Southern Gas Corridor Seeks Financial Backing Amidst Volatile Oil Prices

During the third ministerial meeting of the Southern Gas Corridor (SGC) Advisory Council, held in Baku, on February 23, the European Commission’s vice president for the Energy Union, Maroš Šefčovič, encouraged international financial institutions to bankroll the SGC project (Trend, February 23). Amidst volatile oil prices, securing financing is of primary importance for this strategic energy transit corridor’s timely implementation.

Speaking in fall of 2016, the deputy vice president of Azerbaijan’s State Oil Company (SOCAR), Vitaly Baylarbayov, argued that the changing market situation, marked by volatile oil prices, has made strategic planning more difficult and impacted negatively on SOCAR’s investment portfolio (EurActiv, October 4, 2016). At the same time, however, falling global oil and commodity prices contributed to the decline in construction costs of the SGC—from $45 billion to $39.1 billion. Breaking down all the main elements of the SGC: the cost of the longest link in the transit corridor, the Trans-Anatolian Gas Pipeline (TANAP) dropped from $11.7 billion to $8.5 billion; the cost of the Trans-Adriatic Pipeline (TAP) went from $6 billion to $4.5 billion; the Shah-Deniz natural gas field’s second stage (SD-II) has declined to $23.8 billion; and the South Caucasus Pipeline’s expansion (SCPx) has gone down $4.9 billion (Natural Gas World, June 5, 2016; Abc.az, June 2, 2016; World Pipelines, December 22, 2016; Hurriyet Daily News, January 31, 2017).

SOCAR’s stakes in the SGC’s key links (SD-II, SCPx, TANAP, TAP) will be partially financed (51 percent) by Azerbaijan’s State Oil Fund (SOFAZ), whose currency reserves stand at $33 billion; the remaining funding (49 percent) will be raised by SOCAR, mostly by receiving external financial support from international financial institutions (see EDM, March 4, 2016). According to SOFAZ’s 2017 budget, $279 million in financing has already been allocated for Azerbaijan’s shares in the SGC, which is almost five times less than last year’s budget allocations ($1.5 billion), even though overall expenditures of the SOFAZ budget in 2017 will exceed that of 2016 (Oilfund.az, March 18, 2016; January 10, 2017). Azerbaijan has managed to raise €1 billion ($1.05 billion) in euro-bonds on the international financial markets to fund the SGC’s segments; but additional external financing is needed to cover the remaining funding gap (Natural Gas World, March 28, 2016). Azerbaijan’s Energy Minister Natig Aliyev confirmed that “The timely realization of the project depends on financial support” (Azernews.az, February 24).

According to Afgan Isayev, the director general of the SGC Closed Joint Stock Company (SGC-CJSC), the total expenses required for the SGC’s implementation amount to some $11.9 billion; the company fulfilled half of its financial commitments by raising some $6 billion of the required sum for its shares (Azernews.az, December 23, 2016). Much of the financial backing for Azerbaijan’s shares in the SGC so far was secured after an Azerbaijani delegation—including representatives of SOFAZ and the SGC-CJSC—visited Washington, in October 2016, and following their subsequent discussions with the US Department of State, the World Bank (WB), the European Investment Bank (EIB), the Asian Development Bank (ADB) and other commercial banks (Trend, October 8, 2016).

In December 2016, the WB approved (through the International Bank for Reconstruction and Development—IBRD) two $400 million loans—one for Turkey’s BOTAŞ and the second for the SGC-CJSC—for the TANAP project. Those loans are guaranteed by the governments of Azerbaijan and Turkey. Another WB loan for TANAP, this one for $750 million, was offered through the Multilateral Investment Guarantee Agency. The SGC’s third ministerial meeting in Baku, on February 23, facilitated the dispersal (the following day) of the WB’s first tranche of the loan for the SGC-CJSC through the IBRD (Worldbank.org, December 20, 2016; Huriyyet Daily News, December 21, 2016 and February 8, 2017; Azertag.az, January 16, 2017, February 24, 2017; Azertag.az, December 23, 2016; Miga.org, October 14, 2016). That same month, the ADB and the Asian Infrastructure and Investment Bank (AIIB) approved, respectively, a $1 billion loan for the SD-II and a $600 million loan to the SGC-CJSC for the TANAP project, with a guarantee from the Azerbaijani government (Adb.org, December 7, 2016; Aiib.org, December 21, 2016; Azertag.az, February 24).

The EBRD had earlier declared its intention to allocate a loan of up to €1.5 billion ($1.59 billion) for the TAP project and another large loan for TANAP. However, no concrete decision has been made to date, due to the fact that the technical, economic, financial and environmental assessments have yet to be finalized to verify whether funding these projects would be consistent with the EBRD’s policies (Trend, July 27, 2016; May 13, 2016; December 3, 2015). The EIB may become the next organization to grant additional financial backing, in the amount of €1 billion and €2 billion ($1.06 billion and $2.12 billion), respectively, for TANAP and TAP (Eib.org, March 23, 2016; August 13, 2015). The SGC’s remaining funding (an extra $3 billion loan, including $2.4 billion for TANAP) are expected to be distributed by other commercial banks and financial institutions (Trend, November 19, 2016).

Additional modest financial support (€14 million) has come from the European Commission (EC) under the European Union’s special Connecting Europe Facility (CEF) funding instrument. The money will be directed toward archaeological investigations and rescue excavations studies for the TAP project, within the framework of the EU’s priority energy projects (Ec.europa.eu, February 17). The EC had earlier allotted funding via the CEF for engineering studies on metering and regulating stations to connect Greece’s gas transmission system with TAP, for engineering studies related to the SCPx and TANAP, as well as for environmental monitoring of TANAP (Ec.europa.eu, accessed March 9).

The difficult economic environment notwithstanding, the timely implementation of the SGC is unlikely to be affected given the potent commitment of the international financial institutions and Azerbaijan’s government, which underlines the strong political will to deliver the project. SOCAR itself, however, will likely need to carefully calculate the SGC’s probable financial pitfalls—in light of unsteady oil prices and Azerbaijan’s weak domestic economic performance—in order to avoid mounting long-term debt for the company. According to Standard&Poor’s estimations, despite depressed oil prices (even if prices decline further) and the currency risks in the domestic market, SOCAR possesses sufficient funds to finance the capital expenditure program. Finally, the Azerbaijani government should be able to fund a significant portion of SOCAR’s costs for the SGC, thus allowing the company to limit its debt growth in the future (see EDM, March 4, 2016; Standardandpoors.com, December 14, 2016).