The Southern Gas Corridor and the EU Gas Security of Supply: What's Next?
THE GENESIS OF THE SOUTHERN GAS CORRIDOR
Gas is an essential component of the energy mix of the European Union (EU), constituting one quarter of primary energy supply and contributing mainly to electricity generation, heating, feedstock for industry and fuel for transportation.
Because of the decreasing trend of the EU domestic gas production (particularly due the United Kingdom), the EU gas import requirements have increased rapidly over the last decade, leading to higher levels of import dependence and ultimately outlying the need to address the issue of security of gas supply at the EU level.
This need unexpectedly became tangible in January 2006, when after a long-lasting disagreement on gas prices, Russia cut off supplies to Ukraine for 3 days, Ukraine diverted volumes destined to Europe, and as a consequence gas supply to some Central European countries fell briefly. As a response to the energy security concerns emerged after this Russian- Ukrainian-European gas crisis, the European Commission (EC) launched in 2008 a double strategy, aimed at enhancing the EU gas security of supply architecture. On the one hand, the EC targeted to enhance the EU internal energy market in order to foster gas flows between EU Member States. On the other hand, it aimed at enhancing gas sources diversification, including building LNG receiving terminals in Central and South-East Europe and pursuing the 4th corridor (generally known as Southern Gas Corridor) in order to bring gas from Caspian and Middle Eastern producing countries to the EU..
The official document on which the Southern Gas Corridor is rooted is thus represented by the Communication delivered in 2008 by the EC: the “Second Strategic Energy Review – An EU Energy Security and Solidarity Action Plan.” The document recognized in the Southern Gas Corridor one of the EU’s highest energy security priorities, outlying the need of a joint work between the EC, EU Member States and the countries concerned (Azerbaijan and Turkmenistan, Iraq and Mashreq countries) with the objective of rapidly securing firm commitments for the supply of natural gas and the construction of the pipelines necessary for all stages of its development. Uzbekistan and Iran were also mentioned in the Communication as potential partners, albeit only in a long-term scenario.
After the release of this document, the EC invited representatives of the countries concerned to a Ministerial level meeting aimed at securing concrete progress of the initiative in May 2009. The summit, held in Prague and named “Southern Corridor - New Silk Road”, served to express the political support to the realization of the Southern Gas Corridor as an important and mutually beneficial initiative, aimed at promoting the common prosperity, stability and security of all countries involved. The countries participating at the summit declared to consider the Southern Gas Corridor concept as a modern Silk Road interconnecting countries and people from different regions and establishing the adequate framework, necessary for encouraging trade, multidirectional exchange of know-how, technologies and experience.
Furthermore, the countries participating at the summit also agreed to give necessary political support and, where possible, technical and financial assistance to the development of a project already launched in 2002 by a consortium composed by OMV of Austria, MOL Group of Hungary, Bulgargaz of Bulgaria, Transgaz of Romania and BOTAŞ of Turkey:Nabucco.
THE RISE AND FALL OF NABUCCO
In fact, in 2002 the five-company consortium agreed to cooperate on the development of Nabucco, a projected 3,800 kilometers (km) long pipeline with a capacity of 31 billion cubic metres per year (bcm/year) designed to carry natural gas extracted in Azerbaijan, Turkmenistan, Iraq, Iran and Egypt to Southeast and Central Europe via Turkey.
Gas flows from these producing countries would have reached the Turkish border as follow: via the South Caucasus Pipeline in the case of Azerbaijan; via Iran or the planned Trans-Caspian Pipeline in the case of Turkmenistan; via the planned extension of the Arab Gas Pipeline in the case of Iraq; via the Arab Gas Pipeline in the case of Egypt.
The Nabucco project immediately got an unprecedented political support from Turkey, the EU and the United States (US). For Turkey the project represented a unique opportunity to realize its long-term strategic objective of becoming a key energy corridor between hydrocarbon rich countries in the East and energy importing European markets in the West.
For the EU the project represented a major opportunity to diversify its natural gas supplies away from Russia. For this reason Nabucco not only got the financial support of the EU but also became the flagship project of the Southern Gas Corridor.
Notwithstanding the strong political commitment of the five transit countries and the unprecedented political support of the EU and the US, the Nabucco project ultimately failed, mainly because of commercial and financial reasons: a very large scale pipeline project combined with a hugely uncertain demand outlook and the potential competition of South Stream. Moreover, the project promoters were mainly mid-size companies who have to rely on project finance and bank loans, and the banks ask for guarantees and long term ship or pay contracts which the market could not deliver. Furthermore, another major element of uncertainty for the Nabucco project was related to the fact that -with the only exception of Azerbaijan- all the potential suppliers were facing major difficulties to materialize their willingness to evacuate gas to Europe via Turkey.
THE EVOLUTION OF THE SOUTHERN GAS CORRIDOR BEYOND NABUCCO: TANAP AND TAP
Taking into consideration the insurmountable commercial and financial barriers that the Nabucco project was facing, Azerbaijan -clearly the gas producing country most interested on the development of the Southern Gas Corridor- completely reshaped the Southern Gas Corridor game in 2011 by rapidly conceptualizing its own infrastructure project to evacuate future gas flows from Shah Deniz Phase II to Turkey: the Trans Anatolian Natural Gas Pipeline (TANAP).
TANAP, a projected 2,000 km-long gas pipeline with a capacity of 16 bcm/year, has been designed to supply 6 bcm/year to Turkey by 2018 and 10 bcm/year to Europe by 2019. TANAP will run from the Georgian-Turkish border to the Turkish-Greek border, but the exact route of the pipeline is not clear yet. TANAP will receive its gas from the South Caucasus Pipeline (SCP), a pipeline already evacuating gas from the Azerbaijani Shah Deniz field to Turkey, which will be expanded in order to accommodate the new volumes of gas coming from Shah Deniz Phase II and going to TANAP.
On the contrary of Nabucco, TANAP was not born as a multilateral project but rather as a producer driven bilateral project between Azerbaijan and Turkey. The initial act of the project -occurred in December 2011- was the signature of a Memorandum of Understanding (MoU) between Azerbaijan and Turkey establishing a consortium to build and operate the pipeline.This initial step was then followed by the signature of a binding intergovernmental agreement on TANAP made by Azerbaijan’s President Aliyev and Turkey’s (at the time) Prime Minister Erdoğan in June 2012. Of course this bilateral relation was not symmetric, but rather unbalanced in favour of Azerbaijan. In fact, the State Oil Company of Azerbaijan (SOCAR) was initially set to hold an 80 percent stake in the project, leaving only the remaining 20 percent to the Turkish partners (15 percent to BOTAŞ and 5 percent to TPAO).
This figure has changed over time, to a more balanced structure entailing a share of 58 percent for SOCAR, 25 percent for BOTAŞ, 5 percent for TPAO and 12 percent for BP. Notwithstanding this realignment of shares, SOCAR is set to continue to retain a controlling share of TANAP and operatorship of the line in the future. In fact, TANAP is crucially important for the Azerbaijani state owned company, as it will have a key role in the delivery of gas from its Shah Deniz field further down the supply chain to Europe, rather than selling at its border.
Among other factors, a key element of strength of the TANAP project relates to its financing: because of the considerable oil revenues provided by the exports through the Baku-Tbilisi-Ceyhan pipeline, Azerbaijan is able to directly ensure the financing of the infrastructure. In fact, the cost of TANAP is estimated about USD 7-10 billion, an amount that Azerbaijan could easily finance just by making use of its sovereign wealth fund, the State Oil Fund, which currently retains about USD 34 billion in assets under management
The entrance of TANAP into the Southern Gas Corridor race in December 2011 gave the “coup de grace” to the already moribund Nabucco project. For this reason the Nabucco consortium tried to reinvent itself in 2012, by proposing a new -and smaller- version of the project: Nabucco West.This pipeline was designed to carry the TANAP 10 bcm/year destined to Europe from the Turkish-European border to Austria via Bulgaria, Romania and Hungary. This project -again supported by the EU - ultimately failed like its predecessor, as the Shah Deniz consortium selected in June 2013 the Trans Adriatic Pipeline (TAP) to provide the missing link between TANAP and the European market.
TAP is an 870 km-long projected gas pipeline designed to provide the missing link for gas transportation from Kipoi, on the border of Turkey and Greece (connection point with TANAP), to Brindisi, destination point in Italy, through Albania and the Adriatic Sea. The length of the Greek section will be 547 km, the length of the Albanian section will be 211 km and the length of the offshore pipeline section will be 105 km, at a maximum depth of 820 mt. The initial capacity of the pipeline will be about 10 bcm of gas per year, but in the future the addition of two extra compressor stations could double throughput to more than 20 bcm/year as additional energy supplies will come on stream in the wider Caspian region.
The pipeline will also have the socalled “physical reverse flow” feature, allowing gas from Italy to be diverted to South East Europe if energy supplies are disrupted or more pipeline capacity is required to bring additional gas into the region. Moreover, the TAP project also includes plans to develop an underground natural gas storage facility in Albania. These features will ensure additional energy security for South-Eastern Europe.
TAP’s shareholding is comprised of BP (20%), SOCAR (20%), Statoil (20%), Fluxys (16%), Total (10%), E.ON (9%) and Axpo (5%). TAP plans to commence pipeline operations in 2020, in time for first gas exports from Shah Deniz II.
THE IMPACT OF THE SOUTHERN GAS CORRIDOR ON THE EU GAS SECURITY OF SUPPLY ARCHITECTURE
The historical evolution of the Southern Gas Corridor, and particularly the rise and fall of Nabucco, clearly exemplifies how the original idea of a multilateral and large-scale project based on a variety of gas supply sources, turned out to be a bilateral and medium-scale project with only one supply source, Azerbaijan. This evolution does not completely fulfill the interest of the EU, not only because of the different market structure (both in terms of volumes and supply sources) but also because of the different legal structure of the two projects.
In fact, Nabucco was a project completely under EU law; this signifies that the pipeline was to be regulated by rules such as third party access and unbundling throughout its entire length. The intergovernmental agreement signed by the five transit countries in 2009 provided a legal framework for 50 years, confirming that 50 percent of the pipeline’s capacity was to be reserved for the shareholders of the project and the remaining 50 percent was to be offered to third-party shippers on the basis of a regulatory transit regime under EU law.
The situation of TANAP is clearly very different. In fact, considering that Turkey has not yet adopted the EU energy acquis on its legislation, Azerbaijan -with a major stake in the project- will practically have the control of the pipeline and of the gas transit through it. Moreover, considering both Turkey’s reluctance to enter the Energy Community and the difficulties related to the opening of the energy chapter of Turkey’s EU accession process, this situation will unlikely change in the foreseeable future. Albeit Azerbaijan could eventually have an interest in having some volumes of non-Azerbaijani gas into TANAP temporarily in the short term (in order to make the project more bankable), it will unlikely have the interest of doing so in the longer term, as the development of Shah Deniz and other fields will continue and additional volumes of Azerbaijani gas will thus be ready to be evacuated to Turkey and the EU via TANAP.
However, beyond all these issues, the pipeline-tandem TANAP-TAP certainly represent the first, historical, concretization of what often appeared to be the “never-ending odyssey” of the Southern Gas Corridor. Thanks to the development of TANAP and TAP we are now in the position to add 10 bcm/year to the EU gas security of supply architecture from 2020. This volume will certainly not radically change the overall EU gas security of supply architecture, as it will basically represent less than 3% of the EU gas import requirements, but it will represent an important element for the South-East European gas security of supply.
TAP will connect to the Italian natural gas grid operated by Snam Rete Gas, from which all Italian gas exit points to European destinations can be reached. Furthermore, TAP will provide a new source of gas to Bulgaria, by linking to existing and planned pipeline infrastructure, including reverse flow through an interconnector to the Kula-Sidirokastro line, and/or a proposed connection with the planned Interconnector Greece-Bulgaria (IGB) pipeline. Finally, as far as the wider South-East European region is concerned, Caspian gas could be flowing also to growing markets in the Balkans that are currently dependent on a single gas supplier: Russia. In fact, TAP is already cooperating with the developers of the planned Ionian Adriatic Pipeline (IAP) to discuss connection possibilities to markets without gas in Southern Croatia, Albania, Montenegro, and Bosnia and Herzegovina.
According to the 25-year sales agreements announced in December 2013 by the Shah Deniz consortium, of the total 10 bcm/year destined to reach the European market via TANAP and TAP, around 1 bcm/year will go to buyers intending to supply to each of Bulgaria and Greece and the rest will go to buyers intending to supply Italy and “adjacent market hubs”. This last part of the sentence seems to be particularly important, principally considering that among the nine companies that will purchase this gas in Italy, Greece and Bulgaria (Axpo Trading AG, Bulgargaz EAD, DEPA Public Gas Corporation of Greece S.A., Enel Trade SpA, E.ON Global Commodities SE, Gas Natural Aprovisionamientos SDG SA, GDF SUEZ S.A., Hera Trading srl and Shell Energy Europe Limited) there are some with important activities in Central and North West European countries.
In this framework, part of the gas arriving from TAP could well be evacuated also to Central and North-West European markets, notably Austria, Germany, Switzerland, France and the United Kingdom (UK). This eventuality is reinforced by the fact that the TAP design offers various connection options to a number of existing and proposed pipelines along its route. This would enable the possible delivery of Caspian gas to destinations such as:
- Austria and Central Europe: natural gas transported via TAP can reach the Central European gas hub in Baumgarten, Austria via the Trans Austria Gas (TAG) pipeline, using swaps and reverse flow;
- Germany and France via Switzerland: using reverse flow through the TransitGas-TENP pipeline system (an opportunity currently being evaluated by the system’s operators);
- United Kingdom: grid operators Snam Rete Gas and Fluxys have agreed to develop physical reverse flow capabilities between Italy and the UK by interconnecting the gas markets of Italy, Switzerland, Germany, the Netherlands and Belgium, enabling Caspian gas to reach the UK.
In this framework it is clear that a reinforced junction between Italy and Central/North-West European gas markets will be essential to enhance the potential impact of TAP on the EU gas security of supply architecture, particularly in terms of allowing South to North gas flows.
The TransitGas-TENP pipeline system -as the only link connecting the main market zones of North-West Europe with Italy- has thus the potential to become a strategic junction between European gas Hubs.
Along this gas transmission route connecting the UK and Italy, only the UK-Interconnector pipeline and the network in Belgium can currently flow gas in both directions. The TENP and TransitGas systems in Germany and Switzerland as well as the Italian network to date can move physical flows from north to south only.
Snam Rete Gas has already begun investments in the Italian network to enable substantial physical south to north flows at the Italian-Swiss border at Passo Gries. For the TENP and Transitgas systems, investments to make the infrastructure bi-directional are in the planning stage and would create not only physical south to north capacity but also additional capacity from Germany to Belgium.
In December 2012, Fluxys Belgium, Fluxys TENP, FluxSwiss and Snam Rete Gas launched a coordinated market process for interested shippers to book long-term gas transmission capacity from the Italian trading point PSV through Switzerland to the NCG and GASPOOL trading points and/or the ZTP trading point in Belgium.
The joint approach of the four TSOs resulted from the Memorandum of Understanding agreed between parent companies Snam and Fluxys in August 2012 for developing and marketing reverse flow capacities from south to north between Italy and the UK.
Though shippers showed strong interest in south to north capacity they were uncomfortable with making binding commitments as it was not clear when a few remaining outstanding issues would be resolved.
The potential of South to North gas flows could represent a tool to enable Southern suppliers -such as perspective TAP suppliers- to compete with Northern suppliers (mainly Russia and Norway) in the wider EU gas market. Just as in the past Italy’s Eni imported more expensive (in relation to Russian prices) gas from Norway and the Netherlands for diversification and therefore security of supply reasons, it is possible to imagine that operators North of the Alps will import gas from Italy (and beyond) for diversification of supply reasons.
For this reason the development of TAP could have a positive impact on the development of reverse-flow capacity on the TransitGas-TENP pipeline system, as supply diversification is expected to be the main rational for reverse flows of this system. The recent events in Crimea and Ukraine and the reaction in Europe where many officials push for a reduced dependency on Russian gas, could further favor such a diversification policy.
With a future gas demand North of the Alps of around 300 bcm/year, a reverse flow of 10 bcm represents just a 3% diversification and a reverse flow of 15 bcm represents a 5% diversification. Large wholesalers/operators/clients active North of the Alps with a large gas demand might be willing to pay a certain price premium for additional supply diversification in their supply portfolio and therefore increasing their supply security.
It is understood that the gas volumes that will reach Italy via TAP are being priced in view to be able to compete also North of the Alps. In fact, large wholesalers like E.ON or GDF Suez might want to diversify their gas supply portfolio directly with the producers from the Caspian basin (in addition to North Africa), while industrial and other clients will most likely diversify by buying from wholesalers South of the Alps (e.g. Eni) which have a different supply portfolio compared to the main wholesalers North of the Alps.
Due to the limited volume of 8-9 bcm/year (depending on how much TAP gas will finally remain in Greece) from 2020, this intra-European flows will of course not radically change the EU gas landscape. However, the importance of TAP for both South-East and Central/North- West European gas markets could well rise in the future as new gas supplies will be accessible and ready to justify an expansion of TAP.
THE SOUTHERN GAS CORRIDOR AFTER THE 2014 UKRAINE CRISIS: WHAT’S NEXT?
As previously mentioned, in the future the addition of two extra compressor stations could double the capacity of TAP to more than 20 bcm. This opportunity, to be positioned in the post-2020 horizon, could radically augment the relevance of TAP and the overall Southern Gas Corridor for the EU gas security of supply architecture, particularly considering the new market and political realities emerging in Europe.
In particular, the unprecedented political standoff between the Western world and Russia resulted by the 2014 Ukraine crisis might reinvigorate the EU’s quest to diversify its gas supply portfolio.
In fact, in the aftermath of the annexation of Crimea to the Russian Federation, the European Commission decided to postpone talks with Russia over the legal status of the planned South Stream pipeline and full capacity utilization of the existing Nord Stream line. Both issues require a compromise to move forward, but the EU Energy Commissioner Gunther Oettinger declared that he will not advance talks about pipelines such as South Stream for the time being. The European Commission has also delayed a decision on exempting the Opal pipeline from Germany to the Czech Republic from the EU’s thirdparty access rules. This means the 55 bcm/year Nord Stream pipeline, built under the Baltic Sea to supply Russian gas to Europe, will have to continue running below full capacity. South Stream, a projected pipeline aimed at delivering 63 bcm/year of Russian gas to Europe under the Black Sea, represents -together with Nord Stream- the cornerstone of Russia’s strategy to evacuate natural gas to Europe bypassing Ukraine.
Furthermore, the European Council of March 2014 concluded that “efforts to reduce Europe’s high gas energy dependency rates should be intensified, especially for the most dependent Member States” and the EU leaders tasked the European Commission to elaborate a plan for reducing energy dependence from Russia.
According to the conclusions of the EU Council: “The plan should reflect the fact that the EU needs to accelerate further diversification of its energy supply, increase its bargaining power and energy efficiency, continue to develop renewable and other indigenous energy sources and coordinate the development of the infrastructure to support this diversification in a sustainable manner, including through the development of interconnections. Such interconnections should also include the Iberian peninsula and the Mediterranean area. Where relevant, interconnections should also be developed with third countries. Member States will show solidarity in case of sudden disruptions of energy supply in one or several Member States. In addition, further action should be taken to support the development of the Southern Corridor, including further spur routes through Eastern Europe, to examine ways to facilitate natural gas exports from North America to the EU and consider how this may best be reflected in TTIP, and increase the transparency of Intergovernmental Agreements in the field of energy.”
The European Commission published its plan for reducing energy dependence from Russia on May, 26 with the Communication “European Energy Security Strategy.” With this document the European Commission outlines once more the need to reinforce the EU’s energy security, particularly in terms of natural gas supplies. The strategy proposed is structured on eight key pillars aimed at promoting closer cooperation among Member States in light of the principle of solidarity, while respecting national energy choices: “i) Immediate actions aimed at increasing the EU’s capacity to overcome a major disruption during the winter 2014/2015; ii) Strengthening emergency/solidarity mechanisms including coordination of risk assessment and contingency plans; iii) Moderating energy demand; iv) Building a well-functioning and fully integrated internal market; v) Increasing energy production in the EU; vi) Further developing energy technologies; vii) Diversifying external supplies and related infrastructure; viii) Improving coordination of national energy policies and speaking with one voice in external energy policy.”
Of course this strategy will likely not have the impossible target of reducing by 100 percent the EU dependence on Russian gas, but it will certainly target a substantial reduction. If so, this strategy will not be very different from the one adopted by the EU in 2008 with the Communication “Second Strategic Energy Review - An EU Energy Security and Solidarity Action Plan”, the one launching the Southern Gas Corridor. However, as far as the Southern Gas Corridor is concerned, this time the situation could well turn out to be different from 2008, not only because of the reinvigorated quest of the EU towards the diversification of its gas supply portfolio after the Ukraine crisis, but also because of the availability of major natural gas reserves in the Kurdistan Region of Iraq and in offshore Israel on the supply side.
These most recent developments seem to suggest that, despite all the long development described in this article -from the genesis of Nabucco to the rise of TAP- the Southern Gas Corridor remains a story still to be largely written. On the basis of the past experience we can expect this story to be complicated, under certain perspectives even byzantine, but certainly also fascinating and full of twists.
This article by Manfred Hafner was first published in Caspian Report - http://www.caspian-report.com/