Nabucco West or Trans-Adriatic Pipeline
Not much time left for the final decision on the pipeline route that will deliver gas from Azerbaijan to the European market. Hitherto, many articles have been written and there have been plenty of scenarios and speculations on this topic. Here, we discuss the key factors that will play a decisive role on the finish line, bearing in mind the latest news and particularities of events around the selection process. The analysis will be based on the three aspects: financial, political and legal. The most important factors put forward by the Shah Deniz II Consortium have been taken into account. These are “the eight selection criteria defined by the SD Consortium: commerciality, project deliverability, scalability, operability, financial deliverability, engineering design, alignment and transparency, and public policy considerations” (TAP, March 28, 2013). Moreover, other issues of political and legal nature which could not be displayed in the aforementioned list are also subject to the discussion.
Financial Aspect
As far as the financial aspects of the Nabucco West pipeline (hereafter NW) and the Trans-Adriatic Pipeline (hereafter TAP) are concerned, there are several areas that the emphasis will be put on: demand and netback, DEPA and DESFA factor, shareholders, and prices at spot markets.
Demand and Netback
Since the projects are viable at least for a period of 20-25 years (Reuters, May 17, 2013), it is extremely important both for Azerbaijan and the other shareholders of the SD consortium to guarantee the security of demand. In this respect, preference should be given to the NW project due to the high dependence of major buyers on a single supplier. Hungary 85%, Romania 100%, Bulgaria 100%, and Austria 51% (share of the total gas imports) are dependent on Russian gas (Ratner et al. March 15, 2013). TAP in terms of gas demand of major buyers is lagging behind, because both Greece and Italy are already oversupplied due to the considerable supplies of natural gas and LNG from North Africa and Qatar. Moreover, there are expectations for further LNG and natural gas supplies via Galsi with an ‘additional volume of 20bcm/year’ (Rzayeva, March 2012).
Also undeniable is the fact that guaranteed access to the Western Balkan’s market will play a crucial role in the selection of the final route. As is the case with the countries along the NW route, the states of Western Balkans also rely to a greater extent on one gas supplier (Serbia, Bosnia and Herzegovina and FYR Macedonia get 100% of their gas imports from Russia), which necessitates the diversification of supply (BP Review, June 2011). Besides that, the fact that gas prices in the Western Balkans remain relatively high makes this market extremely attractive for any project (Alizade, June 11, 2013). According to Farhad Mammadov, Director of the Centre for Strategic Studies of Azerbaijan, “if the planned and EU supported interconnectors are completed between the countries along the NW route (Bulgaria, Romania, Hungary, Austria) and the Western Balkans (Serbia, Croatia, Bosnia and Herzegovina), they will have an additional asset and strength (Contact.az, November 23, 2012). The TEN (Trans-European Network) financed interconnectivity projects throughout South East Europe are not necessarily dependent on NW. They can develop separately and will be completed several years ahead of (circa 2015) the NW project or for that matter TAP” (Rzayeva, March 2012). In terms of access to the Western Balkans, “TAP recently signed two Memoranda of Understanding and Cooperation with the Croatian and Bosnian system operators, Plinacro and BH-Gas, both of which promote the Ionian Adriatic Pipeline (IAP). TAP has also signed respective MoU with Montenegro and Slovenia” (Rzayeva, March 2012). Furthermore, during the latest joint meeting of foreign ministers of TAP and IAP project countries, Montenegro, Albania, Bosnia and Herzegovina, Croatia, Greece and Italy expressed their explicit political commitment and support of TAP (Balkans.com, June 13, 2013). In fact, if materialized, TAP would be able to guarantee access to the Balkan market only if IAP is realized. Whereas, in the case of NW, the link with the Western Balkans, the “Interconnector Bulgaria-Serbia (IBS) is expected to begin in the middle of 2015” (Gaydazhieva, January 04, 2013). Although both interconnectors (IBS and IAP) are planning to deliver circa 5 bcm/year of gas, IBS is of higher importance due to the connection with the Hungarian gas storages. Taking into account lack of gas infrastructure (lack of storages in particular) IBS has become a project of high significance and priority. Thus, in terms of connectivity, there is a slight superiority of NW over TAP.
The question of netback is important for at least two factors. First and foremost, is the potential loss, which may be caused by a lack of gas that the pipeline can be filled with. Those who endorse TAP reckon that the project is financially viable due to the promised 10 bcm/year that will completely fill the pipeline, thereby avoiding sunk costs. In contrast, NW will cost at least $500 million more due to the length and size of its diameter – 48 inches of NW versus 42 inches of TAP (Rzayeva, April 4, 2013). Furthermore, given that there are no guarantees that the pipeline will reach its full capacity of 23 bcm/year, extra costs might not be justified. On the other hand, one may argue that apart from SD II there are prospective fields with substantial gas reserves such as Umid-Babek (400 bcm) and ACG deep water reserves (300 bcm), which can fill the NW pipeline if needed, therefore eliminating sunk costs.
One of the shortcomings of NW is that “the markets along the route are small and gas import volume is limited” (Rzayeva, March 2012). Although the import volumes of initial buyers are expected to be relatively small, Western Balkans, four major buyers – Bulgaria, Hungary, Romania and Austria all together import about 20 bcm/year (BP Review, June 2011) and possibly the Visegrad countries (Poland, Hungary, Czech Republic and Slovakia) in combination are deemed as an attractive market for the SD consortium. If the SD consortium will be able to get half of the market of major buyers it will be sufficient in terms of commercial returns. Secondly, the remaining gas can be sold at spot markets too. In any case, from this angle of view TAP is lagging far behind with the three supersaturated with gas supplies markets. Among TAP partners, Italy is expected to pay higher price for gas; however, a highly unregulated market makes the future of the gas market extremely unpredictable and vulnerable.
The DEPA and DESFA factor
The competition over DEPA and DESFA has got a two-edged importance. On the one hand, if Russia would have won the rally, it would have become the owner of the ‘Greek gates’, i.e. Gazprom could have manipulated the gas imports to Greece. While on the other hand, the victory over the DESFA would have brought added value for SOCAR and made TAP more feasible. “If the Russian gas monopoly acquired the gas industry of Greece, which has a crucial geostrategic position being one of the only two entry points for the Azerbaijani gas to EU via an onshore pipeline, then the Southern Gas Corridor (particularly TAP) would have met an additional strategic geopolitical obstacle” (Livanios, April 2013). However, Gazprom failed to accomplish the mission, and its Azerbaijani counterpart could not get the DESFA during the tender either. Now, if the former argument backs up TAP due to the facilitated access to the Greek market, the latter discourages Azerbaijan from investing in Greece and thus TAP may remain unimplemented. However, SOCAR's attempts to get DESFA are not exhausted yet and further struggle for the Greek TSO is to be predicted.
Shareholders
Although TAP’s composition of shareholders seems to be more experienced in realization of energy projects, the latest addition of GDF Suez to NW made two consortiums equally strong in this regard. “The industry expertise of GDF Suez as the operator of the largest gas transport network in Europe and their status as the second-largest buyer of natural gas in Europe are of immense advantage to the project” (The National, May 29, 2013). “Gaz de France replaces RWE, Germany’s second-largest energy conglomerate, in this project. Hard hit by Germany’s phaseout of nuclear power plants, RWE had to sell its 16.67-percent stake in Nabucco to OMV in March 2013. OMV has now resold a part of that stake, amounting to 9 percent of the total shares in Nabucco, to Gaz de France. Operating the largest gas pipeline network in EU territory, and ranked at the top of Europe’s gas-buying companies, Gaz de France holds gas supply contracts in several Nabucco countries” (IlhamShaban, May 31, 2013). At this point it is also worth mentioning that apart from Swiss Axpo and Italian ENI, Statoil also holds substantial shares in TAP (with 42.5%). The major point here is that Statoil is a party to SD II consortium (holds 25.5 %) and is expected to play an important role at the negotiation table (over GSA) as a member of the Energy Negotiation Team (ENT).
Prices at Spot Markets
The factor of prices at spot markets is presented by many as an important one. Yet it can hardly be considered as the crucial during assessment. The reason behind it is the fact that only a small portion out of 10 bcm per year is expected to reach the final point in Baumgarten in the case of NW’s selection, due to the fact that the priority in GSAs will be given to the long-term contracts with countries along the route. Thus, the comparison of prices at spot markets of Austria and Italy is by and large inappropriate. It does not come as a surprise that revenues from long-term contracts are much higher than those coming from sales at spot markets. Therefore, even if “price in Italian spot market is 5% higher than the one of Austrian” (Rzayeva, March 2012), it does not mean that TAP is more commercially preferable, because if NW partners get a great deal of long-term contracts, these slight price differences in spot markets will not be tangible. Therefore the factor of prices at spot markets should not play the crucial role in the final investment decision, since the prices for long-term upstream contracts are usually much higher than the prices at spot markets.
Political
The political aspect encompasses a broad range of issues starting from the political will of the shareholders of all consortiums (SD, NW and TAP), to the political instability caused by economic downturn, the Russian factor.
Political Will of Principal Actors
The disadvantage of TAP as compared to NW was that political will of principal participants of the project was not underpinned by intergovernmental agreement (IGA) between Albania, Greece and Italy. Absence of IGA was an obstacle for furtherance of the TAP project, since the political will on the side of major buyers was not explicit. Yet this is not the case anymore. Recently IGA has been signed, thus raising the chances of the possibility of TAP’s realization. The position of NW on the whole and the propagation of TAP in recent months has made it the major competitor project of NW – something unexpected, as TAP was viewed as a project inferior to Nabucco from the beginning.
In the case of NW, not only the main buyers, but also EU officials, although unofficially, demonstrated their support for the project. The basic intention behind generating the Southern Gas Corridor was security of supply and diversification. EU viewed first Nabucco, then NW as the project well suited to that end. However, in the last year, TAP increasingly began to be seen by the EU as an alternative to NW, or at least, the project that could co-exist with NW. “The European Commission has shifted from its outspoken support for Nabucco toward political equidistance, dubbed “project-neutrality,” between the strategic Nabucco-West and the commercial-corporate TAP (see EDM, April 26). Nevertheless, European Energy Commissioner Guenther Oettinger re-emphasized the Nabucco project’s strategic rationale—that of connecting the Caspian basin with continental Europe—in a message to the Bucharest meeting: “We cannot forget the reason why the route from Turkey to Austria is so important, because it connects the largest number of vulnerable gas markets in Central and Southeastern Europe, dependent on a single supply source [I.e., Russia]. Our concern is to reduce the dependence of the most exposed countries, as soon as possible” (Press Release, May 21) (IlhamShaban, May 31, 2013). The official position of Germany is expressed in its more supportive attitude towards rivals of NW projects, i.e. Nord Stream and South Stream. This is understandable given Germany’s grand projects and thriving business relations with Russia. Moreover, Germany is more tilted to support TAP, because any improvement in the financial and economic situation in Greece is in the interest of Germany. France’s endorsement was not explicit and it did not participate in NW projects not even by a single actor until GDF Suez became a party to NW.
As far as the political will of suppliers and transit countries is concerned, Azerbaijan is interested in finding markets for its growing gas output, while Turkey aims to become an energy transit hub connecting gas coming from Caspian to Europe. Therefore commercial viability and rate of returns are of higher priority for Azerbaijan, whereas for Turkey the major goal is to be engaged in as many energy projects as possible in order to assume the role of intermediary between gas suppliers and buyers. This is also in line with Turkey’s growing significance as a regional power.
Political instability caused by economic downturn
The TAP project has got several shortcomings such as huge implications of financial and economic crisis on member states. One should bear in mind that it is a long-term project, thus at the least, the political trend in partner states today and in the near future must be taken into account. Comparing the political situation in member states of both TAP and NW consortiums, high instability in Greece and the unpredictability of political trends in Italy make TAP vulnerable as a project. Economic downturn in Greece, which more and more manifests itself in the deterioration of the political situation in the country and political unpredictability in Italy might also jeopardize the TAP project.
The Russian Factor
“The development of South Stream pipeline poses a risk for the delivery of Azerbaijani gas to Europe via the Southern Gas Corridor. The construction of South Stream was officially inaugurated in December 2012 by Russian President Vladimir Putin. Gazprom is aiming to construct first the South Stream, and sign new gas supply contracts with the South Eastern European countries, in order to weaken both commercially and geopolitically the pipelines under design, namely NW, TAP and TANAP” (Livanios, April 2013). The fact that the construction of South Stream was already launched is a sign of clear advancement of this project. South Stream might be another reason for choosing TAP instead of NW, for the two projects are not competing on the same gas markets as in the case of the NW/SS rivalry.
If the choice is made in favor of NW, it might lead in turn to the deterioration of Azerbaijan-Russia relations as the latter’s dominancy in the region is questioned. Therefore from Azerbaijan’s perspective, with long-term goals in mind, TAP is more preferable if SS is to be implemented. Bearing in mind that TAP is expandable to 20 bcm/year – only by 3 bcm/year less than NW, it indeed might be a better deal for Azerbaijan, at least from the point of view that 3 bcm/year will not jeopardize its relations with Russia.
Besides that, the possibility of abandoning the southern branch of the South Stream pipeline is also quite a possible scenario given the fact that GAZPROM removed its bid for DEPA, which signifies its lessening interest in the gas networks of Greece (Geropoulos, June 10, 2013). If GAZPROM will not build a southern branch of the pipeline, additional Russian gas will not flow to Greece and Italy – major countries of TAP project. Such a move by GAZPROM might be read as a sign that it will not interfere in the gas markets of TAP project if that route is selected instead of NW.
Legal Aspect
The major and direct influence of the Third Energy Package on the Southern Gas Corridor is in the part which is located in the Union’s territories, I.e. TAP or NW. In NW, all four countries, Bulgaria, Romania, Hungary and Austria successfully unbundled their transmission operators from suppliers. Moreover, NW is deemed as the successor to the NABUCCO project, thus acquiring its exemption rights which NABUCCO gained in 2008-2009. However, the exemption presumes only a partial (50%) exemption from unbundling. That is why the consortium decided to invite the SD Consortium to carve its share of NW. At the same time, TAP applied for an exemption of 100%, which means full independence from unbundling. “The European Commission adopted a formal decision granting the exemptions from the European Union (EU) legislation for TAP and NW projects. This decision appears as an extension of the existing exemption on the third party access and tariff regulation earlier granted. The national regulators of Austria, Hungary, Romania and Bulgaria have confirmed the extension of the 50 percent exemption from the EU legislation on third party access granted to the Nabucco gas pipeline via a draft decision” (Jafarova, May 17, 2013).
Undoubtedly, those immunities add extra guarantees for realization of the project, thus making it immune. However, few issues have to be emphasized in details. First of all the questions on the supplier are still to be addressed. Although the issue remains confidential, the most likely assumption stands for the Energy Negotiation Team’s (Statoil, BP, SOCAR and Total) acquisition of 50% shares of TAP or NW. In that case, an investigation process, aimed at identification of the level of control over TSOs by the supplier, might be launched. Despite the assumptions and exemptions that the projects will get, there are measures that may mitigate the possible consequences. One option is to request from member states to grant the status of Project of National Interest (PNI) to TAP or to NW. For instance, Albania in 2013 decided to furnish such status to the TAP. Furthermore, the so-called Projects of Common Interest (PCI) was “presented by the Commission on 19 October 2011, this regulation aims primarily to reduce the time needed to obtain building permits for projects of common interest, which under certain conditions may be eligible for EU co-funding under the new Connecting Europe Facility (CEF).” Noteworthy, those projects within the Southern Gas Corridor are in the ‘List’.
“With the execution of the Open Season, (offers potential shippers the possibility to register their interest in booking capacity in the pipeline (non-binding capacity) Nabucco underlines its commitment to European energy law. By offering 50% of the capacity to third parties, we are enhancing competition and liberalization efforts in the Southern Corridor” (Geropoulos, May 09, 2013). Legally speaking an advantage of NW over its counterpart is the launch of aforementioned process of Open Season, because provision of Third Party Access must be applicable to any project that is implemented in EU. However on the other hand, “If all the conditions are met, the EU then corroborates the decision, offering an exemption (for TAP) from certain provisions of the regulatory framework. The commission’s actions follow the regulatory approval of authorities in Italy, Greece and Albania, and include approval for third-party access exemption for the initial capacity of 10 billion cubic meters, exemptions from regulated tariffs on TAP’s initial and expansion capacity, and exemption from ownership unbundling for 25 years” (McAfee, May 17, 2013). Hence, we may clearly observe the full commitment of both consortiums with the requirements of the Third Energy Package. Those aforementioned mitigation mechanisms presented by both TAP and NW will successfully bypass the possible barriers created by the new energy package.
Conclusion
To recap, both projects have the chance to win the race. However, in some regards TAP is far ahead due to such factors as the Russian factor and Netback, while for other reasons, such as security of demand and support from the official Brussels, preference should be given to NW. Yet an unfortunate fact is the impossibility to compare the projects in some other areas which enormously matter, for instance: terms of preliminary negotiations over GSPAs which are not revealed yet. Another factor is the decision over the consensus point between BP and SOCAR which is or will be attained in latent discussion behind the scenes. Moreover, it is still difficult to predict and assess the accessibility of the mentioned projects into the Western Balkans markets. Thereby, along with aforementioned three factors, the major issues emphasized in the paper are reckoned as key factors in decision-making. Naturally, the decision will also depend on the confidence that the consortiums will be able to follow the provisions.
Farid Osmanov and Elmar Baghirov are graduates of International Affairs Master program at Azerbaijan Diplomatic Academy and are focused on the energy security issues.
References list
1) TAP submits decision support package to Shah Deniz Consortium, Trans Adriatic Pipeline, March 28, 2013
http://www.trans-adriatic-pipeline.com/it/news/news/dettaglio/article/388/
2) TAP gas pipeline project gets vital legal approval, Reuters, May 17, 2013
http://www.reuters.com/article/2013/05/17/energy-gas-pipelines-idUSL6N0DY2W320130517
3) Michael Ratner et al., Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification, Congressional Research Service, March 15, 2013
www.fas.org/sgp/crs/row/R42405.pdf
4) GulmiraRzayeva, Azerbaijan’s outlook in the southern corridor, Gas for Energy, March 2012
5) Fuad Alizade, Азербайджан, скорее всего, предпочтет проект TAP, Zerkalo, June 11, 2013
http://www.zerkalo.az/2013/rossiya-ustaet-ot-evrosoyuza/
6) Farhad Mammadov about advantages and disadvantages of TAP and Nabucco West, contact.az, November 23, 2012
http://www.contact.az/docs/2012/Economics&Finance/112300019109en.htm#.Ub4SNYWSmvU
7) Balkan Ministers give their full for the TAP and IAP pipelines, Balkans.com Business News, June 13, 2013
http://www.balkans.com/open-news.php?uniquenumber=176592
8) Stanislava Gaydazhleva, Operation of IBS to begin in 2015, New Europe, January 04, 2013
http://www.neurope.eu/article/operation-ibs-begin-2015
9) GulmiraRzayeva, Final Stretch for the Southern Corridor, Natural Gas Europe, April 4, 2013
http://www.naturalgaseurope.com/gulmira-rzayeva-tap-nabucco-southern-corridor
10) BP Statistical Review of World Energy, June 2011
11) Kostis Geropoulos, It is open season for Nabucco, New Europe, May 09, 2013
http://www.neurope.eu/article/it-s-open-season-nabucco
12) AynurJafarova, European Commission grants legislation exemptions for TAP and Nabucco West, Azernews, May 17, 2013
http://www.azernews.az/oil_and_gas/54024.html
13) David McAfee, Trans Adriatic gas pipeline gets crucial EU approval, Law 360, May 17, 2013
http://www.law360.com/articles/442869/trans-adriatic-gas-pipeline-gets-crucial-eu-approval
14) OMV sells 9% Nabucco stake to GDF Suez, The National, May 29, 2013
http://www.thenational.ae/business/energy/omv-sells-9-nabucco-stake-to-gdf-suez
15) Ilham Shaban, Nabucco-West Project, European Commission Face Same Moment of Truth in Baku, Caspian Barrel, May 31, 2013
16) Kostis Geropoulos, SOCAR’s DESFA bid boosts TAP, New Europe, June 10, 2013
http://www.neurope.eu/article/socar-s-desfa-bid-boosts-tap
17) Anthony Livanios, The Conundrum of the Southern Gas Corridor: What are the Risks for Europe and Azerbaijan? The viewpoint of an insider, Actuelles de l’ifri, April 2013
http://www.naturalgaseurope.com/pdfs/IFRI_actuelleslivanios17413.pdf