This Pipeline Could Finally Loosen Russia's Grip On Europe's Gas Supplies

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Photo: The Nabucco Pipeline

At first glance, a new gas deal between two countries on the south-east fringes of Europe should have little bearing on the energy security of the continent as a whole.However, a deal struck between Turkey and Azerbaijan could well lay the foundations for the energy security of the EU for some decades to come.

Briefly, the deal signed at the end of October commits Azerbaijan to send 16bn cubic metres a year (cm/yr) of gas from the second phase of development of its Shah Deniz gasfield to Turkey, from where it can be exported to European market.

Crucially, it includes a commitment on the part of Turkey and Azerbaijan to ensure that the gas reaches European markets by 2018 even if the companies and consortia that are backing three rival pipeline projects vying to carry the Azeri gas to Europe fail to finalise their plans.

Indeed, on November 2 newswires reported that Boru Hatlari Ile Petrol Tasima, an Istanbul-based government pipeline company, and Azerbaijan’s state energy company Socar will set up a that will look into building a pipeline across Turkey. “With this agreement, all obstacles to transiting the gas have been removed,” said Turkish Energy Minister Taner Yildiz, announcing the deal. “If they [the pipeline consortia] are unable to reach an agreement on this issue, then Turkey will take steps to ensure it happens.”

That’s quite a commitment, given that for much of the past decade Turkey has been accused of dragging its feet over facilitating agreements that would help realise the EU’s own pet pipeline project,

Nabucco, which is the largest and most ambitious of the three planned pipelines vying to take this Azeri gas into the heart of Europe.

Nabucco has long been a major part of the EU’s plans to create a “southern gas corridor” into Europe to help diversify its gas supplies. With its own gas reserves rapidly depleting, the EU is already dependent on imports from outside the union to meet 60% of its gas needs. Currently, those imports arrive both as liquefied natural gas (LNG) and by pipeline from three sources – Norway, North Africa and Russia.

The largest supplier by far is Russia, which already supplies about 25% of all the EU’s gas needs, a figure expected to grow to as much as 40% over the coming decades. This is a worrying prospect, given that gas production in Russia is overwhelmingly dominated by the state-controlled Gazprom – a company which just announced profits for the first half of 2011 up 56% on year to $25bn.

Hence the EU plans for the southern gas corridor – a pipeline route through Turkey for gas from the ample reserves of the Caspian region, Iran and the Middle east, which would offer competition to Russia, and a route which could be expanded as new Caspian and Middle East gasfields come on stream.

And hence too the importance of the commitment by Turkey to deliver this Azeri gas to Europe, even if the three commercial consortia planning to carry the gas fail to finalise their plans. Whether or not that promise will need to be realised won’t become clear until after the BP-led consortium developing the Shah Deniz field has announced it’s decision on which of the three it will offer the gas to.

And then there were three
Of the three planned pipeline projects, the most ambitious is Nabucco – a planned 2,000-km pipeline from eastern Turkey to Austria, expected to cost an eye-watering $12bn-15bn. With a planned capacity of 31bn cm/yr, Nabucco, which is sponsored by a consortium of gas companies led by Austria’s OMV, will also need to find other sources of gas to be economically viable

Its rivals are two projects aiming to use Turkey’s existing east-west transit lines to carry gas to Greece, from where new pipelines will carry the gas across the Adriatic to Italy, and from there via Italy’s existing backbone to markets across the continent. These will thus be far cheaper than building a whole new line like Nabucco.

Sponsored by Italy’s Edison and Greek state gas company Depa, the Interconnector Turkey-Greece-Italy (ITGI) line aims to carry just 8bn cm/yr of Azeri gas and promotes itself as a cheap and simple option. But with Greece in economic turmoil and Depa in line for privatisation, few now believe the project can go ahead. The rival Trans-Adriatic Pipeline (TAP) project aims to start with the 10bn cm/yr of Azeri gas on offer and add up to 10 bn cm/yr of other gas later – an option its backers Statoil, EGL and E.On believe gives it greater flexibility than its rivals.

Now with the new agreement between Turkey and Azerbaijan in place, the final step is for the consortium developing the Shah Deniz gasfield – which consists of BP, Total, Lukoil, Eni and National Iranian Oil Company, in addition to Socar and Turkey’s state-owned TAPO – to choose which pipeline to supply with gas. That decision is expected early in 2012, with few clues available as to which will be chosen.

“The new agreement allows for the gas to be transited through Turkey, and sold on exit,” explains John Roberts, Caspian analyst at Platts, explaining that while previously Nabucco had been favourite to get the gas, the new agreement with Turkey makes it easier for the Shah Deniz consortium to supply its gas to either ITGI or TAP.

Whichever route is chosen, European gas consumers, who are this winter facing gas price hikes of up to 30%, will be hoping the new line comes on stream sooner rather than later.

This post originally appeared at Business New Europe.

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