THE PATH TO THE "HEEL OF THE ITALIAN SHOE"

Last week the consortium for the development of the Shah Deniz [Sah Daniz] gas field in the Azerbaijani sector of the Caspian Sea announced that it has chosen the TransAdriatic Pipeline (TAP) as the main gas supply route to Europe. Years of discussion and deliberation have finally decided the export route of Azerbaijani gas to Europe. This means that gas from the Caspian region will be directed via Turkey, Greece, Albania and Italy, and then on to Western Europe, depending on demand.

The project has received the absolute support of the European Union and the USA which advocated the diversification of gas supplies to Europe and the Southern Gas Corridor as the main route.

The advantages of TAP

On the way to the final choice TAP left on the sidelines the projects ITGI (Interconnector Turkey-Greece-Italy), SEEP (proposed by BP for gas supplies to Austria) and, finally, its most powerful rival - the Nabucco West project. Incidentally, it could be said that it was all the painstaking and detailed work around the TAP project, which had been kept in the shadows all these years, that ensured its financial success. According to the projects managing director, Kjetil Tungland, back in 2010 there was virtually no interest in this route. "I spoke at one conference in Baku on the TAP project but very little attention was paid to my speech," she said. 

It was the Nabucco project that for many years had been seen as the basis of the Southern Gas Corridor, supported by the European Union and the USA, to provide a diversification of sources of gas supplies to Europe. However, the world financial crisis and a universal increase in prices led to an ever increasing rise in the cost of Nabucco. The project, which was conceived as the main route from the Caspian region to Europe with a length of almost 4,000 km and entailed the connection of Turkmenistan, Iraq and even Iran to gas supplies, was eventually restricted to a shortened version 1,300 km from the Turkish-Bulgarian border to Austria. Basically, this version, called Nabucco West, qualified for recognition only after Azerbaijan's announcement of the Trans-Anatolian Project (TANAP), which will deliver gas from the eastern part of Turkey to the western. But despite large-scale political support, Nabucco West has not come about, at least not for the time being.

The main choice of the Shah Deniz consortium was linked with the more attractive commercial conditions for TAP's route. The length of this pipeline is about 900km, whereas Nabucco West is 400km longer, which would mean higher construction costs. Furthermore, TAP will run through the territory of three states - Greece, Albania and Italy - whereas Nabucco West would run through four: Bulgaria, Romania, Hungary and Austria. These two factors will undoubtedly be reflected in the tariffs for the transportation of gas and place TAP in an advantageous position. But in questions of the construction of a gas pipeline network sales markets are a deciding factor. And here TAP provides obvious advantages.

The terminal of the gas pipeline will be San Foca in the "heel of the Italian shoe". In recent years Italy has been experiencing problems with providing the required volumes of gas. With a demand of 80bn cu m of gas annually the country imports about 70bn. Its main suppliers are Russia, Algeria, Libya, Norway and Qatar. And the gas arrives both through a pipeline system and in liquefied form. However, instability in Algeria and Libya has led to interruptions in gas supplies and the country has been busy looking for new sources in order not to increase its dependence on Russia, from where almost a quarter of all its imports comes. Here Azerbaijani gas could play the role of a rescue line in the diversification of import sources.

Greece, on the other hand, through whose territory TAP will run, has long been interested in supplies of Azerbaijani gas. It even received it as part of re-export contracts conducted by the Turkish Botas company. Although the country's requirements are in no way comparable with Italy's, there are a number of advantages here. It is in these two European countries that the highest gas prices were shaped. This is linked, first and foremost, with the remoteness of these countries from the main resource fields in the north of the continent.

The gas from Russia travels several thousand kilometres across the territory of several states before it reaches the main sales market which, of course, entails high transit costs. It is not without reason that Gazprom wants to make Tarvisio in northern Italy the terminal of the new "Southern Stream" gas pipeline, whereas before the route was expected to run to Baumgarten in Austria, to where Nabucco West was also heading.

According to the calculations of experts of "RIA-Reyting", the population of Greece and Italy are probably paying more than most in Europe for their gas - in Greece it is more than $1,350 for 1,000 cu m, and in Italy $1,300. The people of these countries are in third and fourth places in the price rating, where Sweden and Denmark occupy the leading positions. And the wholesale price for gas imports in these countries is 15-20% more than the average figure for Europe. Whereas on average in Europe the price for 1,000 cu m of gas is about $400, in Greece and Italy it is $470-500.

According to BP's vice-president for the development of the Shah Deniz project, Al Cook, TAP was selected from among ten possible routes in eight criteria, the main one of which was the commercial conditions for gas transportation and its cost in the region of final delivery. He noted that TAP offers much better advantages than Nabucco West in these criteria.

Nabucco remains on the agenda

But this is not the end of Nabucco West. According to SOCAR President Rovnaq Abdullayev, the choice of the TAP pipeline is merely the first step towards the implementation of Azerbaijan's plans to ensure the diversification of gas supplies to Europe. "This step was taken at the initiative of Azerbaijani President Ilham Aliyev, who in January 2011, signed with President of the European Commission Jose Manuel Barroso an agreement on the Southern Gas Corridor. Azerbaijan's role was once again reaffirmed during the country's president's visit to Brussels," Abdullayev said. He pointed out that in the long term Azerbaijan is proposing to develop a number of other promising gas fields, including "Absheron" [Abseron], "Asiman-Shafag" [Asiman-Safaq] and "Umid" and the deep-lying gas-bearing strata of the "Azeri-Chirag-Guneshli" [Azari-Gunasli-Ciraq] fields. "All this is the second wave, in the context of which we intend to develop gas supplies in the Austrian direction, which will make the Nabucco pipeline topical, taking into consideration also the expansion of the TAP project and, perhaps, other routes," Abdullayev said.

The geography of export

Incidentally, along with the choice of export route, the purchasers of Azerbaijani gas have also been defined. The volume of 10bn cu m of gas annually, which will flow from the Shah Deniz field to Europe, will be divided among buyers in Italy, Greece and Bulgaria. Talks with the gas purchasers in these countries have been virtually concluded, and long-term contracts (for 25 years) will be concluded in the next few weeks, said SOCAR's vice-president, Elsad Nasirov. At the same time, gas buyers in these countries are not being restricted to any limits for the further transportation of gas. Consumers who purchased gas in Italy can supply it to Switzerland, especially as in 2016 a pipeline link will be built between Italy and Switzerland. Azerbaijani gas could also find its way to France, Austria or even Germany, depending on price characteristics and demand. 

Gas will reach Bulgaria from Greece because there is a gas "bridge" between these two countries. If there are greater supply volumes a second bridge could be built. At subsequent stages of the export of gas the objective will be the Balkan peninsula. "The Ionian-Adriatic pipeline project is the second part of the TAP project which provides for supplying gas to the Balkan peninsula. Gas will flow through this pipeline to Albania and Montenegro and then to Bosnia-Hercegovina, Croatia and Slovenia. This will be an additional volume of gas above the originally envisaged 10bn cu m," Nasirov said. Incidentally, the Adriatic and Ionian Initiative council, which unites the Balkan countries, has given its political support for the TAP project.

At the same time, the choice of the TAP route opens up prospects for SOCAR's work in the gas markets of Albania and Montenegro, which until now have not been provided with gas. "SOCAR is first and foremost interested in Albania and agreement has already been reached with the government of that country that the company will work on setting up a gas infrastructure in subterranean reservoirs. There are also several other companies that want to work with us to create a gas system in Albania. Incidentally, this is an advantageous project for us because we shall sell our gas at an intermediary point and thus earn greater profits," Nasirov said.

At the same time SOCAR is finally brushing away all thoughts about a link between the TAP route and the purchase of the Greek gas transportation company DESFA, for which the Azerbaijani company is to be the only contender. "TAP and DESFA are different projects and have no mutual relation. But at the same time we may consider DESFA's potential for the transportation of gas to Bulgaria," Nasirov said.

Questions of the acquisition by shareholders of the development of the Shah Deniz field of shares in the TAP project are also due to be resolved before the end of the year. At this moment in time, of Shah Deniz's shareholders only the Statoil company has a share in TAP. At the same time, BP, Total and SOCAR have all expressed an interest in obtaining shares. "For Azerbaijan it is important to be a part of TAP in order to monitor the process of construction and obtain dividends from the transportation of our gas and, finally, that the project is reliable," Nasirov said.

An investment decision

The settling of all the aforementioned questions will, finally, pave the way for the adoption of an investment decision within the context of Stage-2 of the development of the Shah Deniz field. "By the end of the year we expect to adopt an investment decision on the Stage-2 project. This is one of the biggest world projects with a proposed volume of investment of $40bn, including offshore work to develop a field for the extraction of 16bn cu m of gas annually, and also the expansion of the existing infrastructure at the Sangachal [Sanqacal] terminal and the South Caucasian trunk pipeline, which delivers gas to the Georgian-Turkish border, and the construction of the TANAP pipeline from eastern Turkey to the west to link up with the TAP route," said BP's regional president for Azerbaijan, Georgia and Turkey, Gordon Birrell.

According to the plans all projects for extraction and transportation must be completed so that in 2019 Europe will be able to receive Azerbaijani gas which, incidentally, is in no way striving to compete in this region but, on the contrary, may create preconditions for cooperation.

"We are not competing with anyone on the European gas market. We are moving to markets where more gas is needed than is currently being supplied. The financial crisis in Europe will end sooner or later and demand for gas will increase. And our gas will help the producers now in the market to fulfil their commitments. We believe that our gas is in complementary volumes. This is in everyone's interests," Elsad Nasirov stressed.