European Energy Security: Southern Gas Corridor On The Move

After years of political bickering and commercial uncertainty, Europe’s Southern Gas Corridor project is finally gaining traction. If all goes well, Caspian gas can start flowing to Europe no later than 2018, easing the overdependence on Russian energy imports.

Final decisions on Azerbaijan's giant Shah Deniz II field along with the selection of the initial European route are expected in the coming months. In late June Azerbaijan and Turkey concluded an agreement on a Trans-Anatolian Pipeline (TANAP), a pipeline stretching from the Georgian-Turkish to the Turkish-Bulgarian border. At TANAP's endpoint in Western Turkey the "European leg" begins. Two pipelines are still in the race: Nabucco West, a shortened and scaled back version of the original "Grand" Nabucco going to Cental Europe and the Trans-Adriatic Pipeline (TAP) ending up in Italy.

Several factors have contributed to the latest flurry of activities.

First are the Azeri government's, SOCAR’s and the Shah Deniz II consortium's calculations and concerns. Baku understands it is under increasing time pressure. Azeri oil production might peak in the coming years and the handsome flow of revenue underpinning regime stability will decrease significantly. The Azeris treat the Southern Gas Corridor as their strategic link to Europe, while they are also cautious not to antagonize Russia by biting too large of a piece off Gazprom's market share. But the emergence of potential competitors from Levant and Black Sea offshore, Polish and Ukrainian shale, or new LNG terminals might threaten future Azeri gas positions in Europe. Russia's rival Southstream could “accidentally” be built regardless of the prohibitive costs if Moscow overplays its hand against Ukraine.

Second, it has been confirmed lately that Azerbaijan has reserves way beyond earlier assumptions. Production from gas fields like Umid, Absheron, and ACG could push up Azerbaijan’s natural gas production to 50-55bcm per year by 2025. Add to this the potential from the Kurdistan Region of Iraq, as Ankara and Erbil continue their historic rapprochement. That casts new light on the Southern Gas Corridor and defies earlier concerns that there will not be enough gas to fill a major pipeline and bring strategic quantities to Europe, even if the chances for a Trans-Caspian pipeline remain remote.

Third, Europe underwent yet another energy crisis this February as Russia cut back supplies again in the middle of the winter. This time there was no standoff between Ukraine and Russia. Instead the latter was unable to satisfy the increased domestic and European demand caused by the unusually harsh weather. The crisis was another wake up call. Though Europe was much better prepared this time thanks to strategic storage capacities, new interconnectors, and reverse flows in Italy, some industries were briefly forced to suspend their operations.

Fourth, after years of sluggish growth prospects, European gas markets are showing signs of life in the wake of the Fukushima nuclear disaster. Increasing demand in Germany, Central and South East Europe, coupled with the dynamically growing Turkish market, presents enticing opportunities.

What will the Southern Gas Corridor look like?

The first leg from the Sangachal gas terminal in Azerbaijan to the Turkish border is supposedly straightforward. The capacity of the existing Baku-Tbilisi-Erzurum pipeline owned by the Shah Deniz consortium will be tripled. If earlier experience is any guidance though, complications may arise due to Georgian internal politics.

As for the Turkish section, SOCAR has learnt the lesson from the Russian-Ukrainian disputes. By owning 80 percent of TANAP it effectively minimizes Turkey’s future blackmailing potential. The Turks are likely to have agreed on that deal in expectation of a substantial discount on natural gas prices-- understandably as oil and gas imports account for 50 percent of the country’s sizable current account deficit.

Furthermore SOCAR and the other big Shah Deniz consortium members want a share in the entire value chain: in Nabucco West and also TAP. They will be welcomed with open arms to both, especially as Nabucco is in sore need of heavy hitters with financial firepower.

There will be enough Azeri gas to fill both European routes of the Southern Gas Corridor, even if Turkmen or KRG gas never makes it to Europe. Thus the “choice” is about timing and sequencing and not ultimate exclusion. It boils down to the question of which pipeline first.

Commercial considerations will be decisive: how initial sales and purchase agreement discussions proceed will largely determine the fate of the projects. But policymakers in the EU and in the US government must also give the right signals as strategic transatlantic positions are at stake.

TAP claims to be a strategic project that plans to supply not just Italy but the vulnerable Western Balkans countries too. The ailing Greek economy would surely benefit from a major infrastructure investment project. Admittedly Italy suffered in February and could use additional available capacities in times of crisis.

At the same time Italian gas consumption is decreasing due to economic turmoil and increasing usage of renewables. Italy also has access to the Mediterranean suppliers and global LNG markets. The country's problem lies rather with the lack of gas storage. Bad as it was that situation cannot be compared to the hardship experienced by Bulgaria during the crisis in 2009, where schools, hospitals and factories had to be closed and people froze as Russia turned the tap off.

Most Central and South East European countries still only have access to Russian gas and thus are forced to pay 30-40 percent above Western European market prices-- and about four times US prices--for gas imports. Breaking the stranglehold of Russia over the energy sectors of Central and South East Europe by supply diversification necessitate prioritizing the Northern route and building Nabucco West first. Via a string of interconnectors that have recently been built or planned a Nabucco West with increased capacities could also supply the Western Balkans.

The race is far from over. The endgame will be messy. There is a truckload of details that must be hammered out in the coming months, as the key players enter into negotiations over pipeline ownership and transit conditions. But after years of twists and turns there is "light at the end of the pipeline." If Europe keeps up the pressure, the concerned member states persist in pursuing the strategic objective, and the United States maintains its dedication and diplomatic assistance, the transatlantic alliance will benefit from the realization of the Southern Gas Corridor.

David Koranyi is deputy director of the Atlantic Council's Patriciu Eurasia Center.   Republished with the kind permission of the Atlantic Council