Now that the Trans-Adriatic Pipeline (TAP) was (apparently) chosen to be the preferred route to carry gas from the Shah Deniz II field in Azerbaijan to Europe, the EU flagship pipeline project Nabucco has effectively been killed. Agata Loskot-Strachota, Energy Policy Expert at the Centre for Eastern Studies (OSW) in Warsaw and Janek Lasocki, Advocacy Coordinator at the European Council on Foreign Relations in London, discuss – in five questions-and-answers – what this means for the Southern Corridor and EU energy policy in general.

Photo: Reinhard Mitschek, CEO Nabucco (source: publicsbg)

On 26 June, OMV, the Austrian shareholder in the Nabucco pipeline, announced that Nabucco had failed to win the bid for gas from Shah Deniz II. It is clear now that the BP-led consortium of Shah Deniz II will choose the rival project, TAP, which will carry Azeri gas to Southern Europe, rather than directly to Central Europe, as Nabucco would have done.

Some enthusiasts may see in this the beginning, at last, of the Southern Gas Corridor. Most gas in Europe is imported by pipeline through three corridors: from Russia (Eastern), Norway (Northern), and North Africa (Western). Gas from the Shah Deniz II field was to at last have given a secure primary supply to make the new route viable. The Southern Corridor was planned to contribute to energy diversification by opening up access to vast new gas supplies from the Caspian and the Middle East, whilst also bringing an end to Russian dominance in Central and South-Eastern Europe, which have been disproportionately dependent on Gazprom.

Sceptics on the other hand will point to TAP as yet another proof that the Southern Corridor is an illusion. Actual construction is still distant. Even if the consortium succeeds in building the pipe it will be just a link enabling Azerbaijan to sell its gas and pursue some of its energy policy goals. With only one supplier, depressed European demand and other alternatives available, it is nonsense to speak of a genuine “corridor”, they will argue. In addition, the choice for TAP now makes it impossible to achieve the primary goals set for the Southern Corridor, most importantly to bring about diversification for Central and Eastern Europe and to lessen that region’s dependence on Russian supplies.

As far as the latter is concerned, more important in recent years have been the shale gas revolution, depressed EU demand as a result of the economic crisis and progress in the past few years in the integration of the European energy market, both in terms of a common regulatory framework as well physical infrastructure. The Third Energy Package took steps to liberalise the energy market and resulted in unprecedented anti-monopoly action brought against Gazprom by the European Commission. The gas crises of 2006 and especially 2009, when Russia turned off the taps during winter, brought to light the inadequacy of cross-border infrastructure in the EU and led to the development of a number of new interconnections as well as implementation of reverse flow capability so that at critical moments supplies can be shared between member states. The European Energy Programme for Recovery (EEPR), launched in 2009, set aside over €1.4 billion to support these projects.

The Southern Corridor project has for long been seen by many as the most important single energy security project of the EU. But over ten years of work and negotiations have shown at least two things: firstly, that this is not one single event as some imagined but a complex process requiring the cooperation of a host of stakeholders, including governments and multinational energy companies, negotiation of a series of agreements and contracts, finding financing and adapting to changing market conditions. Secondly, the decision that has been taken shows clearly (together with all these years of delay) the limits of EU external energy policy and how in fact the development of the Southern Corridor is dependent on a number of conditions outside the control (and even influence) of the Europeans.

That means also that the future of Southern Corridor is still far from certain and there remain today more questions than answers about the Southern Corridor. There are, in fact, five major questions that now need answering.

1. Will there be enough supply to complete the whole corridor?

According to European Commission plans, the Southern Corridor was to contribute to a target of securing new gas for 10–20% of demand in the EU by 2020, totalling 45–90 bcm (billion cubic metres) per year. TAP and “Nabucco West” (i.e. what was left of Nabucco after the Azeri’s and Turks decided to build their own pipeline – the Trans-Anatolian Pipeline or TANAP – across Turkish territory) were, however, substantially smaller. TAP has a projected initial capacity of just 10 bcm, potentially rising to 20 bcm and the earliest it could be operational is 2019. Therefore, if all goes well from here on, the EU has the opportunity to open up by 2020, 10bcm annually, 2% of Europe’s gas needs (calculated on the basis of the IEA’s WEO Current Policy Scenario forecast for EU demand in 2020). It would, therefore, be more accurate to call this a medium-sized link rather than an actual corridor. It would be three times smaller than the Yamal-Europe pipeline running from Russia through Belarus and Poland, and five times smaller than the current capacity of Nord Stream.

To fulfil the potential of the Southern Corridor it would need to channel gas from new sources in the Middle East (currently talk is of Iraq but originally the goal was Iran), across the Caspian (Turkmenistan) and the Eastern Mediterranean (where Turkey, Cyprus and Israel have recently begun exploration for new gas sources). For now, however, the only certain source for this route to European markets is Azerbaijan. This has undoubtedly been the most important factor impacting the delay in bringing to life the Southern Corridor, its current smaller than originally envisaged capacity, as well as the bitter competition between rival projects.

Once the connection is completed further sources of supply may start to follow, but that is dependent on the domestic political developments in these potential supplying states (such as Turkmenistan), developments in the region (Iraqi Kurdistan, Cyprus and Israel) and geopolitical changes (Iran), and these all currently remain distant possibilities.

2. Will there be enough demand in Europe in the context of the changes in the energy market?

Equally important is ensuring sufficient demand for the gas that is supposed to come through the Southern Corridor. Here, the events of past few years and changes in the international energy market may play to the disadvantage of the project.

The so-called shale gas revolution in the US, further discoveries of conventional gas fields and plans to increase supply of LNG on the world market, as well as the beginnings of the development of non-conventional gas in a swathe of countries, are all changing the energy market landscape, especially compared to when the Southern Corridor was first planned. New sources of gas that seem easier to access without complicated new infrastructure, seem to be more easily accessible than they were not long ago, be this in the form of LNG or new unconventional gas. These changes have also had an impact on the policies of Russia and Gazprom, who now seem more willing to give more advantageous deals. With all this, new supplies from the Caspian or Middle East seem less critically important than they did just a few years ago.

The past few years have also seen a decrease in demand for gas in Europe. This was firstly due to  the economic crisis, but is now perpetuated because of high energy prices in Europe and the extra competition from cheap American coal and subsidised renewables. Some forecasts have this situation continuing until at least 2015. But with the fast changing situation on the world markets it is very hard to make reliable forecasts about the future. In the long term, European demand for gas should indeed rise, and access to Middle Eastern reserves would indeed contribute to gas supply security. One cannot take for granted however, what role the Southern Corridor could play in this changed market.

3. What impact will the choice of TAP have on the Southern Corridor?

Choosing TAP has been justified as the more commercial option, being a shorter and cheaper route reaching a bigger market with greater flexibility for suppliers to choose customers for its gas (the Greek and Italian markets and through them Western Europe and beyond, as well as transit through Bulgaria and the Western Balkans). TAP also serves well Azeri export strategy: with SOCAR, the Azerbaijan national energy company, expected to acquire DESFA in Greece, the Azeri’s will have more downstream control over its gas.

Additionally TAP means less of a direct competition with Russian gas, which might be beneficial for both Azerbaijan and companies engaged in the Shah Deniz consortium. TAP does not enter directly the zone where all Russian major gas corridors end. Additionally the Italian market is already well diversified.

The choice of TAP does, however, spell the end for the Nabucco project, which means that in the foreseeable future gas from Caspian or the Middle East will not reach Central and Eastern Europe directly and will not lead to less dependency of the region on Russian gas. Thus, it will not serve the original aims of energy diversification and decreasing dependence on a single provider.

Less politically important, TAP would be more reliant on Azerbaijan and Turkey to find extra supplies or increase its capacity. One cannot exclude that Azeri (and Turkish) interests may make TAP develop into something more suitable for their strategies. In that sense the choice for TAP means failure of the EU and may result in a gradual diminishing of its future engagement in the Southern Gas Corridor.  Although the European Commission has in the past year distanced itself from supporting any one project, the truth remains that it has long favoured Nabucco as the project that best fulfilled the goals once set for the Southern Corridor and EU energy policy.

4. What role for the EU?

Years of work on the Southern Corridor have highlighted the limits of EU policy. There has been continued strong political backing and even some financial support (via the European Energy Programme for Recovery, EEPR), although access to financing has only become more difficult because of the financial crisis in the EU.  But real progress in the project came about because of decisions taken by the producing and transit states: Azerbaijan’s decision to sell to Europe and the Turkish-Azeri agreement to transport via Turkey through TANAP, as well as the present decision of  the Shah Deniz consortium in favour of TAP. The EU has only indirect influence (if any) on these decisions and is itself unable to guarantee extra sources of gas or a sufficient level of demand.

It is fair to say however, that without the involvement of the EU the Southern Corridor as a project could have had difficulties in surviving as long as it did. The political backing and technical coordination afforded by the European institutions has been vital especially in the context of the overall complexity and scale of the project and the conflicting interests of parties involved (the European Commission has lobbied long and hard for continued talks between Azerbaijan and Turkey). The cost of these efforts was much greater than the expected returns. That could also be the EU’s future role with regard to the Southern Corridor project, if the EU continues to support it. But whatever the EU will do, it will not be sufficient to meet all the expectations Europeans keep having from the project.

5. What next for the Southern Corridor?

There is still a long road to travel until the Southern Corridor becomes a reality (if ever) and it would be justified to say that as an EU project the Southern Corridor has at the very least lost its momentum. The moment has passed when the EU needed significantly more gas from new sources. Both in the old member states and in Central and Eastern European member states the thinking about EU energy policy fundamentals and goals has changed. The reason is that European and global gas markets have changed, in particular in the way gas is being traded. This is provoking new competition between gas that is supplied using traditional methods (through pipelines, in the framework of long-term, oil-indexed contracts) and gas supplied in new ways (be it LNG or unconventional gas, delivered on the basis of short-term or spot markets, with prices reflecting current gas market conditions). Those changes may ultimately be the reason why TAP was chosen over Nabucco West.

The future of the Southern Corridor will now be a test-case for the sustainability of these changes in the EU gas market and the ability of suppliers to adapt their export strategies to them.

Agata Loskot-Strachota is Energy Policy Expert at the Centre for Eastern Studies (OSW) in Warsaw. Janek Lasocki is Advocacy Coordinator at the European Council on Foreign Relations in London.