FINISH LINE FOR SGC

Traditionally, the Advisory Council (AC) for the implementation of the Southern Gas Corridor (SGC) holds meetings in February of each year. This year it has been particularly productive, because the project reached the finish line. Three of the four components of SGC are ready and successfully operated: natural gas from Stage 2 of the Shah Deniz field development enters the Turkish market via the Trans-Anatolian gas pipeline (TANAP) running from Azerbaijan through Georgia. With the volume of supplies exceeding one billion cubic meters (bcm), this figure will increase to 2 bcm annually starting from 2019.

"Today we are close to complete this giant energy project. We believe in the success of this project and that for each of us it will become a story of long-term accomplishment," President Ilham Aliyev said at the 5^th meeting of the Advisory Council on February 20, 2019 in Baku.

Support from the West

Currently, the SGC is mainly focused on the construction of the Trans-Adriatic Gas Pipeline (TAP), 87% of which has already been completed. CEO of the consortium for the construction of TAP, Luca Schieppati, assures that in 2020 the pipeline will be ready to receive Azerbaijani gas. By the way, Azerbaijan's share in the $40 billion investment portfolio of SGC is $11.5 billion.

In fact, the success of the SGC project has been possible thanks to the assistance provided by the EU and United States. Sandra Oudkirk, Deputy Assistant Secretary for Energy Diplomacy, who also took part in the Baku meeting, expressed the support of the Trump administration for the project and stated that Washington was ready to promote the further development of SGC. It is not surprising since both the EU and the United States view the SGC as a new source of gas supplies to Europe and as an alternative to Russian gas, although supply volumes cannot compete with those of Gazprom.

"As we all know, the Southern Gas Corridor was built for expansion. Therefore, it is an opportunity for regional states in terms of transporting even larger volumes of gas to consumers in Europe from the east of the Mediterranean, from Central Asia and the Caucasus. The U.S. government will strongly support the efforts you are making to achieve this goal. In the coming years, we will work together with you to realise the region’s resource potential and to open it to the largest energy market in the world," Sandra Oudkirk said.

New countries and new opportunities

The number of states participating in the Advisory Council meetings for SGC increases every year, which indicates the growing interest of Europe to this project. This year the meeting gathered the representatives from 17 states. Remarkably, it was the first time when the meeting included delegations from Serbia, Hungary and San Marino. Furthermore, State Secretary of the Romanian Ministry of Energy,a Iulian–Robert Tudorache, announced his country's intention to become involved in the SGC and noted the instrumental role of the BRUA gas pipelines and the Bulgaria-Romania interconnector in expanding the SGC to Central Europe. For reference, the BRUA gas pipeline (1,318 km) will connect Romania, Bulgaria, Hungary and Austria. The pipeline is designed to ensure the transportation of natural gas from the Southern Gas Corridor to Austria through Romania, as well as the integration of SGC sources to the markets of Central and Western Europe.

Hungary and Croatia expressed interest in SGC even earlier than the rest of the above countries. According to Croatian President Kolinda Grabar-Kitarovic, as part of plans to become an energy hub of the region, Croatia is also building the Ionian-Adriatic gas pipeline (IAP), which will allow Zagreb to receive Azerbaijani gas. The IAP gas pipeline, as a supposed branch of TAP, provides for the transportation of Azerbaijani gas from Albania through Montenegro, Bosnia and Herzegovina to Split, Croatia. After a successful feasibility study, Albania and Montenegro received an EU grant of €2 million for this project.

European Commissioner for Budget and Human Resources, Gunther Oettinger, stated in Baku that the geography of the buyer countries of Azerbaijani gas under the SGC will be expanded. "Azerbaijan and SOCAR are strategic partners of the European Union. Our cooperation will continue even after full commissioning of the SGC. There is an agreement to extend the project to other countries. EU will do its best to complete the SGC as soon as possible because this is a truly ambitious and historical project," Oettinger said.

Also, according to European Commissioner, Europe is looking forward to Azerbaijani gas in 2020. At the same time, EU clearly does not intend to limit itself to annual supplies of 10 bcm of natural gas, trying to increase this number to 20-25 bcm in the future. This means that Europe will support the construction of the second phase of the TAP project by all means, making sure that the pipeline is filled with Caspian, mainly Azerbaijani, gas and not Russian, since Gazprom had previously declared its readiness to supply Europe with up to 10 bcm annually through the second TAP line. "This corridor is of strategic importance, since it will allow diversifying not only routes, but also sources of supply. The Caspian region is just a new route and a new source of gas," Oettinger said.

So far, the only resource base for SGC is the Shah Deniz field with promising peak production estimated at 25 bcm in 2022-2028. However, at the Baku meeting of the Advisory Council, President Aliyev said that the confirmed reserves of natural gas in Azerbaijan are 2.6 trillion cubic meters (tcm). Taking into account the development plans for 2020-2022, other gas fields (Absheron, Umid, Babek, and partly Garabagh) can significantly expand the SGC coverage, especially in terms of doubling the capacity of the route.

Turkmen progress

Nevertheless, EU continues to work actively to attract gas from the eastern coast of the Caspian Sea to the SGC. According to Oettinger, the EU had submitted its proposals to Ashgabad for the supply of Turkmen gas to Europe via the Southern Gas Corridor. "The fact that a high-ranking representative of Turkmenistan (state advisor to President Yakhshigeldi Kakayev) participates in the Advisory Council meeting is a signal of Ashgabat's interest in the route. Azerbaijan has the necessary infrastructure for the transit of Turkmen gas to Europe and had also submitted its proposals to Turkmenistan. However, we expect a final solution from Ashgabat. If the Turkmen side shows interest in gas transportation via the Trans-Caspian gas pipeline, then such a decision is possible," Oettinger said.

The government of Azerbaijan also stated the interest of Turkmenistan to SGC, underlining that the final decision depends on Ashgabat.

As for Turkmenistan, the country can indeed diversify its gas export routes though SGC, given that China is currently the sole buyer of Turkmen gas. Turkmenistan is among the top four countries in the world along with Russia, Iran and Qatar with total reserves of natural gas estimated at 50 tcm.

The adoption of the Convention on the Legal Status of the Caspian Sea in August 2018 contributed to the intensification of negotiations between Turkmenistan and the EU on the construction of the Trans-Caspian gas pipeline (TCP).

During the meeting in October between the Turkmen delegation headed by Foreign Minister Rashid Meredov, EC Vice President for Energy Maros Sefcovic and representatives of the EC Directorate General for Energy, EC expressed great interest in the construction of the TCP and declared its readiness to help attract investment in this project. Turkmenistan also announced its desire to supply Europe with an annual volume of up to 40 bcm of gas.

Later, Turkmen President Gurbanguly Berdimuhamedov instructed Deputy Prime Minister for Fuel and Energy Muratgeldi Meredov to speed up works to expand international cooperation and bring Turkmen energy to the European market.

At a meeting of the Advisory Council in Baku, Y. Kakayev reaffirmed Ashgabat’s readiness to resume negotiations on the TCP. "One of the projects that can make a valuable contribution to the energy security of Eastern European countries is the Trans-Caspian gas pipeline. Turkmenistan has sufficient resources to provide the markets of European countries with natural gas. Turkmenistan confirms its readiness to resume negotiations on this project. I am confident that the meeting of the Advisory Council will be another step in the successful implementation of the TCP project," said Kakayev.

Obviously, there is a progress in the Turkmen position and we will see soon if this ends up with real agreements. However, the mechanism and sources of funding for TCP and the actual beneficiaries of the project are still unclear. Surely, given the lobbying of the EU project, it is possible that European banks will be involved in the financing. However, it is hard to believe that Turkmenistan will assume the heavy burden of debt for the construction of TCP.

Moreover, it is required to conduct an environmental impact assessment that meets the strict requirements of international standards. According to the terms of the Addendum to the Caspian Convention, all five Caspian states shall express their opinion within six months on whether the project complies with environmental safety requirements. In other words, there is a formal reason for blocking the project due to the threat of environmental safety of the sea. In addition, some experts believe that it is the economic interests that raise the concerns of Tehran and Moscow with environmental issues. But in reality, their objective is avoid competitors, in this case Turkmenistan, to export gas to Europe.

By the way, Germany is very interested in supplying Turkmen gas through Azerbaijan. At the same time, it is also actively lobbying for the Russian project to build the Nord Stream-2 gas pipeline against the EU interests.

Representative of the German Foreign Ministry Alexander Schoenfelder said that the August agreement on the status of the Caspian Sea in fact created a basis for laying an offshore pipeline from Turkmenistan to the gas transmission network of Azerbaijan. "Turkmenistan can quickly gain access to the European gas market, which we consider very important in the interests of diversifying supplies. Germany and the EU would thus receive an additional gas supplier, while Turkmenistan could significantly expand its customers," Schoenfelder said.

Head of the German company Edison Technologies, Edison Kasapoglu, has immediately shown interest in the TCP project. According to him, the pipeline from Turkmenistan to Azerbaijan through the Caspian Sea and further to Europe would expand the possibilities of diversifying gas imports to the EU.

Technically, the implementation of a mini-variant of the supply of Turkmen gas via SGC to Europe can be carried out through Iran. Moreover, there are two existing onshore pipelines for the supply of Turkmen gas to Iran: a Korpece-Kurt-Kui gas pipeline (annual capacity: 8 bcm) and a Dovletabat-Sarakhs-Hangeran gas pipeline (annual capacity: 12 bcm). In turn, Azerbaijan has extensive experience in importing gas from Iran via the Astara-Gazimammad pipeline. Only Iran’s readiness to deliver such supplies and the size of tariff for the transit of Turkmen gas remain in question.

Important role

According to forecasts of the International Energy Agency, Russia will remain the main supplier of gas to Europe until 2040. According to experts of the agency, in the mid-2020s, the demand for imported gas in Europe will reach a maximum of 409 bcm annually, and the share of Russian gas, as now, will stay at about 37%. Then the demand for gas in Europe will begin to fall, but at the same time, domestic European production will also fall, so that by 2040, Russian exports will reach approximately 140 bcm annually.

Meanwhile, even if SGC cannot seriously affect the balance of power on the European gas market, it will play an instrumental role in ensuring Europe’s energy security and will bring considerable dividends to the project participants. The implementation of the SGC, in addition to gas supplies to Europe, opens up new opportunities for Azerbaijan in terms of its participation in gasification projects of individual countries in the Balkans and in Central Europe.