4 March 2021

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NEW ENERGY MAP FOR EURASIA

Azerbaijan to expand the potential of the Southern Gas Corridor to ensure uninterrupted commercial gas supplies to Europe

Author:

15.01.2021

The full-fledged launch of the Southern Gas Corridor (SGC) has literally become a New Year's gift for European natural gas consumers. On December 31, 2020, for the first time in history, Azerbaijan began commercial gas supplies to Greece, Bulgaria and Italy.

“This is our historic achievement, since we were the initiators of the Southern Gas Corridor. We also bore the major part of financial costs,” Azerbaijani President Ilham Aliyev said on this occasion.

 

Safe, direct and comfortable route

Azerbaijani gas was delivered to Italian consumers through Melendugno to the SNAM Rete Gas (SRG) gas distribution grid, and to Greek and Bulgarian consumers through Nea Mesimvria to Greece and Bulgaria through the DESFA gas transmission grid.

As President Ilham Aliyev noted, the SGC project lays the foundation for a new format of cooperation between the participating countries and other Eurasian states. “We have re-drawn the energy map of Eurasia. We have built three interconnected 3,500 km long gas pipelines and launched the Shah Deniz-2 project. European consumers are already receiving Azerbaijani gas. It is good for both them and us,” Mr. Aliyev said.

The benefits are obvious: the transportation of natural gas to Europe will strengthen the energy security of Azerbaijan as a producer by diversifying supply markets and consumer countries through diversifying sources and routes.

The start of Azerbaijani gas supplies to Europe was not celebrated as expected due to the pandemic and lockdown but this does not diminish the historical significance of the event. It opens a new page in the development of Azerbaijan as a gas country, which has received direct access to the European gas market – the largest importer of natural gas in the world.

"New gas supplies to southern Europe contribute to energy supply on more favourable terms, decarbonization, as well as connecting the continent with the Caspian region," the Azerbaijani Ministry of Energy stated.

At the same time, the ministry admits that the successful launch of the Caspian gas supply system to Europe would have been impossible without Azerbaijan's exemplary cooperation with partner countries, companies, international financial organizations and the constant strong support of the Southern Gas Corridor by the US, Great Britain and the European Union.

“TAP is an integral part of the continent's gas network and contributes to the energy transit roadmap. We offer a reliable, direct and convenient transport route to Southeast Europe and other countries,” Luca Schieppati, Managing Director of TAP.

The project has good prospects for further development. Despite the start of commercial activities on TAP, the study of the possibilities of expanding its capacity will start already this summer. If these studies turn positive, the increase in TAP throughput will open up new prospects for Azerbaijan in terms of expanding the geography of gas supplies to Europe.

 

Delivery for 25 years

As a sidenote, TAP transports natural gas to Europe from the giant Shah Deniz field in the Azerbaijani sector of the Caspian Sea. The 878 km pipeline connects with the Trans Anatolian Pipeline (TANAP) on the Turkish-Greek border, crosses the territories of Greece, Albania and the Adriatic Sea to reach the southern coast of Italy.

As the last segment of the Southern Gas Corridor, TAP, which provides Europe with reliable access to a new source of natural gas, plays an important role in strengthening the continent's energy security by diversifying supply and reducing reliance on a single supplier.

“Seven years ago, we made a final investment decision with our partners and signed a set of 25-year agreements on gas purchase and sale with European gas distribution companies. The construction of three interconnected gas pipelines with a total length of 3,500 km, which some considered impossible at the time, has already been completed. And today, Azerbaijani gas is in Europe,” SOCAR President Rovnag Abdullayev said.

The State Oil Company of Azerbaijan (SOCAR) believes that TAP can encourage gas supplies to the countries of Southeast Europe through the connecting lines that will be built in the future. For example, SOCAR experts believe that Bulgaria will be able to improve security of supply by meeting 33% of its natural gas needs through TAP. This will increase the supply of natural gas into the country. TAP ends in Greece and Albania, as well as in Italy, also opening up opportunities for the transportation of Azerbaijani gas to other European countries.

Of the more than 10 billion cubic meters of gas that will be supplied by TAP to European countries in 25 years, consumers will receive 8 billion cubic meters annually in Italy and 2 billion cubic meters in Greece and Bulgaria. The of the volume will be supplied to neighbouring markets. At present, 10.5, 2 and 1 million cubic meters of gas are supplied to Italy, Greece and Bulgaria on a daily basis, respectively.

“With the start of commercial deliveries via TAP, Greece is further diversifying its supply structure. The project will provide competitive gas prices, with the main beneficiaries being the end consumers,” the Greek company DEPA said.

The company notes that the start of deliveries via the TAP pipeline is an important milestone for DEPA. “This is the culmination of more than seven years of our company's efforts to gain access to Caspian gas in Greece, a new source of supply at competitive prices. With the new TAP gas, DEPA will further improve its commercial position in the Greek market,” DEPA CEO Konstantinos Xifaras said.

The Bulgarian government claims that due to supplies from Azerbaijan, the country has achieved complete diversification of gas supplies. To emphasize the significance of the event, the Bulgarian Prime Minister Boyko Borisov visited a compressor station in the village of Kulata on the Greek border on January 1, where he said: "From today on - full diversification!"

Obviously, this does not mean at all that Bulgaria will stop large purchases of Russian gas, but its position in negotiations on prices and conditions has radically improved, because the Russian company has now lost its almost monopoly position on the Bulgarian market.

"The agreement with Azerbaijan is an extremely important contract, which is related to the implementation of our priorities - the diversification of natural gas supplies," Bulgarian Energy Minister Temenuzhka Petkova said.

Certain changes can be expected in the export of Russian gas to Italy. Even if Gazprom manages to maintain the volume of supplies, with the introduction of TAP, the Russian giant should hardly count on significant increase of Russian gas supplies and prices in Italy.

Turkey and Georgia expect that with the start of Azerbaijani gas supplies to Europe, their role in ensuring Europe's energy security will only increase.

“The Southern Gas Corridor has been launched. This is new milestone in terms of the contribution that our country makes to ensure the energy security of Europe,” Turkish Foreign Ministry stated.

“Until now Georgia was only a transit country for the supply of Azerbaijani gas to Turkey and Russian gas to Armenia. But now we have become an international player. From now on, gas exported through Georgia will play an important role in diversifying international supplies, mainly to the EU energy markets, and in increasing the security of these supplies,” the Georgian Prime Minister Giorgi Gakharia said.

As to the importance of supplies for the EU, Mr. Gakharia noted that the SGC would compensate for the reduction in local gas production in Europe. An important goal of this route is also to increase competition in the common European market. At the same time, supplies of commercially attractive and environmentally friendly natural gas will be ensured to the Balkan countries that have not yet used it or are heavily dependent on Russian gas imports.

 

Doubling of volumes in future

The successful operation of SGC is obvious. Contrary to sceptical forecasts, Azerbaijan has already named certain terms. According to SOCAR estimates, taking into account current global trends, capital expenditures on the project will be fully reimbursed within 8-10 years.

“As our projects develop and expand, they take in capital investments. This can affect the terms of compensation and postponing them to a more distant future. If the prices for hydrocarbons go up in the future, which is at least my forecast for 2021, then, accordingly, the time of cost recovery and time when we switch to a fully profitable project will get closer,” Vitaly Beylarabeyov, Deputy Vice President of SOCAR for Marketing and Investments said.

Meanwhile, Mr. Beylarbeyov also pointed out that the project to create the Southern Gas Corridor cost $33 billion, saving $12 billion from the initial estimate of costs made back in 2013.

Further work on the SGC will be associated with the possibility of expanding its throughput capacity. The opinions about the need to increase the capacity of the pipeline at least twice were voiced even during the construction of TAP. Agreements to launch relevant studies were reflected in the declaration following the February meeting of the Consultative Council on the SGC project held in Baku.

Following on, in the summer of 2021, the second stage of marketing research will begin to further expand the TAP and increase the pipeline's capacity to 20 billion cubic meters.

According to Mr. Abdullayev of SOCAR, a decrease in gas production in the European market creates a need for additional volumes, which Azerbaijani gas will satisfy. Thus, the importance of Azerbaijan for Europe will increase.

International experts also positively assess the prospects for expanding the Trans-Adriatic pipeline.

Wood Mackenzie Research Director Murray Douglas said the launch of TAP will mark the next stage of the Southern Gas Corridor (SGC) project: “Despite the green deal in Europe and the current uncertainty in the market, we are positive about the prospects for TAP's expansion. Gas supply dynamics in the region has changed since the construction of TAP began in 2016, especially thanks to Turkey's recent discovery of giant gas in the Black Sea, as well as more lucrative supply alternatives, including Russian gas. All eyes will now be on the mandatory TAP market testing phase in the summer of 2021. This could be a signal for the recovery of fundamental indicators of the European gas industry in the post-lockdown period,” the expert said.

Stanislav Mitrakhovich, a leading expert of the Fund for National Energy Security and Financial University under the Russian government, believes that the expansion of the SGC capacity opens up opportunities for the supply of Russian gas to Europe.

“In the future, we can expect attempts to expand the capacity of the TANAP and TAP gas pipelines to allow the Russian gas to enter the system via the Turkish Stream. It will be necessary to negotiate with Ankara separately. In the dialogue with the EU, it is necessary to point out the principles of the Third Energy Package, which prevent the access to the system of suppliers not involved in the construction of pipelines, such as Gazprom. In that case, Gazprom could use TANAP-TAP as an infrastructure in which it did not invest funds,” Mitrakhovich said.

The expansion of SCP may have good prospects for the supply of Turkmen gas to Europe as well. Ashgabat should seriously consider this option if Turkmenistan really wants to diversify its gas supplies. Europe also appreciates these prospects as an alternative to Russian gas. Therefore, we can expect that the EU and Turkmenistan intensify negotiations on the implementation of the Trans-Caspian gas pipeline.

Iran can also use SCP to export its gas to Europe, but this possibility seems rather vague due to tense relations with the West.

In short, any potential gas suppliers willing to use the SCP route will not lose anything, since Azerbaijan has already fulfilled the most difficult task of creating a system of direct gas supplies from the Caspian region to Europe.



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