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South-Eastern Europe's Natural Gas Pipeline Competition

Ioannis Michaletos, June 6, 2011

The region of South Eastern Europe has grabbed the business energy headlines for quite some time, due to the multiple and grand-scale pipeline projects that aim to secure a steady and gigantic flow of natural gas from the Caspian Basin and Central Asia onwards to the European consumers.

There are various plans going ahead, involving the top energy companies of the world, along with a mass of infrastructure developments at hand. The significance of these projects greatly exceeds their business potential, since they overlap with vested geopolitical interests and shifts in power of global importance. An overview of those and details around their progress and capabilities is presented, bearing in mind that the maturation of these pipeline projects has been reached and decisions upon their construction should be expected in the mid-term.

 
The South Stream project
 
The pipeline project named South Stream is planned to carry 63 billion cubic meters of natural gas per year from Southern Russia up to Italy. The pipeline is expected to cost 19 billion to 24 billion euros, and a significant section of the pipeline will be offshore, crossing the Black Sea from Novorossiysk and reaching to Burgas port in Bulgaria
 
The pipeline will be built and operated by several project companies. The offshore section of the pipeline will be built and operated by South Stream AG, a joint company of Gazprom and Eni.
 
The South Stream is an energy project aimed at merging the Russian Federation producers and most notably Gazprom with the E.U. consumers, especially Italy and Germany-Austria. It bypasses both Ukraine and Turkey, aiming at reducing dependency of Russia towards these two countries. Presently the bulk of the gas exports to the west of Russia traverses through Ukraine.
 
South Stream could be seen as a complementary route to that of North Stream, which already delivers gas from the Baltic shores of Russia to Northern Germany, and which bypasses Poland. In a few words, the South Stream is a political project first and foremost aiming at decreasing the dependency of the Russian energy exporters to countries of Western Europe, with which it has various frictions.
 
The head of Gazprom's South Stream project, Sergey V. Korovin, commented regarding confrontation of this project with other ones, "The European gas consumption projections envisage a significant increase by 2020. Therefore, additional volumes of gas will be needed. South Stream, and Nabucco are by no means mutually exclusive projects. If both Nabucco and South Stream are built, Gazprom will cooperate closely with our European partners to optimize the gas flows of the different pipelines in order to guarantee a smooth functioning of the gas supply system."
 
The Nabucco project
 
The Nabucco pipeline (also referred to as the Turkey-Austria gas pipeline) is a proposed natural gas pipeline from Erzurum in Turkey to Baumgarten an der March in Austria. The project is backed by several E.U. states and the United States and is often seen as rival to the Gazprom-led South Stream pipeline project
 
The project is developed by the Nabucco Gas Pipeline International GmbH. The shareholders of the company are OMV (Austria), MOL (Hungary), Transgaz (Romania), Bulgargaz (Bulgaria), BOTAS (Turkey), RWE (Germany). The pipeline is estimated to cost around 7.9 billion euros, and the company leading the project is OMV.
 
The final investment decision is scheduled to be made in 2011, and the pipeline is expected to be operational by 2015. In September 2010, the consortium signed an agreement with EIB, EBRD and the International Finance Corporation (IFC), according to which the banks will conduct due diligence for a financing package of 4 billion euros.
 
Nabucco is considered as a project with strong diplomatic backing by the United States, although no American companies participate. The reason is two-fold. First of all, it decreases Russian energy involvement in the European Union, since no Russian company participates. Secondly, the final aim of Nabucco is to export Iraqi gas to Europe, therefore increasing the indirect dependence of the European Union toward the United States, since Iraq is under direct American influence for obvious reasons.
 
According to the head of communications for the consortium, Christian Dolezal, regarding the competition or not of Nabucco with other pipelines, he said, "Nabucco and other pipeline projects as South Stream are not competitors since Nabucco has different objectives. Nabucco aims at providing secure and stable supplies of natural gas in the heart of Europe to meet the future demand and to boost industry. The key word is [providing] 'secure' supplies."
 
The Trans-Adriatic project
 
The Trans-Adriatic Pipeline project, known as TAP, is a venture between Statoil, EGL and EON, and it is scheduled to transfer natural gas from the Caspian states to the European markets through Turkey, Greece and Albania. Statoil is already involved in Azerbaitzan through its 25 percent of the Shakh Deniz reserve, and full-time production is to begin by 2015.
 
The pipeline will be in most part a series of extensions in the existing pipeline connections between Greece and Turkey before moving on to Albania and Italy and possibly Montenegro.
 
TAP aims to find the middle ground between the two big competitors, namely South Stream and Nabucco. From one point of view it includes some of the biggest names in the European energy market, and on the other, strives to increase independence both from the Russian gas reserves and from the indirect American energy politics towards the European Union. All of course depends on the ability of the consortium to acquire the necessary and long-term quantities from Azerbaitzan and the Caspian region—a difficult task.
 
The head of communications of the TAP consortium, Michael Hoffmann, commented regarding the nature of the competition between TAP project and others, "The question is not about 'if' all projects can be realized; the question is more about 'when.' In the long term, the wider Caspian and Middle Eastern regions can provide enough gas to fill all the pipelines, allowing all projects to coexist. Really, the question is about which project will be built first and who will be the first to open the Southern Gas Corridor."
 
The Poseidon project
 
The "Poseidon" natural gas pipeline is the Western part of the ITGI pipeline that is a Turkish-Greek-Italian energy project that will transfer 11.5 billion cubic meters of gas per year, from which 2.5 billion will be allocated for the Greek market and another 8 billion for the Italian one. Poseidon is a 203 km undersea link to Otranto-Italy, and the whole ITGI system will supply the aforementioned markets with Azeri natural gas.
ITGI already connects Turkey and Greece (since early 2008), and the Poseidon link will be fully operational by 2012 to 2014 with a total cost of around 500 million euros.
 
DEPA and the Italian company EDISON each own 50 percent of Poseidon. The European Union has characterized the ITGI project as an "absolute priority one."
 
This project is a direct competitor to the TAP one, and again it strives to be the middle ground between the two gigantic projects of South Stream and Nabucco. Its eventual success—as in the case of TAP—depends on the ability to take hold of the Azeri gas reserves in long-term contracts.
 
The Greek alternate minister, Ioannis Maniatis, speaking on behalf of his government in a recent international energy conference, blamed Brussels for overly promoting Nabucco and claimed that the Southern gas corridor should be envisioned on purely financial and technical viability data and not on political criteria. In that sense he explained that the only sensible project that fits the aforementioned is the ITGI pipeline connecting Turkey-Greece and Italy and which is going to be filled mostly by Azeri gas, depending on the progress of the Shakh Deniz 2 gas field.
 
The pipeline game will be fierce
 
Overall, the plans as they have been laid by all major corporations are based on the assumption that Azerbaitzan has enough quantities through its Shakh Deniz 2 field to cover the supply for them. By excluding the South Stream, which seems to rely on the unified gas system of the Russian Federation, the rest of the projects will fiercely compete on one reserve basically, unless a conclusive agreement is being reached—something very difficult to be achieved, taking into account the actual reserves and the divergence of the existing business and political interests. It has also to be noted that Iran's reserves are out of the game, due to the international sanctions of that country, and the Iraqi reserves have a ways to go before they can be securely exported to other markets.
 
In such a case, it is not unthinkable that pipeline projects will merge, or that some players will exit the race. Moreover, the geopolitical balance of the region along with the wider global energy politics will complicate even further the situation before any final decision is being made.
 
The only certainty so far, is that all entities involved in this pipeline game will compete for more political back up, both on a national level but also on a trans-national one, and especially on the E.U. level.
 
Lastly, the upheaval in North Africa and the Middle East adds another significant worry for energy policy makers in Europe who have to act fast before an energy security crisis becomes a reality due to the dependence of most E.U. states on producers from those regions. An estimation that can be reached for the moment is that by taking into account the business schedules of most companies involved in the projects, the series of elections in many participating countries and the situation in the Mediterranean Basin, most of the final decisions will take place between mid-2011 and mid-2012, and these actions will definitely shape the energy landscape of Europe for the coming decades, bringing about political repercussions as well.

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