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TANAP and Nabucco West

 

On June 28, 2012 the partners of the Shah Deniz gas producers’ consortium announced the selection of the Nabucco West proposal as the Central European conduit for the shipping of Azerbaijani gas. Against the background of a dwindling prospect that the “old” Nabucco project would ever come to fruition, Nabucco Gas Pipeline International GmbH submitted in early May the plan of scaled-down pipeline in terms of length and capacity: 10 billion cubic meter per annum (bcma) instead of the old 31 bcma, to span 1,300 kilometers from the Turkish-Bulgarian border till next to Vienna, instead of all the way from eastern Anatolia. Of course, Nabucco West is to rely on the already established legal framework: the 2009 intergovernmental agreement (IGA), the Project Support Agreements signed with the individual governments in 2010, and the Third Party Exemptions from the requirements of EU’s Third Energy Package.

Nabucco West’s fortune proved to be tied to the success of another recent deal: the Trans-Anatolian Pipeline (TANAP). TANAP is a joint Azerbaijani-Turkish proposal that capitalizes on the two governments’ key roles in the Shah Deniz end-game. TANAP is to ship up to 30 bcma from eastern to western Turkey as of 2017 – the year when the Shah Deniz 2 natural gas is supposed to come online. The estimated cost is USD 7 billion. The shareholders are Azerbaijan’s SOCAR with 80 percent, and Turkey’s Botas (10 percent) and Turkish Petroleum (10 percent). The IGA on TANAP was signed on June 26, only two days before the official selection of Nabucco West. The TANAP deal has obviated SOCAR’s interest in a midstream presence in the value chain – and it is, by the way, hard to figure out why the Nabucco partners thought they could override that interest. For its part Turkey, with its longstanding aim of becoming a world-class energy hub, preferred a transit arrangement more aligned with its own commercial and strategic interest than the old Nabucco arrangement.

With TANAP virtually sure to ship Azerbaijani gas across the Turkish territory as of 2017, an extension to Europe will have to be chosen by the Shah Deniz partners between Nabucco West and the Trans-Adriatic Pipeline (TAP) – the Norwegian-Swiss-German joint venture bound to cross the Adriatic Sea to South Italy. A final decision is expected by May 2013. In-between, the Shah Deniz consortium will be leading separate negotiations with the two contenders. Several aspects are sure to be factored in the commercial comparison: contracts on gas volumes, shipping tariffs, and very likely the acquisition conditions by the Shah Deniz partners of shares in each of the two pipeline consortia.

In the latter respect, it is significant that BP has already announced it concluded negotiations for the acquisition of a “significant”, though as yet publicly unspecified, stake in the TAP project (Trend, July 13). Finally, politics will be involved as well, as the terms that each of the joint ventures offers the transited states are going to be weighted.

The public reactions to the announcements on June 26 (TANAP) and 28 (Nabucco West) have displayed nothing but optimism from the involved actors, but they also a certain order of preferences. TAP’s leadership promptly welcomed the signing of the TANAP IGA, which it defined as a contribution to the “opening up of the Southern Gas Corridor.” (Natural Gas Europe, June 27). One day later, Botas greeted the Nabucco West selection and on June 29, the Turkish Minister for Energy and Natural Resources, Taner Yildiz, publicly stated that TANAP and Nabucco West will be connected (Trend, June 29).

A comparative assessment of the chances that Nabucco West and TAP, respectively, have of being chosen as the final transport solution of Caspian gas to European markets seems to favor the former proposal. While TAP’s competitive advantage derives from Statoil’s vested interest in controlling both the production and the distribution of the Shah Deniz 2 gas, TAP is technically less developed than Nabucco West. It is in fact rather basic in terms of agreements and legal permits, while its competitor inherited the whole legal and regulatory infrastructure of Nabucco. Then, TAP addresses the Italian gas market which, even if currently marginally more profitable than the northern European markets, is still well provided and with ample diversification options. By contrast, Nabucco West retains the politically strategic value of supplying the Central and East European countries, much more dependent on Gazprom. They are paying significantly higher prices for Russian gas than their West European counterparts. Besides, from the Baumgarten an der March hub (Nabucco West’s terminus point) the German gas market will also be supplied with Azeri gas, as RWE and BayernGas are interested buyers.

Finally, there is another hurdle that TAP will have to surmount: since it is planned to cross northern Greece till the Albanian Adriatic coast, TAP will have to somehow incentivize Athens, which has no stake in it and whose own project – the Turkey-Greece-Italy Interconnector (ITGI), that the Greek gas company DEPA co-owns along with Italy’s Edison – was dropped in February 2012 from the Shah Deniz 2 bidding process due to concern that DEPA would be unable to fulfill its financial obligations following the country’s financial crisis.

Hence, all in all, it is likely that Nabucco West will come out winner. For Romania, in particular, this will bring an extra couple of bcma of non-Russian gas imports, about EUR 1.5 billion in infrastructure investments, jobs and transit fees – although in diminished proportions than initially expected from Nabucco, Bucharest’s longtime flagship venture. The same will be the case for Bulgaria and Hungary, countries uneasily dependent on Gazprom’s deliveries. Nonetheless, given recent reports about Azerbaijan’s natural gas reserves1, there is also a possibility that the Caspian state will have the means to supply both Nabucco West and TAP. In any event, for the time being, it makes commercial sense that the Shah Deniz 2 partner companies keep both options on the table, in order to increase their negotiations leverage. It will certainly be in-teresting to see which of the plural and mutually divergent interests within the Shah Deniz consortium will to win the day.

 

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FOOTNOTES:

1 France’s Total announced in September 2011 that Azerbaijan’s Absheron offshore field holds reserves of around 350 bcm of gas and 45 million metric tons of gas condensate (Wall Street Journal, Sept. 12, 2011). According to SOCAR representatives, production from Absheron could start as early as 2016-2018.