Baku’s Energy Strategy for Southeast Europe

Background

During President’s Ilham Aliyev official visit to Athens on 15 June, energy issues will be top of the agenda: Greece is becoming increasingly important for Azerbaijan as a gateway to the European gas market, and for the Southern Gas Corridor (SGC) project as a whole.

Now that the Trans-Adriatic Pipeline (TAP) project has won the bid to bring SD2 gas to the Italian market passing by way of Greece and Albania, Southeast Europe has gained value and importance in both strategic and commercial considerations. Greece, as one of the three recipients of SD gas, will benefit greatly from this project.

From a commercial perspective, the most important benefit for Greece is the 2 billion Euros of new investment that will flow into the country, money which will not come from EU institutions and is not in the form of credit from international financial institutions. This marks a crucial step forward in the wake of the EU bailout after Greece’s debt crisis. Greece will also benefit from 2000 direct and 10,000 indirect jobs, contributing greatly to the process of recovery from the financial downturn.

From the initial stages of the Southern Gas Corridor project, and later when the Interconnector-Turkey-Greece-Italy (ITGI) project was rejected by the SD2 partners, Greece was essentially an outsider, having no direct role to play. However, with the TAP project passing through Greek territory, the country is no longer a spectator and now has apolitical and geopolitical role to play. For the first time ever, the country has a tool through which it can pursue an energy diplomacy strategy. This diplomacy should be directed first of all to ensuring energy security, diversification of energy supply sources and transforming Greece into the central connecting point for all the countries of Southeastern Europe. 

Implications

With regard to the above, Greece could play a significant role in creating a vertical corridor for all the gas volumes going East to West. Developing the necessary infrastructure to support such an initiative is crucial. Here, the role of SOCAR comes into play. As a company that has stakes in all the segments along the industrial energy value chain including in DESFA, the gas transmission system operator (TSO), SOCAR can provide key impetus in this next stage.

Azerbaijan and its State Oil Company fully understand the increasing role of Greece in terms of providing necessary infrastructure for bringing more gas from alternative sources towards the Southeastern, Central European and Balkan markets. The natural gas transport operator system DESFA, of which SOCAR is now the majority owner, will play a significant role in this sense. 

The infrastructure components that could be included in such a corridor are TAP, East Med Pipeline, and LNG facilities – Revithousa – in Piraeus that would be linked to the infrastructure in Southeast and Central Europe. Greece can increase LNG imports via Revithousa by increasing the terminal regasification capacity.

The EU has already agreed to provide 160 million Euros in financing for the expansion of the LNG plant within the Project of Common Interest (PCI) initiative, which will enable the country to import more LNG. The Revithoussa LNG Terminal is situated in the Gulf of Megara (Kolpos Megaron) on Revithoussa Island (Nisos Revithoussa), some 10 nautical miles west of Piraeus. The terminal is owned by DESFA S.A. SOCAR, which acquired 66 percent of the privatized Greek Gas Transmission System Operator in December 2013, has automatically become an owner of the regasification plant as well.

Within this context, however, the State Oil Company of Azerbaijan has faced difficulties in obtaining the necessary approvals. This is because having a stake in upstream, midstream and downstream projects in one value chain constitutes a violation of Article 11 of the EU Third Energy Package. However, as it turns out, this is not set in stone. This restrictive behavior by the Greek Government breaks the principles of the Energy Charter (to which Azerbaijan is a signatory), as well as those of the World Trade Organization (of which Azerbaijan is not a member).

The main issue in relation to the Energy Charter is that the Third Energy Package imposes different criteria on a transmission system operator if it is not EU-owned, and so it is discriminatory, breaching the principles of national treatment, fair and equitable treatment and most-favored nation treatment. According to the latest available information, the Privatization Committee of Greece has agreed to grant the licenses to SOCAR, and the next step will be approval by the European Commission, which will take at least two months. It is expected that approval by the EC will follow by the beginning of August 2014.

With the expansion of the regasification capacity of the Revithoussa LNG terminal, additional volumes of LNG can be imported to the Greek market and onto neighboring countries such as Bulgaria, Macedonia and Albania (once Albania installs the necessary infrastructure). Regasified liquefied natural gas can be sent to the northern borders of the country via the existing TSO.

In order to move the gas freely from Greece to other regional markets, interconnectors between Greece and those countries need to be built, along with a gas transportation and distribution grid in Albania. Additional investment is needed to link the national grids of Greece and other Southeastern European countries, and this investment is easily accomplishable and affordable.

Under the scope of the vertical corridor concept, other options could be realized by using the SOCAR TSO in Greece. These options could include creating a floating LNG Terminal in northern Greece, which will be linked to the national grid, providing additional quantities of gas.

Additional volumes of gas imported via a floating LNG terminal and the transmission system could be added to the SOCAR gas portfolio and exported to local markets. This would improve Greece’s energy security and help diversify its supply sources – it currently imports 64 percent of its gas from a single supplier – Russia. 

In addition, there are plans to transport natural gas from new reserves in the Eastern Mediterranean and Cyprus to Greece via the East Med Pipeline operated by DEPA. These volumes could be delivered to the TAP pipeline through the TSO, and then exported on to a broader range of countries via the planned interconnectors envisaged for the TAP.

Because TAP has a third party exemption for 25 years for 10 bcm/a, gas from Cyprus could also be added to the gas export portfolios of SOCAR or the TAP partners, and shipped as the partners’ own gas.

In addition, according to the TAP contract signed by the partners, the gas transportation contract will be completely granted entirely to SOCAR after 2031. Under this agreement, the and State Oil Company of Azerbaijan will have the right to be the sole transporter for SD2 gas and as well as gas coming from other sources through the TAP pipeline.

Adding additional volumes of gas from alternative sources to the SOCAR portfolio would generate greater revenues for the company as the sole transporter of the natural gas, with its 25-year mandate for gas transportation via TAP. Needless to say, all these scenarios will depend on the market – supply and demand dynamics, price and price formation mechanisms are necessary to ensure the commercial viability of these projects. 

A combination of all the possible supply sources together with the transportation infrastructure (both the existing critical infrastructure – DESFATSO, Revithoussa LNG Terminal, as well as that which is planned – TAP, floating LNG terminal, East Med Pipeline), concentrated in Greece within the vertical corridor, could make Greece the linking point for the suppliers, transporters and consumers of the South, Southeastern and Central European markets and the Balkans.

SOCAR can also benefit from east-west gas flows within the scenarios described above, given its involvement in all the segments of this chain, including the downstream projects in Greece.  

Conclusion

As part of the vital materialization of the critical infrastructure described above, the Southern Corridor should not be considered as a single value chain. It should be seen as a multiple pipeline network with multiple exit and entry points, which will ensure not only the energy security of countries in the South, Southeastern, and Central Europe and the Balkans, but also demand security for the companies developing the Second Phase of Azerbaijan’s giant Shah Deniz natural gas and condensate field.

Bringing more gas to the regional market through Greek territory stands to transform Greece into an important transit route, providing energy security to countries that urgently need to diversify their imports. Energy issues in such a sensitive region are fraught with political complications, which lead to conflicts of interest. However, the economic merits should be rigorously taken into account when making important decisions: otherwise it will be impossible to attract international investment in building such infrastructure, as investment decisions are made based on commercial considerations.

Ms.Gulmira Rzayeva is a principal research fellow at the Center for Strategic Studies (CSS) under the President of the Republic of Azerbaijan. Her area of expertise includes energy security covering issues such as the energy policy of Azerbaijan and Black Sea/ Caspian region energy security.

Policy Brief published with thanks to the Caspian Center for Energy and Environment of ADA University, a Natural Gas Europe Knowledge Partner