Oil and gas pipelines are not just simple steel tubes that ferry energy from place to place. They are highly charged pieces of infrastructure with a history of attracting political controversy, disputes over prices and access – and failure.
“Pipeline politics” is a way of life in many areas of the world, from Pakistan and India to the Middle East and Europe. Continental Europe has long sought to diversify its energy sources away from Russia and improve its security of supply. Progress on plans to develop a “southern corridor” from the Caspian Sea via Turkey to Europe has put the spotlight back on the continent’s energy needs.
This summer, after more than a decade in the planning, a BP-led consortium developing the Shah Deniz II gasfield in the Caspian Sea off Azerbaijan chose the Trans Adriatic Pipeline (TAP) initially to carry 10bn cubic metres a year of gas. The pipeline will start near the Turkish-Greek border, crossing Greece, Albania and the Adriatic Sea to southern Italy.
Once the gas starts flowing in 2019, it will be the first time that significant amounts of gas from the landlocked Caspian region have had a clear path to European consumers, avoiding Russia. Even though the initial volume only represents 2 per cent of total European demand – Russia will supply more than 15 times that amount this year – supporters stress it is just the beginning of a new supply route.
“The pipelines will be scaleable and should, therefore, swiftly increase in capacity to supply gas from other fields as well,” Günther Oettinger, the EU commissioner for energy, told an audience in Washington in July. “I expect Azerbaijan, together with other countries in the Caspian region, will be supplying us with at least 30bcm a year by 2025.”
It is such bullish assertions that prompt some market watchers to predict that Russia – which accounts for about 30 per cent of Europe’s gas imports – will fight to retain its market share and that its plans to build South Stream, a pipeline under the Black Sea, are the opening shot in the battle.
The bulk of Russia’s exports to Europe have long been shipped across Ukraine but winter price disputes between the two countries in 2006 and 2009 led to gas being cut off and supply disruptions further down the line.
South Stream, which will bypass Ukraine, “is aimed at strengthening the European energy security”, proclaims the project’s website, calling it “a key project within the strategy on diversifying the routes of gas supplies to the EU”.
The South Stream company responsible for the offshore portion of the line – comprising Russia’s Gazprom with 51 per cent, Italy’s Eni with 20 per cent and France’s EDF and Germany’s Wintershall with 15 per cent each (allowing for roundings) – aims to award the contracts for the pipeline this year, with construction starting in 2014. The pipeline is projected to transport 15bcm a year from the end of 2015, with volumes increasing eventually to an annual 63bcm.
Although the first two of the four planned pipelines will not deliver new gas but be a straight substitute for existing sales agreements, some market watchers argue that this meets a key objective.
“If Gazprom only builds two of the planned four pipelines it will still be achieving its objective. To a significant extent, at least at the beginning, South Stream will deliver gas on existing agreements. The aim is simply to reduce Russia’s dependence on Ukraine as a transit route,” says Laurent Ruseckas, an analyst at consultancy IHS CERA and an expert on the Caspian.
John Roberts, an independent energy security specialist and author of Pipeline Politics: The Caspian and Global Energy Security, says South Stream will “at least be started”. He expects two of the planned four pipelines to be built.
Yet the project may face problems. “At the moment, Gazprom’s agreements with individual countries do not appear to comply with EU law (obliging pipeline operators to grant third-party access or specifically seek exemption from this),” he says.
“And unlike TAP, for example, which sought to have an overarching agreement with all countries, South Stream is just a series of bilateral agreements.”
A spokeswoman for Mr Oettinger says while South Stream “is not our top priority, we recognise its value, in particular for Russia”.
“When it is on EU territory, South Stream will be subject to EU internal energy market rules but the European Commission will not impose on South Stream any unreasonable or unjustified level of administrative or regulatory requirements but treat it equally fairly like all other infrastructure projects,” she adds.
However things develop, Mr Ruseckas does not see TAP and South Stream battling for markets. “The EU depends on Russia for a substantial part of its gas. That will not change,” he says.
For TAP, the next few months are critical as it gets ready for the construction phase. In September, the Shah Deniz consortium revealed a list of buyers for the gas, including Royal Dutch Shell, Germany’s Eon, France's GDF Suez and Italy’s Enel.
It is an expensive endeavour. The whole venture will cost upwards of $40bn – $25bn for the development of the Shah Deniz II field and at least $15bn for the delivery system, including a huge new pipeline called Tanap that will pass through Turkey. TAP has not disclosed a price tag yet. It has said only that the cost of the project in Greece will be about €1.5bn.
According to Michael Hoffmann, TAP’s director of external affairs, irrespective of the pipeline’s initial capacity, it is a source of new supplies.
“The question is not whether TAP will create a big difference in terms of diversifying the EU’s supplies,” he says. “The point is, bringing a new source of gas from the Caspian region. Once the southern corridor is open, think of it as the first step in a grander project that will increase supplies.”
Get alerts on EU energy when a new story is published