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    Southern Corridor Woes



The Southern Corridor project faces its first serious testing concerning budgeting and capacity

by: Ioannis Michaletos

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Natural Gas & LNG News, News By Country, , Azerbaijan, Pipelines, Trans-Adriatic Pipeline (TAP) , Trans-Anatolian Gas Pipeline (TANAP) , Top Stories, Caspian Focus

Southern Corridor Woes

The Southern Corridor project, a multibillion energy infrastructure endeavor that includes the TANAP-TAP system of pipelines, appears to be facing certain issues that could potentially derail the timeline of is construction and certainly cause anxiety amongst stakeholders.

More specifically, French supermajor Total SA is looking for an exit amidst contradicting reports with regards to the cause of the decision. Latest information streamed by SOCAR VP Suleyman Gasimov confirmed the corporation is looking to buy Total's 10% share in the Shah Deniz consortium, which is the basic source of natural gas for the Southern Corridor. Meanwhile interest has also been expressed by the Turkish Botas, who along with SOCAR is developing TANAP. Total has yet to make known the reasons for its premature departure, however interesting points can be made by assessing the situation so far.

With regards to financing - is Total expecting serious delays in a future returns on investment capital? It should be noted that Total is currently engaged in multiple long-term, high-cost projects worldwide.  While it owns a 40% stake in the Absheron gas reserve in Azerbaijan that it wants to develop, raising funds by selling its shares in Shah Deniz may be a forced move in that sense. A recent Financial Times piece mentioned that "Total’s decision was driven by the economics of the project...as a broader asset sale program. Including the cost of building the pipelines, the total price tag for the project is likely to exceed $40bn."  Shah Deniz development was estimated three times less, thus the price tag has exceeded original business plans for all players involved. Meanwhile, Total is in the process of selling assets worldwide worth more than $10 billion. 

Norwegian Statoil has also disinvested in the Shah Deniz consortium by reducing its stake from 25.5% to 15.5% selling the rest to BP and SOCAR. Statoil is also engaged in various expensive projects in the North Sea and its indigenous resources, therefore it cuts down its investment burden by decreasing its involvement in the Azeri market. It is of interest to note that even Azeri officials such as Energy Minister Natig Aliyev, recently addressed the issue of overpricing of the project by admitting during the proceedings of the Caspian Oil and Gas international conference that the investment volume may exceed $50 billion. The serious upgrading of the transmission links between Azerbaijan and Turkey, plus the construction of TANAP in often rugged geographical terrain and the establishment of TAP who is also going to have a sub water route and will also traverse the mountainous Southern Albania are serious factors to be assessed for. If we take into account that for the development of Shah Deniz II alone, more than $28 billion is needed, then the estimations for an excessive budgeting for the whole of the Southern Corridor are not off the mark.

Furthermore, the scheduled gas volumes to be transferred through the route, are for 16 bcm, out of which 6bcm are for the domestic Turkish market and the rest through TAP to the Greek, Albanian and Italian markets and quite possibly to Bulgaria. By taking into account the Ionian-Adriatic Pipeline route, an actual spur of TAP and of Southern Corridor system, then these amounts will also have to meet the demand in Montenegro, Bosnia and Croatia with the first two countries barely gasified, thus the overall costs will simply be much higher than expected.

On the other hand officials from the consortium's participating companies from time to time stretch out for the future prospects of "opening up" the Turkmenistan’s and Uzbekistan’s great gas potentials, thus being able to accommodate a serious upgrade of the TANAP-TAP-IAP system of pipelines for multiple times its original capacity design. Nevertheless, the ambiguous and undecided legal status of the Caspian Sea prohibits so far the viable construction of the only path to connect Central Asia with Shah Deniz en route to Turkey and the EU. Moreover Central Asian states are steadily increasing their export volumes to the gigantic Chinese market, whilst Russian companies have gained a foothold, thus ending on an extent the diversification efforts of that route. For the time being the only viable producer of gas in order to upgrade Southern Corridor, is Iran which controls the second largest gas reserves in the world.

The embargo against Iran and most importantly its vicious antagonism both with Saudi Arabia and Israel, along with American hesitation to promote Iran's role further, prohibits any realistic promotion of that option. Iran itself has been drafting plans for years to proceed into exporting considerable amounts of gas both to Pakistan-India emerging natural gas consuming markets and to China via Central Asia, whilst in 2011 it signed a deal with Iraq-Syria to construct a pipeline stretching all the way to East Mediterranean, therefore Tehran assumes it has other options apart from the EU market and itself would be a hard bargainer requesting a lift in its international exclusion in case Brussels would like to boost Southern Corridor's capacity base. Lastly Iran is indirectly linked with the Russian transmission system through the buyout of the Armenian natural gas company from Gazprom. Armenia has a gas link with Iran that if it is upgraded it could accommodate Iranian exports to Europe via Russia.

Overall, there are project issues that need to be dealt with and the most important and pressing one is its financial viability judging on the actual designated gas volumes and the total cost of its construction. Otherwise, more corporate exits from the consortium will derail the timetable for its enactment of operations. Presently the Shah Deniz consortium, which is the cornerstone of the Southern Corridor project, is composed in shares by: SOCAR (16.7%), BP (28.8%), Statoil (15.5%), NICO (10%), Lukoil (10%), TPAO (9%) and Total (10%). The latter seems to be testing waters after all in order to weight if its investment in Shah Deniz would be worthwhile and all indications point out that the coming months will be crucial for the involvement of the French in the consortium.