Southern Gas Corridor: Godot Finally Comes?

If all goes well, by the end of this month the multinational Shah Deniz Consortium will select the European leg of a grand pipeline project known as the Southern Gas Corridor to ship Caspian gas to Europe.

The choice between Nabucco West that would bring gas to Central Europe, and the Trans-Adriatic Pipeline (TAP) that would run through Greece and Albania to Italy, is the last key piece before the final investment decision in October to complete the second production phase of Azerbaijan’s largest offshore gas field. Shah Deniz II will produce 16 billion cubic meters (bcm) of gas per annum, 6 billion of which will be bought by Turkey and the remaining piped all the way to Europe beginning in 2019.At first glimpse it is hard to understand all the hype around the Corridor. After all, 10 bcm represents less than 2 percent of Europe’s gas consumption, hardly a silver bullet in supply diversification. The original idea for a Southern Gas Corridor (the ‘Grand Nabucco’ concept) was first conceived more than twelve years ago to bring Iranian gas to Europe. That is a non-starter today. Turkmen gas will not be available for the foreseeable future due to political and legal disputes over the Caspian Sea. In any case, Azeri offshore gas will surely not be cheap to produce and then transport to Europe close to 4,000 kilometers long that is vulnerable to both geopolitical shifts and terrorist attacks.

Yet the importance of the Southern Gas Corridor cannot be overstated. Opening up a fourth major natural gas corridor (the first three being the ones from Norway, North Africa, and Russia) is of strategic significance not only for Europe but for the transatlantic alliance as a whole. The rationale behind the concept is more valid than ever:

First, Europe will likely need more gas in the long run. As conventional reserves deplete, Europe’s dependence on gas import is expected to grow further from the current 64 percent in the coming decades to above 80 percent. Even a significant — and at present distant — uptick in unconventional gas production in the old continent will likely only offset the decline in indigenous conventional production and keep import rates steadily around 60-65 percent (in comparison: the United States has imported 5.6 percent of its natural gas consumption in 2011 and is widely predicted to become a net liquefied natural gas exporter by 2016).

Second, Europe may also face difficulties with two of its existing major supply corridors. The Arab Awakening and the ensuinginstabilities in the wider MENA region could threaten supplies from North Africa. The attack against Algeria’s Amenas complex last year, the fragility of Libya, Egypt’s political turmoil and its growing domestic gas consumption all point to a less reliable North African route. Russia presents a different challenge. Admittedly, Gazprom’s monopolistic positions are slowly being eroded by the spread of spot pricing in Western Europe; the progress in interconnections and the completion of the EU internal energy market; and the ongoing investigation against Gazprom for anti-competitive behavior that could seriously disrupt the Russian gas giant’s present modus operandi in a few years’ time. But Russia’s positions are still relatively strong in Central, Eastern, and Southeast Europe and the Baltic. Many of these countries are up for renegotiation of their long-term natural gas supply treaties with Russia. Without access to alternative supplies they will remain high, oil-linked price-takers in a vulnerable position. Europe needs to diversify to ensure security of supplies, avoid dangerously high levels of dependence, and enhance its negotiating positions vis-á-vis existing suppliers. In addition to increasing LNG imports, bringing gas through the Southern Gas Corridor serves that purpose well.

Finally, the Corridor will be essential to stabilizing a volatile region. It will also bring new supplies to Turkey, the fastest growing gas market in Europe to decrease its dependence on Iran and Russia. Turkey’s energy bill makes up the bulk of the current account deficit that endangers its economic growth. Just as the Baku-Tbilisi-Ceyhan pipeline solidified Azerbaijan’s and Georgia’s Western links, the Southern Gas Corridor will expectantly contribute to cementing theirEuroatlantic orientation.

Nabucco West would clearly serve the diversification rationale better inasmuch as it would bring gas to a region still overly dependent on Russia. While the Italian and Western European markets are oversupplied and well diversified, gas through Nabucco West would reach most of the countries exposed to the 2006 and 2009 Russo-Ukrainian gas crises, including countries in Southeast Europe. TAP could only do that through a series of not yet built interconnectors.

Nevertheless, it is important to note that the choice might eventually be more about sequence than exclusivity. In an integrated and fully-functioning internal energy market with reinforced competition rules both gas from TAP and Nabucco West would increase supply security of the European gas market as a whole. Moreover, the Southern Gas Corridor’s initial 10 bcm capacity is likely only the beginning. Both pipelines are scalable and by the beginning of the next decade additional supplies will be more than enough to fill both Nabucco West and TAP. Further fields in Azerbaijan will supply more gas in the early 2020s and over time both gas from the Kurdistan Region of Iraq and the Eastern Mediterranean could be shipped through the Corridor to Europe.

As the marathon race between Nabucco West and TAP is nearing its end, the remaining political and commercial uncertainties around the project should not be underestimated. If and when the European leg is selected and the final investment decision is taken, they will only herald a new, but equally challenging chapter in this long journey. The implementation will be incredibly complex, one likely fraught with delays. But now at least it seems that contrary to Beckett’s famous protagonist, gas through the Southern Gas Corridor will eventually come.

David Koranyi is deputy director of the Atlantic Council’s Eurasia Center. This piece first appeared on The Huffington Post.

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