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    Southern Corridor Project: A “Fait Accompli”



The Nord Stream II project is not a sure thing at this point, says former US Ambassador Richard Morningstar, who believes the Southern Corridor is a done deal.

by: Drew S. Leifheit

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Top Stories, Caspian Focus, Liquefied Natural Gas (LNG), Pipelines, Nord Stream 2, Trans-Adriatic Pipeline (TAP) , Trans-Anatolian Gas Pipeline (TANAP) , Azerbaijan, Turkey, Ukraine, Iran, Expert Views

Southern Corridor Project: A “Fait Accompli”

Azerbaijan is complicated from a geopolitical standpoint – one just has to look at the map, says Ambassador Richard Morningstar, Founder Director of the Global Energy Center at the Atlantic Council. “It's in an interesting neighborhood to say the least,” he remarks, adding that the geopolitics of retaining relations with Turkey, Russia and Iran can get complicated.

As the former US Ambassador to Azerbaijan, Morningstar knows a thing or two about the country and the region. He's also been a US Special Envoy for Eurasian Energy.

Still, Azerbaijan, he says, has succeeded over the last 20 years despite its location, for one via the realization of the Baku–Tbilisi–Ceyhan (BTC) oil pipeline running from Azerbaijan to Turkey; meanwhile, notes Ambassador Morningstar, the Southern Corridor is in progress, and will eventually deliver gas to Turkey and eventually to Europe.

Ambassador Morningstar offered his insights to Natural Gas Europe in the interview that follows.

Mr. Ambassador, given Europe's dependence upon Russian sources of gas, what's your perspective on the Southern Corridor project and other alternative sources of gas?

The Southern Corridor will be important for gas. One must remember that at first it will only deliver 10 billion cubic meters (bcm)/year that will go on to Europe; there will be an additional 6 bcm/annum that goes to Turkey.

It is important that Europe develop more alternatives to Russia. Europe has made a lot of progress in the last 5-6 years to become more energy secure. But, it still has a ways to go. The Southern Corridor is not the only source that will expand energy security. 

Liquefied natural gas (LNG) will be important for Europe. They're quickly developing renewables. Infrastructure, interconnections, and storage facilities are very important as well.

What are your thoughts on Western diplomacy nudging energy projects along in places like Azerbaijan?

Western diplomacy has been very important. Obviously, the Southern Gas Corridor is very important to Europe. European countries have been heavily involved. The US has helped in the process at certain points, and played a major role back in the 1990s developing the Baku–Tbilisi–Ceyhan (BTC) pipeline. Certainly, Western diplomacy is not the only reason why this is taking place, but it has certainly helped a lot.

What's your assessment of how much Russia interferes in such plans?

I think Russia would be happy if the Southern Corridor did not happen, but I think at this point it's a fait accompli – it will happen. The Shah Deniz project has been approved and a final investment decision has been taken. Work is progressing on it and on the Trans Anatolian Pipeline (TANAP) that will cross Turkey and go on into Europe. The present issues between Turkey and Russia will only strengthen the resolve for completing the Southern Corridor. The question will be how much the Southern Corridor can expand beyond the currently planned quantities of 10 bcm to Europe and the 6 bcm to Turkey. It is also a question of whether there will be other gas sources that can put gas into that pipeline system.

How realistic is the prospect of Iranian gas running through the Southern Gas Corridor?

It depends on many factors. First of all, the nuclear agreement has to be implemented, sanctions have to be removed, and if they are, there's a possibility that Iranian gas could go into the Southern Corridor. But it's not clear that's what Iran wants to do.

There have been statements out of Tehran that gas would go to the region, but also maybe on to Asia. LNG is also a likely way gas will initially leave Iran.

It's possible the Southern Corridor could be utilized, but it is absolutely not clear that is what Iran wants to do with its gas. We'll have to wait and see.

You mentioned LNG. Of course, we hear about a lot of LNG coming onstream and then there are the various sources that could contribute to the Southern Corridor. How do you see these various sources faring against the competition?

Another interesting question. Gas prices are quite low right now. The availability of LNG to Europe has already had an effect on a lot of countries, including on the price of Russian gas. LNG and gas prices right now are lower in Europe than anyone ever expected, so there is a question of how LNG can compete with piped gas. The main thing for Europe is that there be the LNG alternative - if it results in competition, that lowers the price of piped gas. Its availability is important.

Speaking of Russian routes, talk of Nord Stream II has peaked near the end of the year. Gazprom keeps going back to the drawing board after its plans are foiled. Meanwhile, some countries in Central & Eastern Europe deeply oppose Nord Stream II being built. If you were a betting man, do you think it will be constructed?

I certainly would not say the Nord Stream II project is a sure thing at this point. There are three sets of issues: 1) commercially – understanding why some of the companies in Europe would like to see gas go under the Baltic Sea and on to Germany, from the standpoint of security of supply; 2) politically – to me, it would seem to reward Russia with Nord Stream II after what's happened in Crimea and Eastern Ukraine. The effect on Ukraine and, ultimately, the denial of transit fees, is an important consideration; what effect it will have on gas that's presently transiting Ukraine and going to countries in the southern part of Central & Eastern Europe is also a question mark; 3) legally – there are various issues under the 3rd Energy Package that have to be sorted out. To receive any exemption from the 3rd Energy Package it must be shown that the project would diversify the energy supply – and that's not what would happen with Nord Stream II - it would further concentrate supplies from Russia. Meanwhile, there's still a competition case that the Commission is conducting with respect to Gazprom.

The various issues have to be weighed, and you can't totally separate the commercial from the political issues, nor the legal from the political issues, and certainly not the commercial issues from the legal ones.

If, from a legal standpoint, Nord Stream II would not comply with European law, then it shouldn't happen – that's first and foremost.

The political aspects should also be part of the equation.

So there's a whole series of issues that creates a whole lot of uncertainty. We'll have to see how it all plays out. So, if I were a betting man, I certainly would not bet that Nord Stream II will happen – it's quite uncertain.

Given the recent tensions between Russia and Turkey, what do you think is the best strategy for Turkey given it uses a lot of Russian gas?

Turkey will make that decision. So far, Russia has applied strong economic sanctions to Turkey, but they really haven't done anything that will seriously adversely affect Russia for supplying gas.

They've delayed the Turkish Stream project, which had already been delayed and would not have happened anytime soon.

Whatever the relations between Turkey and Russia, Turkey is still receiving gas from Russia through the existing pipeline system.

The question is, what will Turkey do? It's already seeking as much gas as possible. If it had options to be fully supplied from other areas, it might take a certain course. But I'm not sure it would do anything to disrupt the supply at this moment.

Mr. Ambassador, what will be on your radar screen in the coming year in terms of energy diplomacy?

It's going to be interesting to see developments in respect of the European Energy Union, the steps Europe takes to improve its infrastructure.

LNG will be available from the US in the coming year – will that LNG come to Europe and what will the market situation be?

What will be the developments with respect to Russia and Ukraine?

Returning to the political question of Nord Steam II, I think it would be difficult politically to approve it. But we don't know what the situation will be, a year or two years from now in Russian-European relations, and things might change. We have to see how the Turkey-Russia relationship will develop, so there are a lot of moving parts and the only thing we can be sure of is that one year from now things will be different from how they are today.

-Drew Leifheit