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Shah Deniz 2 gas kickstarts southern corridor project

The pipeline network joining the Caspian to Europe isn’t finished yet, but the gas is, at least, now flowing part of the way

The pieces of the jigsaw are gradually slotting into place for gas supply to Europe via the 3,500km Southern Gas Corridor (SGC) pipeline project. Commercial gas deliveries to Turkey via the Trans Anatolian Pipeline (Tanap) have started up, supplied by feedstock from Phase 2 of BP's Shah Deniz project in the Azeri section of the Caspian Sea.

The start-up of supply from the $28bn Shah Deniz 2 project is a feather in the cap for both BP and Socar, the Azeri state energy company. It's been achieved on time and within budget, enhancing Azerbaijan's reputation as a place the oil industry can operate successfully.

Once working at maximum output, Phase 2 is expected to add 16bn cubic metres a year of gas to existing production, taking total production from the Shah Deniz field to 26bn cm/y of gas and up to 120,000 barrels a day of condensates.

The Phase 2 project incorporates supply from at least 26 planned subsea wells, two bridge-linked platforms, 500km of subsea pipelines and flowlines, and the expansions of a terminal near Baku and the South Caucasus Pipeline (SCP). The latter includes 428km of new pipeline through Azerbaijan, as well as 59km of new pipeline and two new compressor stations in Georgia, according to BP. The UK-based supermajor's partners in the consortium are Socar, Turkey's TPAO, Malaysia's Petronas, Russian independent Lukoil, Iranian-owned Nico and Azeri state-controlled SGC. 

Uniting Tanap and Tap

Some 6bn cm/y of Shah Deniz 2 production will go to Turkey, which is now receiving the first of that gas though Tanap, the second leg of the SGC route into Europe, fed by the SCP.

In June, the Azeri company SGC said 95% of the $8bn Tanap project had been completed. Meanwhile, Murat LeCompte, head of Socar Turkiye Enerji, told Turkish media that Tanap would be ready to connect to the Trans Adriatic Pipeline (Tap), the final leg of the Southern Gas Corridor, by mid 2019. If it happens, this will be a relief to the Tanap consortium, which has struggled to raise finance for the project over recent years.

Once Tanap and Tap are joined, the SGC will be able to supply 10bn cm/y into southern Europe. Tap, which runs from the Turkish border through Greece and Albania and then across the Adriatic to Italy, is also progressing towards completion. According to the Tap consortium, which includes BP, Italy's Snam, Belgium's Fluxys and Spain's Enagas, around 85% of 765km of pipes needed are now in the ground in Greece and Albania. Agreements and infrastructure to take Caspian gas right across Europe are also being put in place.

However, it's not all plain sailing. Like Tanap, the €4.5bn ($5.24bn) Tap project has also had financing difficulties, though succour has come in the form of backing from multilaterals and support from European export credit agencies. On 4 July, the European Bank for Reconstruction and Development said it had approved a direct loan of up to €500m for Tap, and was also said to be looking at further support via a syndicated loan. That follows on from European Investment Bank approval of a €1.5bn loan earlier in 2018.

Source: Petroleum Economist

Further problems have arisen in Italy. Sergio Costa, environment minister in the recently elected coalition government, said in early June that Tap would be put under review. He said the project looked "pointless" in view of falling gas demand.

While his remarks have created uncertainty, it remains to be seen whether this view will be translated into policy, given the precarious nature of the coalition and the need to get agreement between the partners. The right-wing League, which shares power with the 5-star movement to which Costa belongs, may be more reluctant to scupper such a major international project.

Russian interest

Further down the line, more controversy could stem from the ambitions of Russian gas suppliers, such as Gazprom, to route some their gas supply to Europe via the SGC in the future in an effort to reduce Russian reliance on pipelines transiting Ukraine. The European Union wants to encourage diversity of supply through the SGC, but whether that will run to gas from Russia—whose dominance of EU supply partly inspired the SGC's construction in the first place—is open to doubt.

Meanwhile, at the northern end of the continent, Russia's efforts to inject more gas into Europe via the planned 55bn cm/y Nord Stream 2 pipeline is still facing challenges including the possible impact on financing of US sanctions on Russia, resistance from some EU countries, such as Poland, and opposition from environmental groups taking legal action to block construction.

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