Southern Gas Corridor Raises Significant Financing, but Still Faces Provocations

On February 6 and March 15, the European Investment Bank (EIB) allocated loan packages of €1.5 billion ($1.8 billion) and €932 million ($1.14 billion) to complete the construction of the Southern Gas Corridor’s (SGC) two main segments, which will carry Caspian-basin natural gas from Azerbaijan to Southeastern Europe—respectively, the Trans-Adriatic Pipeline (TAP) and the Trans-Anatolian Pipeline (TANAP) (Eib.org, February 6; Azertag, March 17). The EIB’s Vice President Andrew McDowell said he hoped the large loan would smooth the way for the $5.6 billion TAP pipeline project to be able to procure further financing on international markets (Reuters, February 6). The European Bank for Reconstruction and Development (EBRD) is also planning to allocate up to €1.2 billion ($1.5 billion) for TAP by mid-2018 (Azertag, February 20). This follows the bank’s decision, in October 2017, to allocate $500 million for the more than $10 billion TANAP (APA, October 20, 2017). The first Azerbaijani gas flows from the offshore Shah Deniz II (SDII) field are expected to pass through TANAP in June 2018 (Azernews.az, January 5, 2018).

The EIB and the EBRD also allocated, respectively, €50 million ($61 million) and €60 million ($74 million) for the construction of a new gas pipeline between Romania, Bulgaria, Hungary and Austria, as part of the so-called “Vertical Corridor,” which might be connected to TAP’s Greek section for transmission of gas from the SGC to Austria (Ebrd.com, February 23). Earlier, the World Bank, the Multilateral Investment Guarantee Agency and the Asian Infrastructure Investment Bank (AIIB) guaranteed loan packages for TANAP in the amount of $800 million, $750 million and $600 million, respectively; moreover, the Asian Development Bank (ADB) lent $1 billion for the SDII (see EDM, March 9, 2017). Unexpected support for the SGC also recently came from Germany: according to Berlin, the German Ministry of Finance will provide €1.2 billion to help Azerbaijan finance its project portions in the SDII and TANAP (Euractiv.com, March 6). The director general of the SGC Consortium, Afgan Isayev, said that the consortium has hitherto invested $8.4 billion out of the total $11.5 billion required for the financing of Azerbaijan’s participating stakes in the SGC (Trend, December 22, 2017).

The EIB’s decision on TAP had actually been due in December 2017, but it was delayed because of the decision to carry out a more detailed project assessment, notably following opposition to the pipeline from several non-governmental organizations (NGO) in Europe (EurActiv, February 7, 2018; December 13, 2017). Last December, 33 members of the European Parliament (EP) addressed a letter to EIB President Werner Hoyer, calling on him to halt the financing for TANAP. The original letter was publicized by Bankwatch, an environmental and human rights group with a lengthy track record of carrying out various provocations against the SGC (Bankwatch.org, December 8, 2017). The gambit was part of a long-running coordinated campaign, involving various NGOs and European political parties, to put pressure on the European Union to slow down the implementation of the SGC and undermine its ability to attract funding from international financial institutions (News.az, March 19, 2018; EDM, December 16, 2016; April 26, 2017). Nevertheless, as noted above, the EIB was ultimately not swayed and offered a new loan to the SGC’s TAP project this past February.

Nevertheless, the pressure campaign has continued. On March 8, the Greens alliance in the EP introduced a motion to oppose the inclusion of “Projects of Common Interest” based on fossil fuels (which include the SGC’s main pipeline segments) on the European Commission’s list. The European lawmakers alleged these projects are incompatible with the climate and decarbonisation commitments the EU made under the Paris Agreement (Europarl.europa.eu, March 8). The motion was overwhelmingly rejected by most EP members on March 14 (a day before the EIB’s decision on TANAP).The votes in favor came mainly from France, Italy, Spain and Germany, while the political factions supportive of the resolution were the Greens, about a third of the EP members of the Socialists and Democrats bloc, as well as deputies affiliated with France’s far-right Front Nationale (EurActiv, March 21; Votewatch.eu, March 14).

Azerbaijan’s withdrawal, last year, from the Extractive Industries Transparency Initiative (EITI), which oversees member countries’ adherence to transparency standards in the extractive sector, has also been used to raise questions about the SGC’s financing (see EDM, March 28, 2017). However, the EIB, after due diligence, decided that “[d]espite its withdrawal from the EITI, Azerbaijan is developing, in line with EITI [transparency] requirements,” and the SGC will contribute “to security of supply and by enabling a new source of cost-competitive gas” (Platts.com, February 7, 2018). These judgements echoed the EBRD’s statements from last fall, which confirmed that the SGC is strategically important for the EU in its efforts to diversify supply routes and develop an open, competitive market for natural gas that can replace dirtier-burning coal (FT, October 18, 2017).

Azerbaijan’s President Ilham Aliyev, during the SGC’s Fourth Advisory Council Meeting, mentioned that the Southern Corridor’s implementation would not have been possible without the strong commitment and contributions of the Shah Deniz, TANAP and TAP member companies as well as the world’s leading financial institutions. Currently, confirmed President Aliyev, construction of the SGC is approximately 95 percent completed: TANAP is 95 percent done, TAP—67 percent, SDII—99 percent, and the SGC’s easternmost pipeline link, the South Cuacus Pipeline Expansion (SCPX), is 95 concluded (President.az, February 15). The Azerbaijani State Oil Fund’s 2018 budget, unlike in 2016 and 2017, has not earmarked any funds for the SGC (Oilfund.az, January 10, 2017; December 29, 2017). As a result, external financing is becoming highly significant for the early completion of this massive gas transit project, and has required serious and unceasing effort by the Azerbaijani side to secure it (Azernews.az, October 8, 2016).

All this is occurring against the background of Azerbaijan’s looming presidential election, which will be held in April. At the same time, EU-Azerbaijani relations are gradually improving again, following a short cooling-off period; the two sides are presently resolutely engaged in finalizing their Strategic Partnership Agreement (CACI Analyst, January 23; Emerging Europe, February 24). Maintaining forward momentum on the SGC is thus important to Baku out of both domestic and foreign considerations.