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    Azeri Gas Needs High Price in Italy


Current wholesale prices in Italy do not support the delivery of gas to Italy, but the expectation is that this will change.

by: Dalga Khatinoglu, Ilham Shaban

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Azeri Gas Needs High Price in Italy

A government source in Baku has told NGW that Azerbaijan will offer gas to Italian customers at about 5-10% less than the average import price, as it already does for Georgia and Turkey. “There is no doubt that our gas will be competitive in the Italian market, even with our $250/’000 m³ price redline for EU,” he said.

A top Socar official told NGW that even with the lowest gas price scenario, SGC is profitable and breakeven will come sooner than was projected in 2013. The active construction period was 2016-2017, when the goods and services were very much cheaper than the 2013 estimates, leading to a 12% cost saving.

He said that one of the reasons for selecting TAP instead of West Nabucco was the higher gas price market as well as lower pope route costs. “We do not expect pessimistic scenario any more for the gas price."

A BP source also said that the payback period for the $20-bn worth Azeri-Chirag-Guneshli oil fields project was only six years, while the first phase of Shah Deniz – including the South Caucasus pipeline – broke even in under 10 years. Both projects are operated by BP.

The dominant supplier to Italy is Russian export monopoly Gazprom, which sold gas to the EU at an average price of $190/’000 m³ last year, rising above $220/’000 m³ in the first half of this year.  However, the price is expected to increase in coming years, as it will have to if Shah Deniz gas is to compete profitably. Azerbaijan sold gas to Georgia at $167/’000 m³ and below $200/’000 m³ to Turkey in 1H 18, before Shah Deniz 2 came on stream fully.

The $40bn project is cheaper than originally planned and the cost is split between the upstream field development work in the Caspian Sea and the pipeline from there to southern Italy, known as the Southern Gas Corridor (SGC).

Despite the continuing challenge that Italy’s new government poses to the Trans Adriatic pipeline (TAP), the European section of SGC, Azerbaijan and shareholders are confident the SGC will be built on time.

Half of Italy’s gas supplies come from Russia, and the rest from European and African suppliers, including LNG. 

Socar deputy vice president Vitaliy Baylarbayov said during an Atlantic Council webcast briefing in Washington September 12 that there is no “plan B” for TAP. “I am confident that the Italian section of TAP will be completed on time (2020),” he said. Despite challenges in Italy, the Greek and Albanian sections of TAP are about 91% complete, with about 700 km in the ground.

The vice president of BP Emily Olson also said that despite “complex problems” she is “very confident” that the project would be complete on time. BP is a shareholder in the SGC and operator of the gas field that will supply the gas: Shah Deniz, in the Caspian Sea.

TAP’s head of communications Lisa Givert told NGW that the consortium is continuing its positive engagement with the Italian government. “The construction and operation of TAP are authorised by the single permit issued in 2015 further to the positive environmental impact assessment of the project of 2014. The verifications of compliance (VoC) for micro-tunnel drilling, on-shore pipeline installation and the construction of the pipeline receiving terminal have been assessed and approved. The assessment of VoCs for the offshore pipeline installation will follow”.

She added that the start of preliminary works at the pipeline receiving terminal is expected to be launched in the next months and offshore pipeline works are planned to be carried out in 2019.

Phase 2 of SGC still vague 

Regarding the second phase of SGC, which aims at doubling deliveries to the EU after 2026, gas deliveries will be a lot cheaper as much of the infrastructure is in place. 

None of the ten clients of 16bn m³/yr Shah Deniz stage 2 gas has started negotiations with Azerbaijan or other possible suppliers to increase gas intake from the SGC expansion phase, a source told NGW. Recently, Azerbaijan’s energy minister said that with the help of interconnectors, SGC expansion would be able to meet about 40-50% of the Balkans' gas demand. The statement shows that the country eyes new markets and clients, although Romanian offshore gas poses a threat to these assumptions.

Given US sanctions on Iran, and the problems around the TransCaspian pipeline to transit Turkmen gas westwards, it seems only Russia and Iraq will be able to join Azeri gas in time for the second phase of SGC towards the end of the next decade. Azerbaijan would have significant gas boom in future as well and can contribute in SGC expansion itself.