The start of the construction of the Trans Adriatic Pipeline (TAP) was launched with great fanfare on May 17, but conditions in the European gas market have changed radically since it was agreed two and a half years ago, dimming the prospects for its profitability and future expansion.
In his speech at the ground-breaking ceremony in the Greek port city of Thessaloniki, Prime Minister Alexis Tsipras emphasised the "pivotal" timing of the project and its contribution to "ensuring Europe's energy supply, as well as diversifying its energy sources [...] The project can contribute to energy becoming a bridge in collaboration and prosperity for everyone in our region."
The 878km TAP, which will run from the Greek-Turkish border to southern Italy, is set to deliver 10bn cubic metres a year (cm/y) of gas from Azerbaijan to Greece, Bulgaria, Albania and Italy through Turkey starting in 2020.
TAP is part of a larger scheme dubbed the Southern Gas Corridor (SGC) that comprises offshore developments at the Shah Deniz II gas field in Azerbaijan, and three interconnected pipelines: the South Caucasus Pipeline connecting Azerbaijan and Georgia, the Trans Anatolian Pipeline (TANAP) that will traverse Turkey, and TAP. The total cost of the scheme is an astounding $45bn.
The Southern Gas Corridor is the result of decade-long negotiations on how to best connect Caspian and Middle Eastern gas producers to European consumers, and to thus reduce Europe's dependence on Russian gas. But conditions in the European gas market have changed radically since the SGC investment agreement was signed in December 2013: demand and prices have declined significantly, and there is now increased competition from American shale gas entering European markets for the first time.
The reality is that the €5bn TAP – which is a success story compared to alternatives that have fallen through such as the Nabucco pipeline – is nowhere near as important to European energy security as its proponents make it out to be. Its capacity of 10bn cm/y is too low to even make a dent in Russia's importance as a gas supplier, for the EU imported 31% of its gas or 158.6bn cm from Russia's Gazprom in 2015.
The political ambition of freeing Europe from its dependence on Russian gas has never been realistic or necessary, Tim Boersma, a Foreign Policy, Energy Security and Climate Initiative fellow at the Brookings Institute, tells bne IntelliNews in an interview.
"The share of Russian gas [in European gas imports] will remain stable for the foreseeable future for two main reasons: Russia has signed long-term gas contracts that would have to be breached, and, secondly, the EU has a liberalised gas market, in which the most competitive sources of supply will likely always have a major share. Russian gas is one of those sources," he says.
Support for the controversial Nord Stream 2 gas pipeline from Russia to Germany, to which large private companies from Europe such as Royal Dutch Shell, BASF, OMV and E.ON have readily subscribed, illustrate Boersman's contention that European markets prefer Russian gas despite opposition from the EU and several European governments.
"The most important aspect is that EU member countries have alternative sources of energy, which most of them do," Boersma continues.
Those that do not are mostly located in Central and Southeast Europe - Bulgaria, Greece, Slovakia, Romania – and TAP could become the alternative that they need. So while TAP's contribution to overall European energy security is symbolic, its regional impact in the Balkans - and Italy - will be sizeable.
An uncertain outlook
The pipeline's profitability, on the other hand, is likely to be low if at all, according to Thierry Bros, senior analyst at the Research Centre for Energy Management. "This is additional gas for Europe, which is already too long in gas, and we are not going to see any growth in gas demand. This means that hub prices will stay lower for longer," he wrote in an email commentary to bne IntelliNews.
But investors in the scheme are likely to take a long-term view on the European gas market, Boersma believes. "Their window is the next couple of decades, and the expectation is that, in time, demand for natural gas in Europe will improve, particularly if the EU and national governments are able to reform the emissions trading scheme to make the use of natural gas in the power sector more attractive [than coal]," he says.
SGC comes at a time of a build-up in regasification capacity throughout Europe and increase in gas storage capacity, meaning that on aggregate, Europe is heading in the direction of replacing coal with natural gas.
These developments are not a given, Boersma believes, and the debate on how to best reduce emissions in Europe is by no means settled; while it emits 45% less CO2 compared to coal, natural gas is disliked by environmentalists, who believe that hydrocarbons should be bypassed altogether in future power generation plans in the EU.
The SGC has created a great deal of enthusiasm among its proponents Azerbaijan and Turkey and smaller Balkan states such as Montenegro, Albania, and Bulgaria, all of which are hoping to benefit from secondary gas conduits derived from SGC in the future. Turkey in particular stands to benefit from the scheme, as it would not only be able to replace most of its imports of Russian gas with Azerbaijani gas, but would also become a node of gas transhipments from the Caucasus to Europe.
After Russian-Turkish relations went sour in November following the downing of a Russian bomber on Turkish soil, Ankara has been eager to replace its 27bn cm worth of yearly Russian gas imports with gas from other sources. And Azerbaijan, its long-term ally, is as good a source as any, particularly since it already sells some 6bn cm worth of gas per year to Ankara at a 20% discount compared to Russia.
After a flurry of bilateral visits between Azerbaijan and Turkey since November, the two countries have vowed to accelerate works on pipeline TANAP, which will provide only 6bn cm/y of gas to Turkey in a first phase but could add 15bn cm/y to its capacity in the coming years.
Boosted by the decision to scrap alternative pipelines Turkish Stream and South Stream in early 2016, TANAP's importance to Turkey cannot be underestimated, particularly since the Turkish gas market is controlled by state-owned Botas, and Ankara is keen to reduce Russian influence over its economy as much as possible.
That a third of TANAP had already been completed by late April, ahead of schedule and under budget, is assurance that TAP will also happen. The European Bank for Reconstruction and Development is convinced enough by TAP's feasibility to mull a €1.5bn loan to the consortium that oversees it, which comprises oil major BP (20% share), Azerbaijan's national oil company Socar (20%), Italy's Snam (20%), Belgium's Fluxys (19%), Spain's Enagas (16%) and Switzerland's Axpo (5%).
But Boersma advises caution when it comes to plans to double TAP's capacity by the middle of the next decade and to connect it to new sources of gas such as Turkmenistan, Iran, Iraqi Kurdistan and destination markets like Montenegro, Croatia, Bulgaria.
"The options to expand TAP [and SGC] are very uncertain at this time, and a better outlook for gas in Europe is necessary in order to start projects from scratch, which all of these [schemes] are. If they ever take place, it will be in the very distant future," he says.