The Southeastern Europe Pipeline Race

by Ioannis Michaletos

The geo-economic landscape in Southeastern Europe, as in other regions in the world presently, is being shaped to a great extent by the competition between numerous energy-producing states, large consumers and multinational corporations all vying to control the bulk of the energy-transport systems, most importantly pipelines. The European Union has formed a strategy called Southern Corridor, relating to the formation of a pipeline that will diversify the supplies of natural gas for E.U. states that currently rely on Russia and Algeria. The plan attracts the attention of all global energy corporations that aim for long-term lucrative contracts, and at the same time countries that have vital interests in the global energy sector are involved in the plannings, by backing up projects that they can influence. The target is to control the energy flow so as to gain political and diplomatic clout.

New players

Recently, the company British Petroleum entered the game by announcing its planning for the Southern Corridor, which it names South East Europe Pipeline (SEEP). According to press announcements and statements from officials, the pipeline will transfer gas from the Caspian region through Turkey, Bulgaria and Romania, onwards to the energy-thirsty industrialized nations of central and northern Europe, where some 150 million consumers are located and major global companies such as BMW, Daimler, Siemens, Airbus, Thyssen and others have their production facilities.

BP’s planning is directly competitive with the Nabucco pipeline, which aims to follow the same route and exploit the same energy resources, although its shareholders are mostly German, Turkish and Austrian companies. Apart from the obvious economic competition, the two pipelines share an antagonism that is reminiscent of the Belle Époque era, when the energy-seeking British and German Empires contested ferociously over oil reserves from the Danube to the Middle East. The victory of the Brits secured global economic predominance for the Anglo-Saxon companies up to date.

BP manages the vast and Azeri gas field of Shakh Deniz together with the Norwegian Statoil, a company that has its own plans for the Southern Corridor by participating in the Trans-Adriatic Pipeline project, known as TAP. BP’s move indicates that these two companies, since they have a joint venture in a field that can potentially secure gas supplies to Europe, may decide to merge their respective plans in the near future.

Moreover, BP as a corporate entity has been seriously battered due to the Mexican Gulf offshore drilling disaster in 2010 and the failure of negotiations with the Russian government relating to acquiring rights to the Arctic Sea reserves. These two failures have cost the company dearly in terms of shareholder value. Thus the London-based energy giant is playing perhaps a last grand move in order to stay on top of a highly volatile and changing market and at the same time secure a mega energy project of direct geopolitical implications that may well lead into a renewed antagonism between the ailing British corporate power and that of the European Union, which is based upon German and French companies.

BP, in order to antagonize Nabucco, promises to offer a project costing a third of that of the other pipeline, since it will transfer initially much smaller quantities. Purely financially speaking, that plan seems promising; nevertheless there are other antagonizing routes to be considered that are also gathering pace.

The rest of the plans

The Interconnector Turkey-Italy-Greece is another project that is backed by companies of the respective countries and aims at the same target, meaning the exportation of Azeri gas to Europe of approximately 12 billion cubic meters per year. The Azeri state energy company SOCAR stated recently that is in negotiations with Turkey in order to finish up details for that project, the most important one being the agreement upon the transit fees of the latter. Should these negotiations prove to be fruitful, ITGI can be put into action by 2013, thus surpassing all of its competitors. In short, the Azeri government is being seen as a precious bride by all interested parties who rely on their future plans.

Within the last three months of 2011, SOCAR will review all plans by Nabucco, ITGI, TAP and SEEP, and it is estimated that it will then decide which will be given the green light to move on. That makes Azerbaijan presently the most focal country for geo-energy affairs in the world, because all interested parties know very well that the winner takes (almost) all and will leave precious little quantity of gas for its competitors to export. The estimation by many independent energy analysts is that a final decision will be ultimately postponed for 2012 or even further in the future and that mergers will take place between those four pipeline projects, depending on the national interests of the four countries with high stakes in that field, namely the United States, Germany, the United Kingdom and France.

The Russian factor

A crucial aspect of the pipeline discussion is the role of the Russian-Italian-backed plan of the South Stream pipeline, which recently admitted new shareholders from Germany and France. It is the only project that is not related to Azerbaijan or Turkmenistan and other Caspian states, and aims to deliver gas to Europe via a different avenue and coming from the Russian and possibly Kazakh reserves. Estimations to date, along with various reliable data, point out that Azerbaijan is not able to provide a full load of the gas needed for the Southern Corridor. Moreover, insoluble legal barriers on the status of the Caspian Sea and current disagreements between all neighboring states for the offshore gas fields are major obstacle for a long-term pipeline-related decision. The obstacles may prohibit any future plans to connect Turkmenistan reserves for export with those of Azerbaijan, since any pipeline will have to trespass the bottom of the Caspian Sea.

It seems that the South Stream, since it is backed by 50 percent shares by Gazprom, which is essentially a state-owned and -run Russian company, can secure the capital needed for a long-term massive investment of up to 16 billion euros, whereas other plans such as Nabucco, where quite a few mid-sized private companies participate, will find difficulty raising capital and making a profit. In any case, the existence of a Russian plan backed by several big European energy players reveals that there is a long way before any pipeline is being constructed amid a ferocious interstate and corporate antagonism.

Estimations

The gas share in the European Union’s energy balance will continue to grow in the coming decades against the background of the negative attitudes of Europeans against nuclear energy, as was manifested in Germany and Switzerland, and the desire to reduce carbon emissions. For the moment, the only important project aiming for the above strategy is the North Stream, a joint German-Russian venture, which begins commercial operations the last weeks of 2011, manages to secure stable gas deliveries in Europe, and solves to an extent the issue of energy supply in the European Union in anticipation of winter.

Concerning the Southern Corridor, the markets under which gas can be secured and exported are Azerbaijan, Turkmenistan, Russia-Kazakhstan, Iraq and Iran. It is not clear whether Azerbaijan has the necessary capability of delivering over 1 trillion cubic meters of the product for the next 35 years—a median life span of such a project. Turkmenistan faces the legal barrier of the Caspian Sea and the all-encompassing political-diplomatic influence of Moscow. Russia-Kazakhstan does have the necessary amounts, but as far as Russia is concerned, it will certainly face political opposition. Iraq is still in a state of flux and nobody can guarantee a safe passage of large amounts of gas through the Kurdish-controlled territories where, in the case of those in Turkey, a vicious guerrilla war is being fought. Iran, lastly, is marginalized by the international community due to its involvement in its nuclear program and its support to international terrorist groups.

The only certainty is that the pipeline competition in Southeastern Europe is far from over, and last-minute surprises, such as new players entering the game, remain a possibility. Most importantly, the issue far exceeds the little publicity it gets from mainstream international media, and it is at the top of the agenda of most global policymakers, making it of historic nature and of binding long-term political consequences for a significant part of the Southern Eurasian mass.

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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