Shah Deniz Gas Producers Select Trans-Adriatic Pipeline Route into Europe over Nabucco

The gas producers’ consortium at Shah Deniz in Azerbaijan has selected the Trans-Adriatic Pipeline project (TAP, Greece-Albania-Italy, led by Norwegian Statoil) to deliver Azerbaijani gas to Europe. This decision eliminates the Nabucco-West pipeline project (Bulgaria-Romania-Hungary-Austria) from consideration. The decision was communicated to the two rival project companies by Shah Deniz consortium representatives personally on June 26. Nabucco’s lead company, Austrian OMV, became the first to confirm the demise of this pipeline project (Oesterreichischer Rundfunk, www.orf.at, June 26).

These projects stood no chance of implementation until Azerbaijan created, in 2011–2012, the Trans-Anatolia Pipeline Project (TANAP), to connect the Caspian basin with the European Union across Turkey’s territory. Azerbaijan has led the way in planning TANAP as its main shareholder and operator. Earlier European hopes to design and build such a pipeline as part of Nabucco’s old version had failed. Any pipeline project for Caspian gas westward of Turkey into Europe can only be implemented as a continuation of the Azerbaijani-led TANAP.

The Shah Deniz gas producers had weighed these (and other) pipeline options since 2010, and the final selection decision was pending since the second half of 2012. Today’s outcome came as a close call. However, TAP had already surged ahead of Nabucco-West when the two rivals submitted their final offers to the Shah Deniz consortium in March (see EDM, April 26, May 30).

Inside the Shah Deniz consortium, BP (formerly British Petroleum) and Norwegian Statoil had favored TAP all along. BP prioritized a lower-cost, non-strategic transportation solution for limited volumes of Shah Deniz gas. As such, TAP fit BP’s bill. For its part, Statoil was the only Shah Deniz shareholder also participating in TAP and was, moreover, TAP’s lead company—hence Statoil’s preference for this project. Azerbaijan’s State Oil Company (SOCAR) was leaning toward Nabucco-West due to the latter’s long-term strategic potential, which was superior to TAP’s. But Nabucco’s financing remained problematic, and the project no longer enjoyed the European Commission’s once-strong political support.

Ultimately, SOCAR won Greece’s tender to acquire that country’s gas pipelines (see EDM, June 25). At this point, SOCAR logically opted for TAP, whose longest section would run through Greece. This may not have been SOCAR’s most compelling consideration but became the clinching one in opting for TAP.

TAP was first proposed in 2003, its project company was established in 2008, and it was included in the EU-planned Southern Gas Corridor to Europe in 2009. The Corridor’s strategic rationale, as declared by the European Commission, was to diversify supply sources and enhance supply security in EU member countries over-dependent on Russian Gazprom. Hence, the EU Commission promoted Nabucco as the corridor’s mainstay and never officially revoked that strategic rationale.

However, TAP does not pursue the same diversification and supply-security goals. It is a non-strategic project in terms of market orientation and volume. TAP is a corporate business project, directing the initial flows of Caspian gas toward Western European markets that already enjoy supply diversification and access to liquefied natural gas (LNG). TAP plans to carry 10 billion cubic meters (bcm) of Azerbaijani gas annually from 2019 onward. It offers to add another 10 bcm per year, sourced from Azerbaijani fields other than Shah Deniz and/or from Turkmenistan, if and when these come on stream. Those were also Nabucco’s designated sources.

TAP is planned to run almost 900 kilometers from its Greek inception point near the Turkish border, onward via northern Greece, southern Albania, and the Adriatic seabed, to the landfall point on Italy’s southeastern coast. There, TAP is planned to link up with Italy’s transmission pipelines operated by Snam Rete Gas. The Swiss Axpo owns gas-based electrical power plants in Italy’s north. Snam’s transmission pipelines run the length of the Italian peninsula and connect with Switzerland’s.

TAP’s construction costs have not been publicly announced and might only be a matter for preliminary estimation at this stage (as with Nabucco-West). Under agreements signed with TAP during 2012, the Shah Deniz shareholders BP, SOCAR and Total of France hold options to acquire a combined 50 percent of TAP’s shares, thereby contributing to TAP’s construction costs (Shah Deniz shareholders have signed a similar agreement with the Nabucco project company, but that agreement is now moot).

TAP’s current shareholders are Norwegian Statoil and Swiss Axpo, each with 42.5 percent of the shares, and E.ON Ruhrgas of Germany (a later entrant) with 15 percent. In June of this year, Belgium-based Fluxys decided to join the TAP consortium as of August 2013. Fluxys is a major operator of gas transmission pipelines and storages in six countries, mainly in Europe’s northwest. TAP’s vision is “to enable south-north flows from Italy to Switzerland and Germany. Azerbaijani gas from the TAP pipeline could be moved straight into north-western European markets” (TAP-Fluxys joint press release, June 17).

The entry of Axpo (replacing its Swiss EGL subsidiary), German Ruhrgas, and now Fluxys, illustrate the evolution in TAP’s raison d’etre.  Initially, TAP had designated Italy as its main market, with small volumes to be delivered in Greece and Albania en route to Italy. Since the second half of 2012, however, TAP has increasingly emphasized its potential to supply Switzerland, Germany, France and Great Britain with gas via Italy. The entry of Fluxys into TAP, as just announced, seems to underscore this evolution. Fluxys holds ownership stakes in the Transitgas pipeline that links Switzerland with Germany, as well as in the Belgium-Britain and Netherlands-Britain interconnector pipelines.

All this would seem to entail using Italy mainly as a transit corridor, rather than main market (TAP’s public announcements do not mention swap operations, which might also be envisaged). Italy is already saturated with gas supplies from multiple sources by varying delivery modes, and is massively building additional LNG reception capacities. Apparently, Italy seeks to become a major transit corridor for LNG tanker-delivered gas and for pipeline-delivered Caspian gas toward continental Western Europe. The TAP project currently seems to fit into this context.

Meanwhile, Gazprom will continue holding sway in the Nabucco countries and their direct neighbors.