TWO IN ONE

Having laid the foundation of the Trans-Anadolu Pipeline (TANAP) last year, Azerbaijan and Tur-key finally clarified the issue of delivery of Caspian gas to Europe's borders. The further route of the "blue fuel" will now largely depend on European consumers themselves who have a vested interest in diversifying sources of their supply. Baku and the Sahdaniz (Shah Deniz) consortium are evaluating the projects proposed for the export of Azerbaijani gas to Europe. Two options are under consideration - Nabucco West and the Trans Adriatic Pipeline (TAP). Which of them will be selected will be known later this year.

The benefits offered by one of these projects, the TAP, its chances of being approved and the current stage in negotiations have been disclosed to R+ by, Michael Hoffmann, External Affairs Director of the Trans Adriatic Pipeline who has recently held talks in Baku.

- Mr. Hoffmann, at the end of last year you visited Baku and held negotiations there. What issues were on the agenda and are there any tangible results? 

- The purpose of the visit to Baku was to meet high level representatives of the Government of Azerbaijan - including Energy Minister Natiq Aliyev and Deputy Foreign Minister Mahmud Mammadquliyev, SOCAR Presi-dent Rovnaq Abdullayev and management from major international energy companies such as BP, Statoil and Total. In addition, the visit provided a valuable opportunity to update many of the relevant ambassadors and missions based in Baku.

The trip included senior board members from Statoil, E.ON and Axpo, as well as representatives of the pipeline project itself, and provided them with the chance to fully articulate their support of TAP and outline recent developments.  Briefings were well received and the visit considered a success by key Azerbaijani stakeholders, who recognised that TAP's substantial progress over the last year has left the pipeline ideally positioned for the end selection decision in mid-2013.

- What stage is the TAP project at now?

- TAP has made tremendous progress in 2012.  Last February, we were the first project to be pre-selected by the Shah Deniz Consortium, clearly demonstrating that the pipeline is the most advanced technically and commercially.  Subsequently in June 2012 Shah Deniz partners BP, SOCAR and Total signed a cooperation agreement, followed in August by a funding agreement, both of which further reiterated their confidence in the project. 

The fact that TAP has a strong, stable and engaged shareholder base of world-leading energy companies, and that it offers the only self-financed proposal not reliant on government subsidies, was clearly an important factor in this decision. 

Importantly on 27th September 2012, the Governments of Italy, Greece and Albania - the three countries through which TAP will pass - confirmed their political support for the project by signing a Memorandum of Understanding in New York.  This endorsement led to the start of negotiations which are intended to conclude a full-scale Intergovernmental Agreement (IGA) on TAP in early 2013.  

By mid-2013 the Shah Deniz consortium will make the final selection on their preferred gas transportation solution to Europe.  We believe that they will select TAP based on our strengths and the fact that our project offers the best solution to their needs.  Once TAP is selected we will be able to take our formal "Resolution to Construct", in other words our final investment decision.  Construction will then begin by late 2014, and by the end of 2018 TAP will be ready to receive Shah Deniz gas through Turkey. 

- It is known that the Shah Deniz consortium is currently considering two options for the transportation of its gas to Europe as part of Phase 2. These are the TAP and Nabucco West projects. What are the proposed financial, economic and strategic benefits of the TAP project?

- TAP is both the shortest route for Caspian gas to reach Europe and the most economical. While it will initially deliver gas to Italy, a market that offers some of the highest prices in Europe, the pipeline will also be able to supply Switzerland, Germany, France and the UK through the Transitgas system in Northern Italy. Furthermore by connecting with TAG pipeline, it can increase gas flows to Austria and Central Europe.

Indeed, TAP's design will allow Azerbaijan to deliver to South Eastern Europe, via interconnections with the planned Ionian Adriatic Pipeline and Interconnector Greece-Bulgaria pipelines. Supplying these new energy-hungry markets is a key objective of the European Union. 

In addition to TAP's strategic benefits, the project boasts a further advantage in the shape of its shareholders. Norway's Statoil, German E.ON Ruhrgas, and Swiss Axpoare not only global energy companies but between them have world leading expertise in onshore and offshore pipeline construction, ensuring that TAP can be designed and built to the highest safety and environment standards. Furthermore the strength of their balance sheet means that the pipeline can be delivered on time without the need to rely on public grants and subsidies, a crucial point in a time of economic crises. 

In short, TAP's reliable, expert and financially secure shareholders guarantees the successful execution of this a highly complex project.

- How does the TAP assess its chances of being selected by Shah Deniz?

- We are convinced that TAP offers the best gas solution to transport Caspian gas to the West.  The Shah Deniz consortium have already demonstrated their support of our plans when they selected the pipeline as the preferred Southern route in early 2012, through the agreement to fund its additional development, and with the provision that SOCAR, BP and Total may take a 50 per cent equity stake in the project.  

- The initial capacity of the pipeline will be 10 billion cubic meters a year, which corresponds to the volume of planned transit of Azerbaijani gas produced under Phase 2 of the Shah Deniz project to Europe. In the future, the maximum capacity of the TAP will be brought up to 20 billion cubic meters. What other sources of supplies are considered for the TAP pipeline?

- TAP has specifically been designed with this flexibility in mind, enabling it to quickly increase capacity without changes to its technical design or additional investment. Indeed, simply by adding compressors we can easily double capacity, matching Azerbaijan's future gas production as it increases. 

More and more oil and gas resources are being discovered in the country. As fields such as Absheron, Umid, ACG come on stream, TAP will be ready to meet the additional volumes of gas available.

- Your earlier statements suggest that the TAP is the only project of the Southern Gas Corridor which can transport large volumes of Caspian gas to Western Europe through the existing pipeline system. Moreover, this project has an additional opportunity to access new and promising markets of the South-Eastern Europe. What are the benefits of the TAP for consumers?

- Although we did originally plan to use BOTAS' existing gas infrastructure, Azerbaijan and Turkey's agreement to build the Trans Anatolian Gas Pipeline last year has removed that need. Instead Azerbaijan will deliver the gas to the border with Greece, where TAP will take on responsibility for its onward transportation. We have been working closely with TANAP's management to ensure that the projects are aligned.

In addition, TAP is able to interconnect with many other pipeline projects in the region.  As a result, it has signed a Memorandum of Cooperation with the Ionian Adriatic Pipeline (IAP) and can facilitate connection to additional pipelines, including the Interconnector Greece-Bulgaria for example.  TAP can certainly support Azerbaijan in reaching new markets, and on the other hand bring new energy resources to many countries in South Eastern Europe. This can mean a significant boost for the economic development of the whole region and allow Azerbaijan to penetrate a wide range of new markets. 

Besides, TAP will contribute to the economic development of the countries along its route, in particular, with direct foreign investment in Greece (1. 5 bln Euro) and in Albania (1 bln Euro). 

- Analysts believe that the entry of the Italian Enel would further enhance the chances of the TAP compared to the competition. Is there any interest from other parties in the acquisition of the TAP shares?

- TAP has always been open to new partners who can add value to the development of our pipeline project, so the entry of leading international energy company such as ENEL would of course be welcome.

It is important to remember that the recent funding agreement signed in August already means that SOCAR, BP and Total are contributing towards TAP's costs and have the option to become shareholders with 50% equity.

- It was reported earlier that the TAP project schedule is designed so that the pipeline will be ready for operation by the beginning of the gas exports from Shah Deniz via Turkey in 2017. How synchronously are these two projects developing?

- TAP is fully aligned with the development of the second stage of Shah Deniz and is in constant dialogue with the consortium to ensure that the projects' key investment decisions are made in synchronization with each other.  When Shah Deniz starts to deliver gas to the Turkey / Greek border in late 2018, we will be ready to transport the gas into Europe. 

- Russia has launched the construction of the "South Stream". Can this somehow bolster or speed up the implementation of the Southern Corridor or, conversely, will it weaken the interest of consumers and investors in it? 

- The energy industry's collective view is that Europe will need to increase gas imports significantly in the future. 

On the one hand domestic production of gas is declining, while on the other many European countries have shut down their nuclear plants.  In order to bridge this growing gap, Europe will have to secure gas from multiple sources, including in our view, through South Stream and the Southern Gas Corridor.

That said it is important to recognise that South Stream does not bring new gas to Europe.  Instead it delivers an existing supply via a new route.  The Southern Gas Corridor should not therefore be viewed from the same perspective as it will increase security and diversification of supply in Europe.

Furthermore I do believe that both TAP and Nabucco West can co-exist as part of the Southern Gas Corridor.  The question is more about the phasing and timing of which pipeline will be constructed first.  

I am confident that TAP's progress over the past year, the early agreements with Shah Deniz, its political support, the robustness of its shareholders' financial footing and their technical expertise, will together result in the pipeline being selected to carry the first Azerbaijani gas to European markets.