In late June, one year after Turkey and Azerbaijan agreed to the construction of the Trans-Anatolian pipeline, a consortium of energy companies operating in the Caspian Basin came to a decision about the transportation of their gas from the Turkish border to Europe. They had been considering two options. The first, Nabucco-West, a transport route actively supported by European Union institutions, would have brought natural gas through Bulgaria, Romania, and Hungary to its final destination, Austria. But the consortium decided to go with the second option, the Trans-Adriatic Pipeline (TAP), a project of Norwegian Statoil, Swiss Axpo, and German E.ON Ruhrgas, which is going to traverse Greece and Albania before reaching Italy.
The decision to choose TAP over Nabucco-West could hardly be called a surprise, as economics and not politics generally prevail in liberalized energy markets. The Italian market is one of the largest in Europe and is well-developed in terms of available infrastructure and storage facilities compared to markets along the alternative route, such as Bulgaria, Romania and Hungary. Moreover, Norway’s Statoil, which is a 42.5 percent shareholder in TAP, is also one of the main operators of the Shah Deniz gas field that is intended to supply this pipeline.
The choice of TAP is good news for Europe’s diversity of supply. Despite having just one-third of the capacity foreseen in the initial European plans for the Nabucco pipeline, the decision to connect Europe to Caspian natural gas resources is expected to pay off in time. The pipeline is designed so that it can be upgraded if market demand requires it. Moreover, it brings Europe closer to connecting with supplies from Iraq and Iran. That may appear a distant prospect, but it is worth considering that the National Iranian Oil Company holds a 10 percent share of Shah Deniz. And as potentially one of the largest producers of natural gas in the world, Iran could one day make a true contribution to Europe’s natural gas supply diversity.
There is another interesting angle to this story. For years, European institutions have actively tried to hinder suppliers of natural gas from possessing gas infrastructure in Europe. The basic idea was that a supplier that also owned pipelines could cross-subsidize its activities, would be less transparent, and might become a dominant market player, limiting competition. Several legislative packages had been passed in Europe that were designed to effectively separate market-oriented energy companies and publicly-oriented infrastructure companies. Over time, these regulations also focused on external suppliers of natural gas.
These regulations, it is widely believed, were aimed at preventing Russia’s Gazprom from becoming more dominant than it already was, and became known as the “Gazprom Clause” in Europe’s Third Energy Package. But just before a final decision for TAP was made, the Azeri state oil company SOCAR was allowed to purchase the Greek transmission system operator DEFSA without any objections being made. It appears that in times of financial turmoil critical infrastructure can be sold to external suppliers after all, as long as that supplier is not Russian.
This case demonstrates how obsessed Europe is with Russia being primary dominant supplier of energy resources. At 34 percent, the largest share of Europe’s gas supplies in 2012 came, in fact, from domestic sources, while large external suppliers Russia and Norway provide 23 percent and 21 percent, respectively. From 2008 onward, a natural gas surplus put pressure on prevailing oil-indexed long-term contracts. This in turn urged suppliers to lower their tariffs and increasingly base long-term contracts on spot-market prices. It seems that Statoil has adapted more swiftly to new market conditions than other external suppliers. If this trend continues, it is only a matter of time before Norway overtakes Russia as Europe’s main supplier of natural gas.
The decision to transport natural gas from the Caspian region to Europe is certainly good news in terms of Europe’s diversity of supplies. But without sufficient market development in Eastern Europe, single-source dependency in this part of the continent is not going to decrease.
Tim Boersma is a dissertation candidate at the University of Groningen and a non-resident fellow at GMF.
For another view on this subject, please see Turkey and the Southern Corridor after TAP’s Selection as the Main Export Route for Caspian Gas