Troubled Waters for the Southern Corridor?

The recent announcement of the exit of Total and E.ON from the Trans-Adriatic Pipeline (TAP) consortium, respectively holding a 10% and 9% shares in the project, casts a series challenges for the overall Southern Corridor project, in which TAP constitutes a vital element.

Presently, the rest of the partners, namely BP, SOCAR and Statoil, remain firmly attached to the project in which they aim to spend a considerable portion of their overall international investment budget for the coming decade. The stagnation in the Italian market and especially in its Southern regions where TAP was scheduled to terminate, along with the recent Gazprom initiative to terminate South Stream's route in Baumgarten gas hub in Austria, played a key role into the exit of the French-German partners.

First of all, E.ON is in the process of pulling itself out of its operations from Italy, whilst Total had already announced its intention of pulling out from Southern Corridor project altogether by selling its 10% shares in Shah Deniz gas field to Turkish TPAO, from where TAP is going to be filled. Total's move is related to the overall cut of its investment projects that will bear little return on funds placed, and it seems it views the Azeri gas coming to Europe via Turkey-Greece-Albania and Southern Italy and all the way up to Austria-Germany; as a less profitable manner under which 10 bcm of gas flown through could serve EU's needs.

Concurrently, the move by Gazprom to shift its massive 63 bcm planned capacity into Austria's hub is more economically sensible both in terms of economies of scale, transportation costs and geo-economic reasons relating to the attachment of at least four states (Bulgaria, Serbia, Slovenia, Hungary) into feeding their gas needs through that corridor, in effect excluding themselves from TAP, which would have to fill the Greek depressed market (negative 7% gas consumption in 2013), the none-existing one of Albania and the Italian stagnant one which has witnessed a negative 15% gas consumption since its peek back in 2005. 

German E.ON, which is a world-class leader in natural gas business is overhauling its entire corporate model as of late by shutting down 13 GW of capacity of power plants and driving down operating costs. For years the role of geopolitics was triumphing in the EU's natural gas scene in contrast with that of pure business plan models, but it seems that once the corporate ball comes to the day when decisions worth of billions of Euros are to be made, then key players will tend to shift away.

In such a case there could be more tremors regarding to TAP's overall business plan, in contrast with the Trans-Anatolian pipeline (TANAP), its feeding source, it has no role in the Turkish market, one of the few in Europe to have a stable increase in gas consumption for the foreseeable future. Furthermore the plans by both Greece and Bulgaria to upgrade their LNG installations and underground storage facilities, is estimated to eventually lead to a regional gas hub that will further depress local gas prices, whilst Turkey is also projecting a wider role for the LNG imports from Algeria, Qatar and Nigeria and staking claim in the Balkans as well.

Furthermore, Croatia, who in theory wants to participate in the TAP project through the Ionian-Adriatic Pipeline (IAP), is boosting its LNG plans on Krk Island. It is evident that in a rather small markets such as the one in Southeast Europe, all this future inflow of gas will severely affect pricing and create difficulties for TAP being profitable.

At the recent international energy forum, 21st Caspian International Oil & Gas Exhibition in Baku, TAP's managing director Kjetil Tungland assured investors and stakeholders that TAP will indeed commence construction in 2015 and brushed off fears of further partner exits. Moreover, he placed emphasis on the fact that the Shah Deniz consortium has already made long-term agreements with the likes of DEPA, Bulgargaz, Shell, Gas Natural Fenosa, E.ON. Gas de France, Hera, Enel and Axpo.

For the moment the only safe assessment that could be made is that the TAP project is facing its first real challenge. It could be positive in nature regarding its viability, since it may attract interest by other prospective clients. Or, it may even lead to a re-route of its scheduled path, as information points out that Croatia, a country which is even willing to shelve its LNG project, should TAP decide to re-route, instead of heading off to Italy, merges itself with IAP and terminates in the Dalmatian coast. In all respects a new round of 'Southern Corridor suspense' duly commences in this early summer season.