Wednesday, 25 May 2016

Why should we believe rather small in terms of capacity, but very expensive project of the Southern Gas Corridor can profoundly improve the security of supply?
Would the Southern Gas Corridor be ready to perform effectively the assigned role in ensuring the security of supply throughout a whole long life cycle envisaged for such a gas infrastructure project? That this can happen may be only a delusive hope of politicians, given obvious challenges in attainment of the project goals. If anybody wants to see them, it is just necessary to pay attention to the facts and views of experts within the gas industry highlighting a number of specific issues.

Is there enough natural gas reserves for the Southern Gas Corridor in Azerbaijan, whether the dwarf project acquires longevity?
To answer this question, just look at the current state of the export potential of Azerbaijan's gas industry. In the first quarter of 2016, gas exports amounted to 2.459 bcm. It is not difficult to see that, if the Southern Gas Corridor is launched now, annual exports would be 1.5 times less then the designed capacity of the gas pipeline. Of course, we do remember the promise of the consortium of companies developing the Shah Deniz II, led by BP that its implementation is aimed to supply 16 bcm per annum of gas to Turkey and EU by 2019-2020. However, this business plan requires a very big volume of investments - the cost of the second stage of Shah Deniz field’s development is estimated at 28 billion USD.

It is no secret that securing investment remains one of the major difficulties for Azerbaijan. The shortage of funding continues to curb the development of Azerbaijan oil and gas industry. Azerbaijani economy is highly dependent on oil and gas revenues. The drop in oil prices led to a reduction in gas prices with a lag of six to nine months, as the prices of long-term contracts for gas are mostly linked to oil quotations. As a result, gas production in Azerbaijan almost stopped developing: in 2015 annual production of gas accounted for 18.9 bcm, whereas in 2014 - 18.7 bcm. At the same time, the major part of gas was consumed in the Azerbaijani domestic market. In 2014, the total domestic consumption amounted to 11.654 bcm.

In addition, it is important to consider that the demand for gas within the country is expected to increase because of the emergence of new industrial consumers in the future. According to Reuters, Azerbaijan planned to complete the construction of a fertiliser plant with an annual capacity 700,000 tonnes of carbamide as well as chemical plants by the end of 2016. The polypropylene plant, with an annual capacity of 150,000 tonnes, was expected to start production at the end of 2016, while the polythene plant, with an annual capacity of 100,000 tonnes, would be ready in the beginning of 2017. Meanwhile there is no official data yet on what resources will be used for this new production, although the main raw material is natural gas.

Perhaps, Azerbaijan is going to import the missing gas from Russia to meet its own growing needs, as it was in 2015 when according to Azerbaijani media, in September-October Russia's Gazprom was delivering 6 mcm of gas per day to the Azerbaijan Methanol Company (AzMeCo) through the Haciqabul-Baku gas pipeline.

In the longer perspective, when the existing reserves become depleted of gas, Azerbaijan promises to connect Europe with two new large deposits Absheron and Shafag-Asiman. Exploration of these gas fields are implemented by the Azerbaijani company SOCAR PSA jointly with European companies - the first of them with Total and the second with BP. According to Azerbaijani authorities, the production is likely to begin in 2021-2022. Thus, only somewhere in the middle of the next decade, the development of new fields will enable to replenish the resource base of TANAP-TAP.

Apart from gas resources necessary for the Southern Gas Corridor there is an equally important question regarding the technical ability to increase gas supplies by TANAP-TAP to Europe as from Azerbaijan and probably from other countries in the Caspian region. Actually, this will require increasing capacity of the entire chain of these gas pipelines.
In this regard, it should be recalled that there is another pipeline in this chain ahead of TANAP. It is the South Caucasus gas pipeline (Baku - Tbilisi - Erzurum), which is currently operating. The length of the Baku-Tbilisi-Erzurum gas pipeline exceeds 700 km. It is apparent that in future further expansion of the Southern Gas Corridor will also require an adequate upgrade of this pipeline through the territory of Azerbaijan and Georgia.

Reaching such goals of extending gas supplies to the EU by TANAP-TAP in the future will require installation of new strings of pipes, compressors and other equipment. In other words, in order to grow up and to progress to a category of larger gas suppliers to the EU the two percent dwarf project will require very substantial investments in the next decade. However, the investments to be made to accomplish the Southern Gas Corridor have already been deemed excessively high.

The Southern Gas Corridor that is too small, but too expensive. Why?
At the High-level Conference "EU energy cooperation with the Eastern Neighbourhood and Central Asia" Vice-President of the European Commission Maroš Šefčovič responsible for Energy Union stated that "this pipeline chain of 3,500 km (the Southern Gas Corridor) whose value 45 bn. USD is one of the biggest construction projects of our times".

When compared with information about investing in other pipeline construction projects that are being implemented in the world gas industry, we can see that the Southern Gas Corridor is indeed the greatest, at least, at its cost. For example, in an interview with the Official News Service for Oil and Gas in Iran (Shana) Hassan Montazer Torbati, planning director of the National Iranian Gas Company, told that Iran plans to establish 5,000 km of gas pipelines for both export and domestic demand as well as 25 pressure boosting stations by 2021-2022. Iran is going to invest about 15 bn. USD in the implementation of the plan. It is easy to see that the value of the Iranian project is three times lower than that of the dwarf project, although the volume of work to be accomplished in Iran is significantly bigger.
In respect of its cost, the Southern Gas Corridor is not comparable with any other similar pipeline projects. For example, the Nord Stream 2 gas pipeline launched by Russian Gazprom and European BASF/Wintershall, E.ON, Engie, OMV and Shell are estimated at 12 bn. USD with the total capacity of two strings 55 bcm and the length of 1,224 km.

Another much more powerful project, initiated by Russia in 2007 as the South Stream, with the capacity of 63 bcm and the total length of offshore and onshore parts of 2446 km was estimated at 40 bn. USD.

Among all similar projects, the South Transport Corridor stands out as an extremely expensive gas supply infrastructure in terms of cost per unit of throughput. "There is no commercial rationale for spending 3bn. USD to produce and transport just 1 bcm per year," Turkish expert Dr Volkan Ozdemir said in an interview with Natural Gas Europe.

Anyone is able to draw his own conclusions, what project will be more commercial, more favorable for the European gas market, as well as for distribution companies or commercial and residential gas users. Overall, everybody understands a cost recovery structure provided for reimbursement of related project investments: the more expensive the project, usually the higher will be the price of its products. That is why, it does not matter who would have invested into the Southern Gas Corridor, eventually the price of Caspian gas may be a really expensive surprise for end users both in Turkey and in EU countries. However, as we can see, the future gas prices, its competitiveness on the market are not the issues of concern to policy makers who are placing a high political priority on the Southern Gas Corridor ignoring the importance of its commercial viability.

With regard to the Southern Gas Corridor, it would be therefore accurate to say that despite the fact that competitive advantages over its "rivals" in the European gas market in the future is questionable, the attention paid by politicians to this dwarf project is staying ahead of any competition. Paraphrasing the old metaphor of "dwarfs standing on the shoulders of giants can see…", in respect of the Southern Gas Corridor it would have been more than appropriate to say that the dwarf sitting on the lap of the European Union, gains increasingly impressive size.
Whatever some say, such a vigorous promotion of the dwarf project providing only two percent of the EU annual gas consumption - the value that almost lies within the operating control limit, first is aimed at supporting the political image of Brussels as well as the US attempts at pushing Russia aside as a major supplier to Europe. At the same time, it should be evident to everyone today that TANAP-TAP alone never resolve those major economic and social challenges, which require a significant increase in the supply of gas to the EU, for example, a growing energy poverty problem in Southeastern Europe.

According to ENTSO-G’s projections, used to plan gas pipeline investment, range from a 13% increase in the EU gas demand to 2030 in its lowest scenario, to a 35% increase by 2030 in its high scenario.

Why wouldn't policy makers in Brussels recognize that, when the Azerbaijani gas is supplied to Europe, the volume of 10 bcm is the maximum that Azerbaijan will be able to provide, while the needs of the EU by 2030 may grow by another 150 bcm?

Why, notwithstanding the circumstances, does the European Commission continue to assert that the Southern Gas Corridor plays a key role in the European Security of Supply Strategy?