[GGP] The Irony of Italy’s Election for Energy

The new Italian government’s declaration that it is reviewing the Trans Adriatic Pipeline (TAP) project threatens to derail a $40 billion set of projects that will bring Caspian gas to Europe and hand Russia a major victory in the process.

What is at stake is the final leg of a complex set of projects referred to as the Southern Gas Corridor (SGC), a project intended to carry an initial 10 billion cubic meters (bcm) of Azeri gas to Italy, with the potential to double in capacity and provide gas to customers beyond Italy. Almost all the required infrastructure has already been built. More than $20 billion has been spent on developing the all-important second phase of Azerbaijan’s giant Shah Deniz gas field (SD2) and almost as much has been spent on pipelines across Azerbaijan, Georgia, Turkey, Greece, and Albania as part of the broader Southern Corridor project.

Tuesday, June 12 marks the official opening of the 1850 kilometer (km) middle section of this system, the Trans Anatolian Pipeline (TANAP), which, as the name suggests, runs across Turkey. While the crucial pieces are mostly in place, including almost all of the 765 km onshore sections in Greece and Albania for the Trans Adriatic Pipeline (TAP), the vital final sections of the system—connecting it to Italy and the gas’ main customers—were not completed by the time the new Italian government was sworn into office on June 1. Specifically, TAP’s 105 km subsea connection from Albania to Italy has yet to be laid, and though some preparatory work has been carried out for the micro-tunnel intended to carry TAP under the beach to the Italian shore and for a five-to-six km onshore line to the terminal at San Foca, no actual pipelaying has taken place.

Following the Italian elections in March, companies in the TAP consortium have repeatedly been asked about progress on the project, including whether the consortium was taking advantage of the hiatus that accompanies government formation to get as much of the Italian end of the project completed as possible, especially in light of the strong performance by the anti-TAP Five Star Movement.

However, that hiatus has come to an end. Italy’s new environment minister, the Five Star Movement’s Sergio Costa, stated his country’s involvement in TAP is under review. “TAP is on the table and we are looking at it as a priority” he said, adding that “given (our) energy policy, given falling gas demand, that project today looks pointless.”

Ever since the TAP group undertook its Resolution to Construct in late 2013, the project has aroused considerable opposition in Puglia’s Melendugno region in the far south of Italy. However, the TAP group secured the necessary permits from the central government to construct the Italian sections of the project and were not as worried about the tensions. Moreover, over the last year, Snam, Italy’s major pipeline company, which became a 20 percent shareholder in TAP in December 2015, has played an increasingly prominent role in organizing the Italian section of the project.

Such steps should have ensured the project’s completion.

However, because the last billion dollars or so of this mammoth series of projects has yet to be spent, it is now in jeopardy, should the Italian Government decide to revoke existing licenses or find some other way to halt operations in Italy or Italian waters. Rome’s rhetoric threatens to undermine the billions of dollars that have already been spent. If there is no connection in Italy, the fate of billions of dollars of contracts secured by the State Oil Company of Azerbaijan Republic (Socar) for long-term gas sales to European customers would be in jeopardy.

At present, there is no Plan B.

This was made clear at a May 24 workshop organized by Energy Community in Vienna, when the issue was raised as to whether the Ionian Adriatic Pipeline (IAP), a planned pipeline from Albania to Croatia, should be fast-tracked to carry gas north in the event that the Italian government’s opposition prevents the gas from moving west. When asked specifically whether the IAP should be given priority status by the European Commission as a Project of Common Interest (PCI), EU officials at the meeting were nonplussed. It had been a PCI project, they acknowledged, but the criteria for such a project had changed and it no longer met the new criteria.

Given the circumstances, what can be done?

This question was raised at a very senior level within one of the TAP participating companies in May. The answer, it appears, was to hope for the best and assume that whatever antagonism a Five Star government might have would be largely all bark and little bite, and while there might be a few months delay, everything would get sorted in the end.

Well it just might, as there is a way out of this mess. However, it is a solution that will have the Kremlin chortling with glee.

The Southern Gas Corridor was designed to enable Caspian gas to access European markets without having to rely on Russian transit. However, it has become increasingly clear that the fall in energy prices means that Azerbaijan can only be expected to provide gas for an initial 6 billion cubic meters (bcm) per year delivery to Turkey and 10 bcm per year to European countries beyond Turkey. Neither Azerbaijan, nor any other gas producer outside Russia, appears capable of supplying gas to fill the projected doubling of SGC capacity to enable 12 bcm per year to be delivered to Turkey and 20 bcm per year to other European customers.

This has prompted Russia’s Gazprom, albeit carefully and occasionally, to float the idea that it might be interested in using TAP to ship Russian gas to Europe by means of a connection between its current Turkish Stream pipeline project and the TAP system.

This leads to a final, intriguing thought. Because TAP’s expanded capacity is open to all, it offers Russia a way to reach markets in Western Europe without having to spend billions of dollars on building its own pipelines to connect Turkish Stream to key market hubs like Italy or Austria. This reasoning—and opportunity—might prompt Russia to call for assistance from the other major element in the Italian Coalition Government, the League (once known as the Northern League), with which it developed friendly relations in recent years.

That would amount to a real irony: Russia intervenes to save a project originally designed to reduce European dependence on Russian gas supplies, so that its own gas continues to reach European markets through new avenues. Is that what diversification is supposed to be all about?

John Roberts is a senior fellow with the Atlantic Council Global Energy Center.

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