Without Clear EU Commitment the South Energy Corridor is Russian Playground

Without Clear EU Commitment the South Energy Corridor is Russian PlaygroundThe Southern Gas Corridor, a $45 billion dollar pipeline project delivering gas from Azerbaijan to Europe via Turkey, is supposed to start operations by 2019-2020.

But as it was reported by Chattem House, Azerbaijan’s ability to uphold its financial commitments towards the project is under serious pressure from continued low oil prices. The same negative tendencies on the oil markets that affect state budget of Russia have its influence on Azerbaijan. The drop in the price of oil was initially treated as temporary by Azerbaijani officials but has already had a devastating impact on most sectors of the country’s economy. Baku has only secured $1.4 billion of the at least $4 billion needed for the Trans-Anatolian pipeline (TANAP), the first part of the route, and needs to secure an additional $2-3 billion for the Trans Adriatic Pipeline (TAP) which brings the gas to Europe.

Back in 2013, Baku chose to support TAP (capacity 10 bcm) over the proposed Nabucco pipeline (capacity 30 bcm), which would have competed more directly with Russian energy exports in Central Europe, in part so as not to aggravate Moscow. Targeting a small market – southeastern Europe – was seen as a much safer bet in terms of exporting Azerbaijan’s own gas without needing additional volumes from other sources. It is now widely seen by experts as a strategic mistake that was indeed well calculated and lobbied by Gazprom.

In addition, in order to strengthen its regional position, the State Oil Company of Azerbaijan (SOCAR) tried to acquire 66 per cent of the Greek gas transmission system operator DESFA, prior to the final decision on Azerbaijan’s gas export via TAP. But the deal was put on hold due to a European Commission’s investigation to assess whether the acquisition was in line with EU merger regulations, and was eventually canceled in December 2016 due to disagreements with Greece over pricing. This was a major setback for the export plan that Baku had been developing since 2013, as it meant the loss of direct access to consumers and control over the Greece–Bulgaria interconnector, as well as ending the prospects of delivering gas via the Revithoussa LNG terminal in the Mediterranean.

The Southern Gas Corridor enjoyed brief support from Brussels following Russia’s annexation of Crimea, which (yet again) alerted the EU to the need for finding alternatives to Russian gas. However, this had a little practical impact: in fact, European energy majors Statoil and Total have withdrawn from TANAP, and Statoil sold its shares in TAP. This dealt a blow to the international image of the project, though the financing was made up by other investors. This story of withdrawal is a foggy one because both Total and Statoil did exercise a lot of efforts lobbying for less attractive TAP over much better set NABUCCO.

Baku has secured $800 million from the World Bank and $600 million from the Asian Infrastructure Investment Bank towards the $4 billion target for TANAP, but the rest is yet to be confirmed. There are loan requests under consideration by the European Investment Bank and the European Bank for Reconstruction and Development for TAP, but Azerbaijan’s withdrawal from the Extractive Industries Transparency Initiative in March put these requests on hold. In order to demonstrate transparency before foreign investors, the Azerbaijani government has agreed to London-based accountancy and advisory firm Moore Stephens conducting a transparency assessment.

However, Baku now owes more than $9 billion, with repayment due by 2020. Gas exports are unlikely to bring in sufficient revenue to repay the loans on time – the country faces growing domestic demand while promising to increase deliveries to Georgia. The revenues from the Shah Deniz, Azerbaijan’s largest gas field, have decreased from $523 million in 2014 to $63.98 million in 2016, showing that significant volumes of gas are staying at home. Baku has other gas reserves, but accessing them will not be possible until 2020 – and they only entail relatively small volumes (up to 1.5 bcm) for domestic consumption. Exports to Europe will not be available until 2025 at the earliest.

TAP’s construction has also been delayed by anti-TAP protests, particularly in the Puglia region of Italy, as well as in Greece and Albania.The protests are supported by Italy’s Five Star Movement, a populist political party whose leader does not hide his sympathies for Russian President Vladimir Putin. The timing has led to speculation that Russia is involved in fomenting the unrest of farmers whose land might be affected by the construction. Baku has not spoken out on the issue, although an SOCAR official has remarked that ‘the campaign against the TAP gas pipeline will suit Russia’.

Russia’s own pipeline project – TurkStream – is in itself undermining TAP. Developed following the failure of SouthStream, it targets the same market as TAP – southeastern Europe. Russia’s project targets Bulgaria, Romania, and Hungary – countries that were bypassed when the TAP route was chosen over Nabucco – as well as Greece and Italy. Turkey, a key partner in the Southern Gas Corridor, is also supporting TurkStream.

Russian energy company Gazprom said construction of a pipeline known variably as TurkStream or Turkish Stream started in May. Sergei Kupriyanov, a spokesman for the energy company, told Russia news agency Tass progress is still in the preliminary stage. "Only preparations are underway in shallow waters now," he said.

The pipeline's route would mirror the now-abandoned South Stream project and run under the Black Sea to Turkey and then to the European market. South Stream was scrapped because of concerns about Russian business practices expressed by some European countries.

Turkey, meanwhile, aims to capitalize on its geographic position by becoming an energy bridge between Central Asian and the Middle East suppliers and the European market. Geopolitical concerns stemming from Turkey's proximity to the fight against the Islamic State as well as democratization could get in the way of Ankara's ambitions.

In its turn, Baku is seeking to secure the loyalty and support of countries targeted by Russia as gas buyers in order to show that in future TAP can benefit more countries by delivering gas with interconnectors. For example, it has secured a 25-year contract with Bulgaria to supply 1 billion cubic meters of natural gas per year from Shah Deniz 2, which will meet of one-third of Bulgaria’s annual gas consumption by 2020. At the same time, Bulgaria is in talks with Russia to receive gas from the Turkish Stream too. As TAP’s 10 bcm capacity would only meet 2 per cent of the EU’s annual consumption, Russian competition could weaken commitment to the EU’s common energy policy.

If the TAP pipeline is built, Russia would also be interested in using it to deliver its gas to European markets. Gazprom's deputy chairman, Alexander Medvedev, has already publicly questioned Azerbaijan's ability to fill the pipeline. This may be a subtle warning to Baku, given that TAP has already secured a third-party access exemption from the EU for the initial capacity of 10 bcm over a period of 25 years. This provides legal protection against interference from Moscow: 50 per cent of the pipeline capacity would be open to other suppliers, including Russia.

However, Gazprom is widely expected to submit a competitive bid for the privatization of Greece’s DESFA. If such a bid were to succeed, Russia would be able to exercise influence directly, through control of the grid. This would undermine the prospects for the Southern Gas Corridor and definitely requires the strong and sustainable commitment from Brussels.

Sergiy Korsunskyi
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