For years, the Nabucco pipeline project has been synonymous with European gas supply diversification. Now it looks like the Trans Adriatic Pipeline might be the better alternative to bring Azerbaijani gas to Europe.
It was expected to make a significant contribution to European energy security by transporting 31 billion cubic meters (bcm) of natural gas annually from Azerbaijan through Turkey to the participating countries of Bulgaria, Romania, and Hungary, and its final destination of Baumgarten, Austria.
However, due to high project costs and the uncertainty regarding the amount of gas available for transport, Nabucco has experienced a number of setbacks, including the withdrawal of German company RWE and the refusal of Hungarian company MOL to pay its share toward the development of the project.
In order to offer more economical transport and in response to smaller competing pipeline projects, the consortium has significantly downsized the project. The alternative design, termed Nabucco West, envisions a similar route to the original, but starting at the Turkish-Bulgarian border, thus significantly reducing the length and cost of the pipeline. Moreover, a scalable transport capacity of 10–23 bcm a year would allow Nabucco West to accommodate additional supplies of gas as they become available.
While Nabucco has been busy revamping its initial project design to accommodate new market realities, its rival, the Trans Adriatic Pipeline (TAP), has made significant strides toward establishing itself as a serious competitor to deliver Shah Deniz gas to Europe – particularly because of the strength and experience of its industrial backers.
A recent gathering of senior ministers from Greece, Italy, and Albania at the Foreign Ministry in Athens made headlines with the signing of an intergovernmental agreement (IGA) for a gas pipeline project. The IGA confirmed the commitment of the three governments, through their pledge to support TAP, to help open the much-heralded Southern Gas Corridor to Europe. It also represents a significant milestone in the development of the TAP project, adding the cement of trilateral governmental approval to its robust commercial, technical, and strategic building blocks.
Now the years-long selection process to decide which pipeline project will win the right to deliver gas from the Shah Deniz II development to European markets is coming to a close.At the end of March, each project had to submit its “Decision Support Package,” the last opportunity to convince the Shah Deniz Consortium of its merits before the choice is made later this year. The eight principles on which route selection will be based include financial, technical, and operational criteria. The consortium will also be looking for maximum value along the export chain, including market prices, infrastructure access charges, and tariffs.
The ability to accommodate further expansion as additional supplies come on stream is also required. The successful project must also meet the public policy aims of enhancing energy diversity, access, and security of supply for Europe. This is the battleground on which the final struggle will be won or lost.
TAP has gained a great deal of ground in the past year, culminating in the IGA signing. Highlights include selection as the priority southern route by the Shah Deniz consortium back in February 2012, followed shortly by various agreements with the Shah Deniz consortium on cooperation (June), funding and equity options (August), and TAP’s shareholder agreement (November). In addition, a host government agreement with Albania was concluded in January 2013 and a cooperation agreement with the Trans-Anatolian Pipeline the month before. In addition, TAP was designated a “project of national importance” in Albania, and TAP leadership has signed a series of Memoranda of Understanding with operators and governments in Southeastern Europe on interconnection with the Ionian Adriatic Pipeline, including Croatia, Bosnia and Herzegovina, Montenegro, Albania, and Slovenia. Meanwhile, front-end engineering and design is due to be completed by mid-year; 10,000 kilometers of terrain have been analyzed by the project’s experts; and environmental and social impact assessments have been submitted in Italy and Albania, with a Greek assessment expected shortly.
Yet, critics would argue that Italy, TAP’s end destination, is already sufficiently supplied and highly diversified. By contrast, Nabucco, which for years had been considered the EU’s flagship project, would serve markets in Southeastern Europe that are most heavily dependent on one major supplier before reaching its Austrian hub. From there, Shah Deniz gas would be distributed to other profitable European markets in the north. As the pre-selected northern route, it would seem that Nabucco is the only project that can reach those parts of Europe unserved by other pipeline projects. Yet careful examination demonstrates that TAP also has the potential to supply these markets.
Italy Looks North
First, let’s look at Italy. Snam Rete Gas, the Italian natural gas infrastructure company, has announced a massive investment plan for 2012-15. This will increase the flexibility of the country’s import and transit capacity and provide greater interconnections with other European countries such as France, Germany, and the UK.
Two parts of this plan in particular add to the commercial and strategic attractiveness of TAP. The transport capacity of the Snam system from the south to the north of the country would be upgraded by an additional 26.4 million cubic meters per day (mcm/d) – approximately 9.6 billion cubic meters per year (bcm/y). Complementing this part of the plan, Snam is also working to create physical reverse flow capabilities from south to north between Italy and Germany. They recently signed a Memorandum of Understanding to that effect with Belgium-based natural gas operator Fluxys to interconnect the gas markets of Italy, Belgium, Switzerland, and Germany. It is estimated that this could handle volumes of up to 15 bcm/y by 2018.
These developments would enable Shah Deniz gas to move toward Northern European markets where demand is forecasted to grow, in turn allowing buyers of Shah Deniz gas to benefit from access to the greatest number of liquid markets in Europe, more opportunities for trading and arbitrage, and a larger number of potential buyers and customers.
The Baumgarten Question
There is also uncertainty regarding the ability of Nabucco’s Baumgarten gas hub to handle additional volume to western German markets without significant additional investment in the grid.
Currently, gas can be exported from Baumgarten toward Germany and Italy via three physical routes: to Germany via the Czech Republic; to Germany directly via the Austrian grid; and to Italy via the Trans Austria Gas (TAG) pipeline.
It is difficult to calculate how much capacity is or will be used on these routes – transmission system operators publish data on daily booked capacity that does not translate directly to used capacity. However, using the European Network of Transmission System Operators for Gas transparency platform, indicative figures can be calculated using booked versus available capacity. These figures show that while spare firm capacity exists to Germany via the Czech Republic, direct links between Germany and Austria are already fully booked for 2013. Another point to consider is that many transit points on Austria’s borders with Germany and the Czech Republic are delivery destinations for Russian gas, thus further constraining spare capacity. All in all, the firm transit capacity available seems to be significantly limited compared to the import capacity in place. Only interruptible capacity is available at any significant level.
By contrast, gas shipped through TAP could potentially reach the Austrian market via swaps through the TAG pipeline and virtual and physical reverse flows. This would not only deliver Azeri gas to the Baumgarten hub, but also offer an enhanced capability, in terms of both demand and liquidity, to transport Azeri gas to other, more attractive European markets.
Gas Market Potential in Southeastern Europe
Similarly, choosing TAP could still allow Shah Deniz to access the growing markets in the Balkans and Southeastern Europe. With its €1.5 billion investment in Greece and €1 billion in Albania, TAP could contribute to the creation and development of new markets throughout the wider region, potentially linking with planned pipelines such as the Ionian Adriatic Pipeline (IAP), the Interconnector Greece-Bulgaria, and the West Balkan Ring, while also addressing the need for diversification of supplies.
In Albania, which currently lacks a domestic gas market, TAP would end the country’s isolation by connecting it to a developed gas system, an abundant and reliable source of gas, and to developed gas markets in Italy and Greece. Moreover, Albania would not only serve as a transit country, but it could also have the potential to become an actual energy hub.
Several agreements have been reached already with transmission system operators in the Balkans and the larger southeastern Europe area, which would give TAP the capability to connect with countries such as the Former Yugoslav Republic of Macedonia, Serbia, UNMI Kosovo, Montenegro, Bosnia and Herzegovina, and Croatia, allowing new sources of gas to reach these markets and further increasing market liquidity. The IAP could eventually create a link between the Eastern Balkans, Slovenia, and Hungary through existing and planned infrastructure.
TAP could also provide Bulgaria with a new source of gas through the planned Interconnector Greece-Bulgaria or via reverse flow. The Greek transmission system operator Desfa asked recently for expressions of interest for the reservation of reverse flow capacity from Greece to Bulgaria. This capability was used at the end of the gas crisis in 2009 to inject natural gas into the Bulgaria-Greece pipeline from a Greek LNG terminal.
A growing number of planned pipelines connecting Bulgaria to Europe – should they be realized – will link the Bulgarian network to the common European gas market, ensuring the diversification of routes, intersystem connectivity, and gas transmission. And finally, in the longer term, this increased interconnectivity could also promote price convergence between the Balkan region and the European market.
As the Shah Deniz decision-making process enters its endgame, the two finalists are making their closing arguments. Beyond maneuvering and hyperbole, analysis shows that TAP has made significant headway over the past few years and can provide the same if not more strategic benefits than Nabucco West. The consortium partners face some tough decisions, but one thing is quite clear: this year the Southern Gas Corridor will take a significant step toward becoming reality, bringing Caspian gas to wider European markets. Ultimately, no matter which project gets the nod, the upcoming June decision can only be considered a success for the EU and its long-standing policy of supply diversification.
Prof. Friedbert Pflüger is director of the European Centre for Energy and Resource Security (EUCERS) at King’s College London. He served for twenty years as a German Member of Parliament and was Parliamentary State Secretary in the first Merkel government. He is an adviser to the Albanian government on its gas policy.
(Der Text erscheint mit freundlicher Genehmigung von IP Internationale Politik online.)