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Tap on track

The Caspian gas pipeline to feed into Europe has secured its project financing

The completion of the €3.9bn project financing for the Trans-Adriatic Pipeline (Tap) has, after a tortuous gestation, paved the way for the final stage of the southern gas corridor (SGC) route into Europe from Azerbaijan to be completed on time in 2020.

The Tap project, designed to handle 10bn m³/yr of Azeri gas, has suffered a host of complications since the consortium building it won the bidding process in 2013 to take gas from the Turkish/Greek border across Greece and Albania, then under the Adriatic to Italy.

A changing pool of shareholders, the complex web of legal and political agreements required and, more latterly, objections to the pipeline in Italy, have slowed development. The financing drive started to gather momentum in early 2016, once the project's structure had stabilised.

The progress made since then to completion of project financing is portrayed as a success story by those involved.

"A two-year negotiating period for a pipeline of this political and logistical complexity is not a bad achievement," Stephanie Hudson, head of project finance at the Tap holding company, tells Petroleum Economist. She was brought into the project in 2015 to coordinate the financing.

The agreement was wrapped up just in time to enable a drawdown of funds to the shareholders to take place on time, in December 2018. The shareholder group had previously been funding the pipeline construction themselves.

Strategic incentive

BP and Azerbaijan's Socar have been the driving forces behind the development of the SGC corridor route to supply gas from their Shah Deniz II development in the Caspian into Europe. The two firms hold 20pc each in TAP, as does Italian grid operator Snam. The other Tap shareholders are Belgian-based Fluxys (19pc), Spain's Enagas (16pc) and Swiss-based Axpo (5pc).

Once a term sheet for the financing was put in place in March 2016, Tap then targeted "anchor lenders", the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), as well as seeking guarantees from French, German and Italian export credit agencies.

The involvement of the two multilaterals was seen as crucial for a project of strategic importance to European governments eager to diversify away from Russian pipeline gas. For the EBRD, Tap also represented an opportunity to foster economic development in Albania, one of the continent's poorest countries.

With those agreements signed by mid-2018, the €635mn commercial banking tranche was then agreed with the group of 17 institutions (see box). Hudson described the tranche as "significantly oversubscribed", but declined to say by how much.

Stiff challenges

Tap says construction is now more then 85pc complete and on track to be ready for first gas next year. But prospects did not always look so rosy. Changes to the shareholder group reflected changes in the ownership of the Shah Deniz II project in the Caspian. Notably, the then Statoil exited first Shah Deniz in 2014 and then Tap in 2015, only to be replaced by Snam.

It was also a logistically complex project, requiring political and legal agreements between myriad organisations and the three countries on the route. Tap has also had to deal with an estimated 45,000 land owners, whose land along the route has been affected by pipeline infrastructure.

More recently, resistance to hydrocarbons projects within the Five-Star Movement, which is part of Italy's ruling coalition, together with environmental objections among communities affected by the project, threatened to disrupt its final stages. But Italy's prime minister Giuseppe Conte approved the project in October 2018, saying that it was too late to stop a venture for which binding legal agreements were already in place.

"One lesson to be learned from the Tap project is not to underestimate the complexity of passing through multiple countries and dealing with multiple shareholders and multiple financing entities," Hudson says.

Tap has been keen to emphasise that the project has been built to meet the environmental and social requirements required by the EIB and EBRD.

"There has been a lot of scrutiny of how we have managed environmental and social risk and rightly so," Hudson adds. "We have had a very detailed risk management procedure that anticipates these risks and aims to mitigate them in advance."

It may not be over yet. The project could double its capacity to 20bn m 3 if supply and demand permit-one reason the Tap route was chosen over rivals is that it passes through a shallow area of the Adriatic, making expansion relatively straightforward.

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