Trans-Anatolia, Nabucco-West Pipeline Projects: An Optimal Fit

As expected (see EDM, January 3, 4, 5), the Nabucco consortium has decided to reconfigure its project for a new role: a European continuation of the Azerbaijani-Turkish, Trans-Anatolia Gas Pipeline (TANAP) project. As TANAP plans to replace Nabucco on Turkey’s territory, Nabucco would link up with TANAP at the Turkish-Bulgarian border, continuing via Romania and Hungary to Vienna, for an expected 10 billion cubic meters (bcm) of Azerbaijani gas annually in the initial stage of both TANAP and Nabucco. With Azerbaijan offering to finance up to 80 percent of TANAP’s construction costs, the continuation pipeline in the form of an abridged Nabucco into EU territory becomes financially credible and bankable.

Overcoming initial hesitation, Nabucco’s Austrian management has confirmed that it has submitted a proposal along these lines to the Shah Deniz gas producers’ consortium in Azerbaijan, as well as to the transit country Turkey. The Nabucco shareholders envisage a final investment decision by 2013 for building the abridged Nabucco, dubbed Nabucco West (Bloomberg, March 22).
 
The US special envoy for Eurasian energy affairs, Richard Morningstar, similarly envisages a final investment decision by 2013. By that time it should be possible to determine whether additional gas volumes would be available, on top of those 10 bcm per year in the first stage, for delivery to Europe. However, the Trans-Adriatic Pipeline (TAP) project, its main destination being Italy, lays claim to the same 10 bcm per year of Azerbaijani gas from the BP-led Shah Deniz project. This is again a zero-sum contest pitting the Italy-bound TAP against the Nabucco countries. According to Morningstar’s remarks in Brussels (as quoted), “The first priority has to be getting at least a reasonable amount of gas to the Balkans. The Shah Deniz consortium and BP understand that if they were to build TAP, significant gas would have to be left in the Balkans” (News.Az, March 27).
 
If those 10 bcm per year are divided into two export directions, however, questions arise: What volumes might still be deemed reasonable or significant, if they are mere leftovers from those finite 10 bcm? And how to define the Balkans in this context? TAP would sell some meager volumes in the Balkan countries of Greece and Albania (en route to Italy); whereas Nabucco covers other Balkan countries as well as Central European ones along its route (Bulgaria-Romania-Hungary-Austria-southern Germany). If the gas flow is divided into two main directions, which countries would still qualify for supplies and how small would those supplies have to be?
 
The European Commission had strongly favored Nabucco on strategic grounds against the Italy-bound, non-strategic projects TAP and ITGI (the latter forfeited to rival TAP recently). By October-November 2011, however, Nabucco had finally lost credibility in the form proposed (31 bcm of gas annually, starting from Turkey’s east, its €8 billion ($10.6 billion) cost an underestimate, and being unbankable in Europe). In that situation, the European Commission fell back on supporting the Southern Corridor as an overall  concept (Nabucco, TAP, ITGI), but reaffirming the same policy priority – namely, supply diversification for countries over-dependent on Russian Gazprom. Those are the Nabucco countries, not the TAP transit countries or Italy.
 
The TANAP agreement of intent, signed by Azerbaijan’s and Turkey’s governments on December 26, 2011, gave Nabucco a new lease on life as a potential extension of TANAP into EU territory. Under the agreement, Azerbaijan and Turkey would own 80 percent and 20 percent, respectively, of TANAP shares (with an option for Azerbaijan to sell a portion of its shares later to a minority partner, rumored to be BP). Construction costs are estimated at $5 billion to $6 billion, to be covered by Azerbaijan  proportionately with its ownership share. The initial capacity is planned at 16 bcm of gas per year (including 6 bcm for Turkey and 10 bcm for European countries), scalable to 30 bcm annually with additional volumes expected from Azerbaijan and Turkmenistan. Construction work is planned for 2013 to 2017, timed to the first commercial gas flow from Shah Deniz Phase Two by 2017-2018.
 
The Trans-Adriatic Pipeline (TAP) project threatens the reconfigured Nabucco West and the TANAP-Nabucco West connection. Led by Norway’s Statoil, TAP proposes to take those same 10 bcm of Shah Deniz Phase Two gas to Italy as its main market, selling some small volumes along the route in Greece and Albania. “TAP” is an outdated designation; the project by now involves building a longer overland pipeline across Greece, adding to the original trans-Adriatic pipeline, and correspondingly raising the project’s costs. In Italy, the TAP pipeline would link up with the country’s pipeline network, operated by Snam (a Gazprom ally). TAP promises to use Italy as a gas “hub” for this project, with onward transportation or swapping of gas to Switzerland and other European countries.
 
TAP leader Statoil claims that the project enjoys the following “advantages”: a possibility to increase the capacity from 10 bcm annually to 20 bcm annually; a link up from Albania to Western Balkan countries (possibly from a storage site to be built in Albania); and use of Italy’s pipeline network for further trading operations, inside Italy and northward of it (Trend, March 17; TAP media release, March 21).
 
At 10 bcm, TAP has limited value, non-strategic with respect both to volume and to destination market. At a putative 20 bcm, however, TAP would turn downright anti-strategic, diverting gas supplies away from countries that depend on Gazprom’s monopoly. As long as the EU’s strategy is supply diversification, TAP becomes anti-strategic. Italy (as well as Switzerland) is highly diversified and amply supplied; whereas Southeastern and Central Europe (Nabucco countries) need both the diversification and the additional volumes. Describing a storage location in Albania as “strategic” seems hardly convincing (and has not been repeated in the latest company statements).

Ultimately, Azerbaijan will have its own say in selecting export destinations from Shah Deniz Phase Two, other Azerbaijani gas projects, and ultimately Turkmen gas. TANAP itself can link up with a continuation pipeline either toward Central Europe or toward Italy, depending on commercial advantages to Azerbaijan. By re-investing its early oil revenues, Azerbaijan can guarantee financing for the TANAP pipeline across Turkey. From Statoil’s or BP’s standpoint, exporting Azerbaijani gas to Europe are corporate business propositions. To Azerbaijan, however, this represents more than a lucrative business opportunity to be maximized. Beyond this it represents a vital national interest and an investment into the country’s future, a direct link to Europe, and Azerbaijan’s emergence as an international gas exporter – comparable with its role as oil exporter – and for a longer duration. Thus, TANAP gives Azerbaijan a strong hand to play in the upcoming negotiations.