Despite US Sanctions on Iran, Green Light for the Southern Gas Corridor

The United States’ Federal Register published the “Iranian Transactions and Sanctions Regulations” on November 5, re-imposing US sanctions on Iran (Federalregister.gov, November 5). This expected action by Washington had raised concerns in Baku about the potential implications of renewed Iran sanctions on Azerbaijan’s Shah Deniz-II (SDII) natural gas field and the South Caucasus Pipeline (SCP), since the Naftiran Intertrade Company (NICO), a subsidiary of the National Iranian Oil Company, holds a 10 percent stake in each. These two segments are both key elements of the US and European–supported Southern Gas Corridor (SGC), which will deliver Caspian-basin gas to Southeastern Europe and help reduce Europe’s reliance on Russian Gazprom.

However, the US ended up waiving the sanctions on the above-mentioned gas projects (Treasury.gov, August 7, November 5). Washington applied the same kind of exemption on the SDII/SCP last year, when it expanded US sanctions on Russia’s energy sector: like NICO, Russian LUKoil owns a 10 percent stake in each of those projects (see EDM, August 2, 2017). This past August, after the first batch of US sanctions on Iran took effect following Washington’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA—the international deal negotiated with Tehran to halt development of its nuclear program), the European Union updated its “Blocking Statute” to minimize the effects of the US’s extraterritorial sanctions on EU companies doing business with Iran (Europa.eu, August 6).

Indirectly, US sanctions on Iran could undermine the economic/strategic viability of the SGC by hindering the possibility of swap deals involving gas from Turkmenistan being transited through Iran to Azerbaijan. Additionally, US sanctions may end up affecting joint Azerbaijani-Iranian plans to develop their previously contested oil fields in the Caspian Sea. On the other hand, of course, Azerbaijan could potentially benefit from the increases to global oil and gas prices caused by sanctions-related halts to Iranian oil exports (EurasiaNet, November 8; Al Araby, November 16).

Moscow has accused Washington of using sanctions against Russia and Iran not simply to support the energy security needs of its allies, but also to allegedly open up the European market for potential US liquefied natural gas (LNG) exports by forcibly decreasing Russia’s market share and undermining the perspective of Iranian gas exports (Sputnik News, October 29; see EDM, November 14). In the meantime, Russia has sought commitments from certain EU states (Italy, Greece, Bulgaria, Hungary) to join the TurkStream gas pipeline which is quietly moving into its final development stages, in parallel with the SGC (Kremlin.ru, October 24; Gazpromexport.com, October 26).

Although the other main segments of the SGC—SDII, SCPx (South Caucasus Pipeline Extension), the Trans-Anatolian Gas Pipeline (TANAP), and the overland Greek and Albanian sections of TAP—will all be operational on schedule, the construction of TAP’s Italian portion was lagging because of the ambiguous position of the new Italian coalition government. Nevertheless, the governing Five Star Movement (5SM) party recently endorsed TAP, thus abandoning its long-standing protests and pre-election pledge to stop the project (Reuters, October 29). At the same time, Italian Prime Minister Giuseppe Conte authorized TAP’s construction despite Russia’s proposal, during Conte’s recent visit to Moscow, to connect TurkStream to the Italian gas network (Kremlin.ru, October 24). Perhaps, Rome’s present embrace of TAP can be traced back to Conte’s July 2018 visit to Washington, where he called the pipeline a “strategic work” (see EDM, November 5; Whitehouse.gov, July 30).

According to Gulmira Rzayeva, an expert with the Baku-based Center for Strategic Studies, Italy’s “green light for TAP” means there will not be “any major delay with delivery of the project” (Newslettereuropean.eu, November 4). Notably, Italian President Sergio Mattarella, during his July visit to Azerbaijan, called the SGC “exceptionally vital for Europe” (Azertag.az, July 18). The deputy vice president of the State Oil Company of the Azerbaijan Republic (SOCAR), Vitaliy Baylarbayov, had earlier said there was “no Plan B,” because “Italy needs this gas” due to its growing demand and imports. Therefore, TAP must be completed “on time,” he added (Spglobal.com, September 12).

Rome’s position likely changed for at least three main reasons: 1) the new government did not want to stand against a US-supported project designed to diversify the EU’s energy sources and wean its dependence on Gazprom; 2) if Italy was not able to resolve its issues with TAP, the pipeline’s Italian segment could have been rerouted toward alternative directions, and the Italian government would have faced huge penalties amidst its critical financial situation (Corriere.it, July 26; Reuters, October 29); and 3) TAP will cover 12 percent of domestic demand in Italy, where average gas prices are 19 percent more expensive than in the rest of Europe (Balkaneu.com, October 30).

Meanwhile, the SGC’s other elements are gradually continuing to move forward. The European Commission recently approved measures to support the construction of the Interconnector Greece–Bulgaria, which will distribute Azerbaijani gas from TAP northeastward (Europa.eu, November 8). At the same time, the Ionian-Adriatic Pipeline, which envisages delivering Azerbaijani gas to several Balkan countries from TAP northwestward, is also being actively developed by Croatia, Albania, Montenegro and Azerbaijan (Trend, June 5). The TAP project consortium recently announced the start of construction of the offshore pipeline section in Albania, in addition to ongoing building of the micro-tunnel therein (Tap-ag.com, October 19, February 14). Around 82 percent of TAP has been completed, and the pipeline is on track to start operations in 2020 (Azernews.az, November 13). Thus far, Azerbaijan was able to attract a significant amount of financial backing for its shares in the SGC (see EDM, April 3).

TAP’s successful implementation is thanks to three key factors: 1) the TAP consortium demonstrated a strong determination to working constructively with a number of local and government stakeholders; 2) the Azerbaijani government, as a gas supplier, also patiently addressed the construction challenges and actively communicated about the project in close interaction with Italy; and 3) TAP, from the very beginning, has been firmly supported by the US regardless of administration (Neweurope.eu, November 9; Trend, October 30).

The SGC has overcome a number of challenges to date, such as falling oil prices, the need for external financial assistance, local protests in Italy and grass-roots campaigns against TAP, a complicated DESFA gas network deal with Greece, competing pipelines, and so on (see EDM, June 16, 2016; September 22, 2016; December 16, 2016; March 9, 2017; March 28, 2017). And although the SGC’s current capacity is far smaller compared to Russia’s TurkStream, the former, unlike the Gazprom project, meets the EU’s goal of diversifying Europe’s gas supply.