How will the Shah Deniz consortium decide on?

On Feb. 20-22, one or more anonymous representatives of the Shah Deniz gas producers’ consortium announced their preferred pipeline options for transporting Azerbaijani gas to Europe. Of the existing five rival options, those representatives have eliminated one pipeline project; suggested (thus, prejudging) the order of preferences for three other pipeline projects; strangely, failed to mention the Azerbaijani-Turkish, Trans-Anatolia pipeline project; and postponed the final selection from mid-2012, until mid-2013 (while implicitly prejudging it already now), without citing an official consortium decision on postponement .

The consortium’s representatives announced that the Interconnector Turkey-Greece-Italy (ITGI) has been eliminated from the contest. This  decision is based on the Shah Deniz consortium’s eight initial criteria for selecting the pipeline solution. The representatives elegantly refrained from citing the financial situation of ITGI’s two shareholders, Italian Edison and Greek state-owned DEPA. The producers’ consortium will henceforth conduct exclusive negotiations with the Trans-Adriatic Pipeline (TAP), led by Norway’s Statoil, for possible transportation of Azerbaijani gas via the western Balkans to Italy.

For transporting gas to Central Europe, the Shah Deniz consortium will choose either British Petroleum’s concept of a South-East Europe Pipeline (SEEP, from Turkey to Hungary, with further connections), or an abridged version of the Nabucco pipeline project (from Bulgaria to Vienna). The same unnamed representatives expressed a preference for SEEP. One of these two will be selected and “will be assessed against TAP,” whereupon the producers’ consortium would decide whether to export Azerbaijani gas to southern Europe or to central Europe.

Italy’s Economic Development Ministry and the Greek Energy Ministry have issued statements challenging the elimination of ITGI from the contest, arguing for this project’s superiority over its rivals, and pledging continuing support for ITGI. In its own statement, ITGI regards its elimination as “merely a temporary decision”. These unusual responses seem to imply that those unnamed representatives did not necessarily or conclusively speak for the Shah Deniz consortium. Apart from the issue of procedure, however, ITGI’s elimination seems all too real, and ultimately a footnote in the selection process. This project contravened the strategic imperative of reducing Russian Gazprom’s market share through diversification of supplies to central European countries. In this and other respects, however, TAP is almost a mirror image of the eliminated ITGI.

TAP proposes (as did ITGI) to carry 10 billion cubic meters (bcm) of Azerbaijani gas annually -- i.e., the entire volume available for export to Europe from Shah Deniz Phase Two of production. This would deprive Nabucco or the Trans-Anatolia project of a resource base; and deprive central Europe of its diversification opportunity, redirecting the gas to southern Europe (mainly Italy) instead. The Italian market and the small Greek market are already saturated and well-diversified. TAP and, lately, ITGI claim that their respective capacities can later be increased to 20 bcm annually each. This can hardly be taken seriously, given their lack of access to further gas sources (Caspian or from northern Iraq). If taken seriously nevertheless, diverting 20 bcm annually to southern Europe, instead of central Europe, would be even more anti-strategic, and a still greater favor to Gazprom, than diverting 10 bcm (see below).

Like ITGI, so would TAP use Turkey’s pipelines, and build a new pipeline for part of the way in Greece. TAP would reach Italy via Greece, Albania and the Adriatic seabed; while ITGI would reach Italy directly from Greece on the seabed of the Ionian Sea. By their own estimates, ITGI and TAP would each cost 1.5 billion to 2 billion Euros ($ 2.64 billion) to execute – far cheaper, compared with the Nabucco or Trans-Anatolia projects. To achieve these cost-savings, however, TAP would (like ITGI) use Turkey’s pipelines, which have very limited spare capacity (a fact that casts further doubt on TAP’s or ITGI’s potential capacity increase to 20 bcm annually each).

Greece had objected to TAP all along, on two counts: as a rival to ITGI (in which the Greek state is a shareholder through DEPA) and because TAP proposes to reach the Adriatic via Albania, which Greece opposes. Consequently, TAP could not be certain of obtaining construction and transit rights in Greece. Now that ITGI has been eliminated, however, some Greek officials consider merging ITGI with TAP or otherwise cooperating with TAP on Greek territory (Athens News Agency via RIA Novosti, February 20).

TAP’s shareholders are Norway’s Statoil with 42.5 percent, Swiss EGL (Elektrizitaets-Gesellschaft Laufenburg) with another 42.5 percent, and E.ON Ruhrgas of Germany with 15 percent. According to TAP’s CEO, Kjetil Tungland (a Statoil executive), “TAP is a strong claimant to victory in the tender for transporting [Azerbaijani] gas from Shah Deniz to Europe. We are confident that TAP is proposing to the Shah Deniz consortium the most attractive route to Italy”. This would imply (see above) diverting the available volume of Azerbaijani gas to the saturated and diversified Italian and other southern European markets, away from central Europe which needs both the added volumes and the diversification. Gazprom would be pleased with such an outcome. Its flaws notwithstanding, TAP plays a strong hand through Statoil, which is the commercial operator of the Shah Deniz consortium.

The Nabucco project (Turkey, Bulgaria, Romania, Hungary, Austria, and the German RWE), backed by the European Commission until very recently, has lost credibility all around in the form proposed. The tipping point of credibility loss (in that form) can be traced to November-December 2011. As predicted, however (see EDM, January 31), Nabucco remains viable and necessary in an abridged form, to carry Azerbaijani gas into central Europe, as a European continuation pipeline to the Azerbaijani-Turkish, Trans-Anatolia pipeline project. In recent days, the Nabucco consortium has submitted a proposal along these lines to the Shah Deniz gas producers’ consortium. Dubbed “Nabucco-West,” the pipeline would no longer start in eastern Turkey, but would run from the Turkish-Bulgarian border to Vienna, for a capacity only half as large as the originally designed 31 bcm per year (Dow Jones, February 20; Trend, February 20, 21). This size, however, would lack spare capacity for future volumes of Turkmen gas, for which the European Commission seeks an outlet to Europe.

Expert Vladimir Socor


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