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As global natural gas fundamentals shift – with Asian demand expected to significantly increase, the US importing less and exporting more – European countries seek secure and reliable long-term supply from a diverse group of producers. An ambitious pipeline project dubbed the Southern Gas Corridor is part of that vision.

European utilities have successfully renegotiated or signed new sales and purchase agreements that link greater volumes of natural gas to spot gas market price indexation, as opposed to the oil product price linkage that historically characterized European supply contracts. LNG cargoes diverted from the US ended up on European spot gas markets, providing liquidity and facilitating greater gas-on-gas price linkage in recent years.

Europe is now eyeing incremental volumes of gas coming on stream from the second phase of Azerbaijan’s Shah Deniz gas and condensate field development, which is one of the world’s largest natural gas fields. Various supply options for Shah Deniz gas have been proposed, including the now failed Nabucco project, but a major new pipeline scheme now appears within grasp and numerous heads of state gathered to discuss their support for the Southern Gas Corridor at the Caspian Forum in New York City September 25th.

With an estimated price tag somewhere between $40 billion and $50 billion, the pipeline system does not come cheap, but in addition to needed gas supply the project could bolster regional energy security, strengthen the investment climate and foster trade and political relations among the various stakeholders.

Project Details:

“Since the Shah Deniz field was discovered, a number of pipeline projects have been proposed. While some, such as the Nabucco pipeline, were much talked-about but never realized, three projects proposed by the Shah Deniz consortium are believed to be viable options:

  • Expansion of the South Caucasus Pipeline. A new parallel pipeline will be added to the existing line across Azerbaijan and Georgia, as well as two new compressor stations in Georgia. Once upgraded, the pipeline’s capacity will increase to more than 700 Bcf. At the Georgia-Turkey border, the pipeline will link to TANAP and TAP (below).
  • Construction of the Trans Anatolian Natural Gas Pipeline (TANAP), which will transport the Shah Deniz natural gas through Turkey. The 56-inch pipeline will run from the Georgia-Turkey border to the Turkey-Greece border.
  • The Trans Adriatic Pipeline (TAP) will transport Azerbaijan’s natural gas exports through Greece and Albania to Italy. BP announced in June 2013 that the Shah Deniz consortium selected TAP to deliver approximately 35 Bcf of natural gas to the European Union.” – EIA

“It’s about cohesion of the region,” said Bosnia and Herzegovina Minister of Foreign Affairs Zlatko Lagumdzija. Macedonia’s Minister of Foreign Affairs Nikola Poposki said the Southern Gas Corridor would make the region more competitive and attractive to investors.

Ahmet Davutoglu, Turkey’s Minister of Foreign Affairs said energy is one of his country’s biggest challenges and while Turkey successfully positioned itself as a strategic transit country, its own domestic consumption is steadily increasing, making energy security a higher priority.

“We are trying to make a connection between consumers and producers that’s positive for economic growth,” said Carlos Pasqual, Special Envoy and Coordinator for International Energy Affairs, U.S. Department of State. And while there are certainly geopolitical considerations, strong commercial relationships should underpin the project’s foundation, he said.

Shah Deniz Phase II has yet to reach a final investment decision, said Pasqual and he pressed the 7 companies and 11 countries involved to prevent individual interests from interfering with the commercial negotiations.

The internal rates of return need to be high enough for each company to move forward, he said.

Statoil and BP operate Shah Deniz II and partner with Total, the State Oil Company of Azerbaijan (SOCAR), Lukoil, Naftiran Intertrade Company (NICO) and Turkish state company TPAO. First gas is expected in 2017, with supplies reaching European markets around 2019.