Shah Deniz consortium.  Nabucco's Managing Director Reinhard Mitschek put the best face he could on it:  "We are convinced that we have submitted a competitive and comprehensive proposal...and that this proposal represents a win-win situation for our shareholders and for suppliers alike."  In changing its size, Nabucco West may have lost the support of the EU.  European Commission spokeswoman Marlene Holzner told the press it did not matter whether Nabucco or a rival won, as long as the EU got direct access to the Caspian gas, and that the initial 10 bcm capacity could be increased in the future.

Nabucco's construction costs for a 10 bcm pipeline are now approaching the per kilometer price of the 63 bcm South Stream pipeline, according to Investcafe's Grigory Birt.  Given the convergence in price, he predicted the new Nabucco had little chance for success.  "The lower the capacity of the project, the less profitable that project will be," he said.

While the final decision rests with the Shah Deniz consortium, the question remains if the European Commission will bring enough political pressure to bear to keep Nabucco-West in the game.  The original Nabucco was designed to carry only 5% of the projected natural gas needs of Europe, and Nabucco-West has less than one-third of the original capacity.  The new proposal does little to meet Europe's desire for a modicum of energy independence from Russia.

Trans Adriatic Pipeline Chosen for Italy

Trans Adriatic Pipeline (TAP) Managing Director Kjetil Tungland told EurActiv he has received a letter from the State Oil Company of the Azerbaijan Republic (SOCAR), inviting TAP to enter into "exclusive negotiations" with the Shah Deniz consortium.  SOCAR added the invitation was supported unanimously by all the members of the consortium, and the decision is final.  What this means is that the Interconnector-Turkey-Greece-Italy (ITGI) project, an alternative route to Italy supported by the Italian and Greek governments and whose members are primarily Greek corporations, has been eliminated from consideration because of the continuing economic turmoil in that country.  The Shah Deniz consortium is a group of companies led by Statoil and British Petroleum (BP).  Other members include SOCAR, LUKOIL, NICO (Iran), Total and TPAO (Turkey). 

TAP is sponsored by the Swiss energy company EGL, Germany's E.ON AG, and Statoil ASA from Norway.  A weakness of this consortium is that it lacks an Italian partner but, with the Shah Deniz decision supporting TAP, ITGI supporter Enel SPA of Italy has expressed interest in joining the TAP group.  "Enel is interested in all projects that bring gas to the country, includiing TAP," said Enel CEO Fulvio Conti. 

If built, TAP will carry 16 bcm of natural gas from the second phase of the Azeri offshore gas field, Shah Deniz.  They would pick up the gas at the Turkish border, and carry it 800 kilometers. While the Shah Deniz consortium has agreed to use TAP if it sends gas to Italy, it still has not made a decision to use that corridor, at all.  Harry Sachinis, CEO of the Public Gas Corporation of Greece (DEPA-an ITGI member) said, the Italian pipeline portion of the Southern gas corridor is only a "provisional decision."

Critics of the project point out that TAP has no intergovernmental agreement among the three countries (Greece, Albania and Italy) through which it would pass, although it was included in an Albanian-Italian bilateral from 2009.  They also says that unless Enel or another Italian firm joins the TAP group, it would be difficult to get Italian government permission for the project, according to Reuters.

Azeris and Turks Pursue Independent Course

While the major energy consortiums wait for Baku to decide among the Nabucco, TAP, ITGI, and BP proposals for the Shah Deniz 2 gas deposits, Azerbaijan and Turkey have moved on their own. The two countries have decided to build on the South East European Pipeline (SEEP) proposal, and upgrade existing pipelines through Turkey. This new pipeline proposal, called the Trans-Anatolian Gas Pipeline, will carry 16 billion cubic meters (bcm) of natural gas per year. This represents the 6 bcm Turkey consumes domestically, and a 10 bcm throughput to Europe, according to Robert Cutler of the Central Asia-Caucasus Institute.

Turkey and Azerbaijan signed an agreement on October 25 to allow the 10 bcm to transit Anatolia. At the time, most analysts thought this was a prelude to Baku's accepting one of the existing Southern Corridor plans. The proposed owner of the pipeline, SOCAR, had a different idea. Rovnag Abdullaev, SOCAR president, announced on October 27 the two countries would build the Trans Anatolian Gas Pipeline. This announcement was ignored until late November, however, when Abdullaev repeated it at the Third Black Sea Energy and Economic Forum, according to an article by Cutler in the Asia Times.

The same article reports that Turkish officials estimate the cost of the TAGP will be 5-6 billion dollars. This would be a significant savings over Europe's preferred Nabucco route, estimated between 10-19 billion dollars.
The TAGP is a clear alternative to other Southern Corridor proposals, but does not necessarily foreclose being incorporated into a larger project at a later date. Turkish Minister of Energy and Natural Resources Taner Yildiz said the TAGP would reduce the cost of the larger proposals, while casting doubt that they would ever be built. "The implementation of such projects as Nabucco, ITGI and TAP seemed doubtful," the Asia Times quotes.
Azerbaijani Foreign Minister Elmar Mammadyarov disagreed. At a Washington DC conference in October, he said the Azerbaijani-Turkish transit agreement meant the Southern Corridor was one step closer to being launched," according to UPI.

Shah Deniz Gas To the Balkans

Plans to deliver natural gas to the Balkans from the Shah Deniz offshore energy field are proceeding. In July, Ankara and Baku signed an agreement clearing the way to allow the international energy consortium that is developing the field to ship gas through existing pipelines in Turkey.

The amount of gas from the initial Shah Deniz project is limited, so Balkan leaders would be interested customers primarily for energy security, says the Atlantic Council's senior fellow Borut Grgic. The gas should be available for delivery in 2014 (Today.AZ, 09 August 2010).

Meanwhile, the consortium operating Shah Deniz 2 has begun talks with potential partners, according to the Norwegian energy company Statoil. (Today.AZ, 06 August 2010). This would bring an additional 10 bcm a year of gas onto the market, and would represent a 1/3 increase in Azeri natural gas production--and becoming the source of 1/4 of all Azeri natural gas.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.