Nicholas Watson in Prague -

The EU enjoyed a small victory, though a victory nonetheless, in its battle to find alternative sources to Russian gas when the Swiss-based energy trading company EGL and StatoilHydro announced February 13 a joint venture to build and operate the Trans-Adriatic Pipeline (TAP), which will transport Caspian and Middle Eastern natural gas directly into the heart of Europe.

The two firms will combine their resources to build the estimated €1.5bn gas pipeline, which will run 520 kilometres from the Greek city of Thessaloniki through Albanian territory and under the Adriatic Sea to connect with the national Italian pipeline grid near Brindisi, located on the heel of Italian boot. According to EGL, the Caspian and Iranian gas will reach Greek territory via an existing network of pipelines that run through Turkey. Greece and Turkey have built a gas interconnector pipeline that came online in November 2007.

The final investment decision on TAP is scheduled to be made in the second half of 2009, with the pipeline expected to become operational by 2011 at the earliest. That start date will depend on the venture getting the necessary gas to fill it. The initial capacity of TAP, the basic engineering work for which EGL completed in 2007, will be some 10bn cubic metres per year (cm/y), rising eventually to 20bn cm/y. EGL hopes the deal with StatoilHydro will meet that goal, since the Norwegian oil and gas major is a 25.5% shareholder in the consortium developing the giant Shah Deniz gasfield in Azerbaijan.

"Our joining of the TAP project should be viewed as a move to offer an attractive market outlet for the Shah Deniz gas to the European market," said Rune Bjørnson, executive vice president for natural gas at StatoilHydro.

The gasfield began production in December 2006 and the operator BP says plateau production from the first stage of 8.6bn cubic metres a year (cm/y) will be reached "over the next few years." Two additional phases have already been planned at Shah Deniz, which together should increase production to 20bn-24bn cm/y, and in November BP announced the discovery of a "potentially significant" new reserve of gas, which could add a "fourth" phase to the development.

EGL also signed an agreement in June 2007 to buy 5.5bn cm/y of Iranian gas over the next 25 years, though the chances of this contract actually being fulfilled remains open to question given that Iran's decrepit gas sector can't even supply its own domestic industry and it's embroiled in an ongoing dispute with Turkmenistan that cut daily deliveries of around 23m cm of Turkmen gas through the Korpezhe-Kurt Kui pipeline, which links Turkmenistan's southern gasfields with north-eastern Iran.

TAP is one of several pipelines on the drawing board that the EU is looking to in order to help achieve its goal of maintaining the region's level of Russian gas imports at 25% of total consumption, partly by opening up a fourth supply corridor from the Caspian and Middle East. The EU-27's demand for gas is expected to rise by 50% by 2030 from today's 440bn cm/y.

Until now, analysts say Russia has run circles around the EU, signing bilateral energy deals with EU countries and marginalising the traditional transit counties like Ukraine and Poland with pipelines like the Nord Stream project, which will run gas under the Baltic Sea. Gazprom says it hopes to export up to 250bn cm/y to Europe by 2020, including liquefied natural gas (LNG).

The EU's flagship project to bring Caspian and Middle Eastern gas to Europe is Nabucco - an ambitious 3,300-km pipeline which would transport gas across Turkey, Bulgaria, Romania and Hungary to OMV's gas hub at Baumgarten, Austria. The feasibility of this project is open to question on several fronts, not least the inability to source sufficient gas to justify its development - something EGL believes it has solved with this deal with StatoilHydro.

EGL insists the size of its pipeline means it's not a competing project to Nabucco, whose viability is being squeezed by Russia's rival South Stream gas pipeline, which will target the same markets and have the same capacity - 31bn cm/y - as Nabucco. Rather TAP is competing with the smaller ITGI project being developed by Italian energy group Edison and Greek gas firm DEPA. The two companies announced on January 25 a plan to set up a joint venture to develop this 8bn cm/y pipeline, which will transport gas from Azerbaijan to Italy via a 206-km undersea link with Greece.

The deal between EGL and StaoilHydro also holds open the possibility of building gas storage facilities and an LNG terminal in Albania.

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