MARRIAGE ITALIAN STYLE

On June 30, the Shah Deniz consortium started commercial deliveries of Azerbaijani gas from Stage-2 of this project through the Trans-Anatolian gas pipeline (TANAP) commissioned earlier this month.

According to BP-Azerbaijan, the peak volume of gas production from Stage-2 will be 16 billion cubic meters (bcm) per year. Given the volume of gas produced under the Stage-1, the annual total gas production from this contract area will be 26 bcm and 120,000 barrels of condensate per day (bcd).

Thus, according to the shareholders of the Shah Deniz Project, the minimum task for exporting additional volumes of natural gas to the Turkish market was completed in a successful and timely manner. Now it's required to ensure the timely delivery of Azerbaijani gas to the European market.

‘Stars’ of discord

The beginning of supplies of Azerbaijani gas from Shah Deniz Stage-2 to Europe is announced for 2020, but the terms vary from the beginning to the second half of the year.

The Trans-Adriatic Pipeline (TAP), which is considered to be the last link of the Southern Gas Corridor, is to ensure transportation of natural gas from the Caspian region to Europe. The total length of the pipeline is 878 km, of which 550 km will pass through the northern part of Greece, 215 km the territory of Albania, 105 km the Adriatic Sea, and the remaining 8 km the territory of Italy.

“Currently, the construction of the TAP gas pipeline is 75% complete. Construction of the Greek section will be completed in November 2018. In mid-2019, all engineering and test work will finish and the pipeline will be ready for commercial operations in 2020,” Minister of Foreign Affairs of Azerbaijan Elmar Mammadyarov said in Minsk at the informal meeting of foreign ministers of the member states of the Eastern Partnership Program.

However, everything is not that simple... There have not been any problems or delays in Greece and Albania regarding the construction of the TAP. In Italy, however, environmental and now political problems create regular obstacles in the implementation of this project.

Even before the construction works, Italian media created a hype around the alleged problem of cutting down olive trees along the TAP route. The authorities of the Puglia region even tried to block construction in court to preserve rare and valuable species of olive trees. However, the then government of Italy was able to resolve this issue without force majeure, when the Italian Constitutional Court permitted the construction in Puglia.

The foundation of TAP was laid on May 17, 2016 in Greece. Almost two years later, at the end of April 2018, three representatives of the Italian Five-Star Movement, Senator Daniela Donna, congressmen Leonardo Donno and Diego de Lorezis, filed a complaint with the prosecutor's office against TAP AG, which is building a gas pipeline in the south of the Adriatic coast of Italy.

According to representatives of the Five-Stars, the enclosure of the construction site with a three-meter fence is allegedly a violation of the Italian law on the preservation of the landscape. In addition, 448 olive trees were temporarily transplanted in April (not in January and February, as indicated in the documents) for the construction of the TAP.

Political motives

Political crisis that broke out in Italy in May ultimately led to a change in the composition of the Cabinet of Ministers, which contributed to the implementation of the TAP project. The newly formed coalition government of Italy, which included representatives of the Five-Stars Movement and the League of the North, announced their intention to revise the pipeline construction project. On June 8, 2018, Italian Minister of Environment Sergio Costa, representing the Five-Stars Movement said that the project was “absolutely meaningless” for Italy.

“Taking into account its energy policy and gas requirements, Italy will reconsider its participation in the TAP project, as well as in two other equally large projects,” Costa promised. He added that this issue was already on the agenda and would be considered as a priority. Incidentally, this “significant event” took place just before the launch of the TANAP (June 12, 2018) and, naturally, caused a negative reaction both among the countries participating in the project and among their partners.

Unfortunately, Costa was not alone in his position with respect to TAP. The governors of Italian provinces hosting the pipeline are also against the gas pipeline. Thus, the governor of the notorious province of Apulia recently demanded a revision of the pipeline route. One of the ministers of this southern Italian region, Barbara Lezzi (Five-Stars), said that the TAP creates unnecessary environmental risks and Italy does not need it.

In fact, TAP is designed to provide gas not only to the countries of Southern Europe. In the future, the pipeline capacity is expected to double reaching 20 bcm per year. This means both an increase in the volume of gas supplies to Europe, and an expansion of the geography of supplies through the construction of new interconnectors on the continent. In this context, categorical position of the new Italian authorities regarding this project seems at least strange.

Italy, apparently less than the rest of Europe, is worried about the issue of the monopoly of Russian gas in European market, and it most likely decided to bet on Gazprom and its gas supplies through the second branch of the Turkish Stream pipeline. By the way, Gazprom and the Italian Eni S.p.a already have an agreement on the organization of a southern route for gas supplies through the territory of Turkey, Greece, and Italy (the so-called Poseidon Project, R+). Memorandum of Understanding was signed in March 2017 and “reflects the interests of the parties in analysing the prospects for cooperation in the development of the southern corridor of gas supplies from Russia to Europe, particularly to Italy, and in the upgrade of contracts for the supply of Russian gas to the republic.”

European support

In response to Costa's statements, Baku immediately announced that the TAP was not an internal issue of Italy but a European-wide project, and appealed the European Commission to intervene and influence the Italian government.

Vice President of the European Commission for Energy Union Maroš Šefčovič pointed out obvious dividends from the TAP project for the countries through which it will pass, as well as for transit countries and their local communities in terms of attracting investments, opening additional jobs, energy for consumers and transition to an economy with lower carbon emissions.

“I believe that the construction of the TAP, which is a European part of the Southern Gas Corridor (SGC), will continue thanks to the continued support of the three national governments (Italy, Albania, Greece) to ensure the supply of gas from the Caspian region to the EU by 2020,” Šefčovič said.

The U.S. Department of State, which has been actively supporting the SGC project, did not ignore the statement of the Italian minister. It is known that the U.S. had always contributed as much as possible to the implementation of the SGC project to ensure the energy security of Europe and reduce dependence on Russian gas.

Deputy Assistant Secretary for Energy Dimplomacy, Sandra Oudkirk, said that the U.S. was negotiating with Italy's political circles opposing the construction of the TAP. “We intend to convince them, since this project is of exceptional importance for energy security in Europe, including Italy itself. We are convinced that this project should be supported by all participants, including the countries that have an indirect link with it because of its importance,” S. Oudkirk said.

Trade Envoy of the UK Prime Minister to Azerbaijan, Baroness Emma Nicholson, appealed to the opponents of the TAP to “decide what future they want for their country.” “As for the construction of TAP, there may be some delays in its construction due to the processes taking place in Italy, but no more,” she said.

New perspectives

Apparently, the pressure from the EU and the U.S. had an effect, as Italian Deputy Foreign Minister Guglielmo Picchi has already stated his country's interest in building the TAP. “TAP is part of an important infrastructure for Italy and Europe. We want to put it into operation, taking into account the possible consequences for the environment,” the minister stated.

Amidst changing moods and environmental problems that are periodically raised in Italy, which the TAP gas pipeline allegedly could create, the decision of the European Bank for Reconstruction and Development (EBRD) to allocate $500 million to finance the project was a pleasant surprise. EBRD is known for a rather tough position in environmental matters when evaluating projects. Nevertheles, on July 4, 2018, the EBRD Board of Directors approved a loan of $500 million to finance the construction of the gas pipeline. The beneficiary of the loan is Trans Adriatic Pipeline AG, whose shareholders are SOCAR (20%), BP (20%), Snam (20%), Fluxys (19%), Enagas (16%), and Axpo (5%).

By the way, as of the end of May 2018, the TANAP project costs reached €3 out of €4.5 billion, or 67% of all required funds. There should be no doubt that the project will be implemented with the political support of the U.S., the EU, and financial support from the world's largest financial institutions.

Of course, the volumes of gas supplied by TAP at the first stage are small and 10 billion cubic meters per year will not be enough to compete with Russian gas on the European market. However, doubling the capacity of the gas pipeline in the long term can significantly change the alignment in the European gas market, since along with Azerbaijan, new producers of natural gas from the Caspian region may be involved in the project.

By the way, it is expected that the leaders of Russia, Azerbaijan, Iran, Kazakhstan, and Turkmenistan will sign the Convention on the legal status of the Caspian Sea at the 5^th Caspian Summit scheduled for August 2018 in Kazakhstan. The text of the convention agreed upon by the parties permits the laying of submarine cables and pipelines along the Caspian seabed. If the document is signed as expected, it will create a good opportunity for the implementation of the Trans-Caspian gas pipeline project and open the way to Europe for gas from the eastern coast of the Caspian Sea through the Southern Gas Corridor.