A WINNING ROUTE

While Europe continues to actively fight the coronavirus pandemic and is trying to question the US sanctions on the construction of the Russian Nord Stream 2 gas pipeline, Azerbaijan is confidently approaching the finish line in the construction of a new gas transportation network to supply gas from the Caspian Sea to European countries.

In mid-November 2020, it became known that the last segment of the Southern Gas Corridor (SGC), the Trans-Adriatic Gas Pipeline (TAP), through which Azerbaijani gas from the Shah Deniz field will reach Italy going through Georgia, Turkey and Greece, is ready to start commercial operations.

Thus, by the end of 2020, Azerbaijan will expand the geography of exports, and the EU will receive not only an additional source of gas, but also a completely new supply route. It will play an instrumental role in diversifying exports and reducing dependence on a single supplier.

It is also expected that the project enhance Greece's role in the gas transit to Southeast Europe and make energy prices in Italy more competitive.

In full readiness

The total length of TAP is 878 km, of which 550 km passes through the northern part of Greece, 215 km through Albania, 105 km through the Adriatic Sea and 8 km through Italy. The project cost is estimated at 4.5 billion euros.

The groundbreaking ceremony of the pipeline took place on May 17, 2016 in Greece. On October 13, 2020, the consortium TAP AG announced the completion of the physical construction of the pipeline. It took another month or so to connect the pipeline to the Italian gas transmission system.

“On November 16, almost four and a half years after the start of construction in Thessalonica, Greece, we moved to the stage of commercial operations for gas supplies via the TAP gas transmission system,” TAP AG said in a statement.

“Our long-term plans are coming true today! As the operator of a new transportation system, TAP, designed and built according to industry best practices and standards, creates an opportunity for diversification in two ways: as a new and sustainable energy route and as a reliable source of gas for millions of European consumers over the coming decades,” Managing Director of TAP, Luca Schieppati, said commenting on the pipeline's readiness for operation.

According to Schieppati, gas from Azerbaijan is expected to provide about 30% of domestic demand in Bulgaria, 20% in Greece and 12% in Italy.

TAP Chairman of the Board of Directors Murad Heydarov notes that the 3,500 km Southern Gas Corridor is one of the most modern and reliable systems currently available for the transportation of energy resources.

“As a key component of SGC, TAP combines strategic and competitive market features. This ensures that Europe can get energy from yet another source while supporting the key goals of an integrated energy market and a sustainable, secure and diversified energy balance,” Heydarov said.

The test gas injection into all TAP segments has been completed, and it is expected that gas will be delivered to Italy in December 2020. When launched at full capacity, TAP will ensure the delivery of 10 bcm of gas to Europe annually.

Given the demand and scale of gas exports to the EU, it can be assumed that TAP, with its current capacities, cannot compete with the European section of the Turkish Stream (15.75 bcm). However, it will be possible to double the throughput capacity of the Trans-Adriatic pipeline, up to 20 bcm annually.

In addition, according to experts, during the COVID-19 crisis and due to low energy prices, TAP supplies can compete with Russian pipeline gas in Greece and Italy, since Azerbaijani gas is cheaper than Russian gas.

The TAP pipeline is also expected to contribute to the gasification of the Western Balkans, which are currently dependent on local coal.

“TAP will contribute to the gasification of the Western Balkan countries, such as Albania, Montenegro, which lack a commercial gas sector, as well as the markets with an extremely modest demand profile of less than 0.5 bcm annually. The latter still remain completely dependent on Russia, for example, Bosnia and Herzegovina,” Mariana Liacopoulou, a researcher at the NATO Canadian Energy Security Association said.

Forecasts and prospects

According to official data, in 2019 the total volume of gas consumption in the EU reached 560 bcm. The share of Russian gas in the European market is 39%.

About 170 bcm of gas for Europe is produced in the North Sea, mainly by Norway (120 bcm). Despite the discovery of new fields, a significant increase in production is not expected here. Another 170 bcm are exported from other countries, as LNG and through pipelines.

After Russia, the largest gas suppliers to Europe are Qatar, Algeria, the US and Nigeria.

Meanwhile, experts predict a decrease in demand for natural gas in Europe by 2030-2040s. The International Energy Agency (IEA) estimates that despite some upside potential as coal and nuclear facilities are decommissioned, gas demand in Europe will not return to 2019 levels as renewables account for most of this market share. "The demand for gas in the EU countries by 2030 will be 8% lower than in 2019," the IEA expects.

At the same time, the head of TAP AG is confident that in the medium term, natural gas in the EU will be indispensable for reducing the negative impact on the environment and supporting the transition to green energy.

Moreover, according to Schieppati, the implementation of the EU's "hydrogen strategy" opens up new opportunities for the Southern Gas Corridor. In particular, the supplies of biomethane and hydrogen through the Trans-Adriatic gas pipeline can be considered promising.

“Fighting climate change is the greatest challenge of our time. Biomethane and hydrogen with advantages in terms of environmental sustainability, security and flexibility of supply, could open up interesting prospects for the use of renewable gases in exports to Italy and Europe via TAP,” Schieppati said.

Russian approach

Russia, as the main supplier of gas to Europe, continues to expand its export gas transportation infrastructure, implementing projects to build the Nord Stream 2 gas pipeline (55 bcm annually) across the Baltic Sea and the Turkish Stream gas pipeline across the Black Sea. The latter actually has two pipelines each with a capacity of 15.75 bcm annually - one of them is intended for gas supplies to Turkey, the second one - to the countries of Southern and Southeastern Europe.

The first pipeline of the Turkish Stream has already been launched with the first gas received in Turkey in January 2020. Gas supplies to Europe (Bulgaria, Greece and North Macedonia) started in early 2020.

At the same time, the Russian company Gazprom admits that not everything goes smoothly with the construction of the Bulgarian part of the pipeline. In June, Bulgarian Prime Minister Boyko Borisov attributed the delay to the impact of the coronavirus pandemic on the provision of compressor station equipment, promising to resolve the issue by the end of this year.

As for the construction of the Serbian branch of the gas pipeline to deliver gas to Hungary and Central Europe, despite the statements of the general contractor about the record progress of works, there is also a delay, and the launch may be postponed until next spring.

The construction of the Nord Stream-2 gas pipeline to supply gas from Russia to Germany through the Baltic Sea is much more difficult. It will directly link the Russian resource base and European consumers. The implementation of the project is hampered, on the one hand, by the US sanctions, on the other hand, by the unresolved issue of using the EU's Third Energy Package.

European buyers hope that the new gas pipeline will be operational within 1-1.5 years. However, it is likely that with the new Washington administration in the White House, the US will intensify pressure on diversifying gas supplies to Europe.

"Assuming that Mr. Biden intends to make the US carbon-neutral by 2050, he may be interested in protecting and promoting the interests of American oil and gas companies in foreign markets, which means new sanctions against other producers and pressure on gas buyers," Vygon Consulting analyst Maria Belova believes.

Experts do not expect any changes in the US position on the Southern Gas Corridor. Its implementation was supported by two previous administrations in an attempt to diversify the EU's energy supply by bringing gas from Azerbaijan to Turkey and Europe. It is expected that this strategy will not change with the change of the head of the White House.

“With J. Biden as the new US president, the US will return to the International Climate Change Club. It is unlikely that President Biden promotes American LNG in Europe, as Donald Trump did. Because it goes against the climate agenda. But this does not mean a change in the attitude to the Southern Gas Corridor, quite the opposite,” Simone Tagliapietra, Research Fellow at the Brussels think tank Bruegel said.

There are only a few weeks left until the start of commercial deliveries along the Southern Gas Corridor. The full-scale launch of the gas transmission system will primarily have a positive impact on the Azerbaijani economy, which is important given the plans to restore the territories liberated from occupation. With the proceeds from the project, the government can expand social programs and accelerate the implementation of additional measures to diversify the economy.

In addition, SGC will bring the countries of the region–Azerbaijan, Georgia and Turkey–even closer together, as well as expand relations with European countries. If we add to this the contribution of the project to the diversification of energy supplies to Europe, it means all parties involved will benefit, there will be no losers from the implementation of the project.