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Newsletter December 2011

ANALYSIS

Gas Pipelines

Forging a New Energy Hub

Greece is set to benefit from the construction of a major gas pipeline—the Southern Gas Corridor—that will supply Azeri gas to the markets of Europe.

According to experts, natural gas consumption in Europe is projected to rise by 90 billion cubic meters (bcm) until 2020. During the same period, European gas production is expected to fall by 102 bcm or 40%, inducing a dramatic increase in Europe’s gas dependence on imports. Allowing for natural gas imports from the Caspian Sea and the Middle East, the Southern Gas Corridor (SGC), the European Commission’s initiative for the diversification of supply sources, will contribute to enhanced energy security for the European markets. The SGC will open with the pipeline that will be selected by the Shah Deniz consortium to transfer gas from Shah Deniz 2 in Azerbaijan to European markets.

In view of the consortium’s forthcoming decision, expected in the first half of 2012, we present an overview of the main competing projects: ITGI, TAP and Nabucco, two of which, namely ITGI and TAP, pass through Greece.

A recent study conducted by Greece’s Foundation for Economic and Industrial Research (IOBE) highlights the benefits that will accrue to Greece, should the country be actively involved in the process of redefining the European energy map and become part of the SGC through either of the two pipelines passing through Greek territory. Apart from the creation of 413 – 445 million Euro added value for the Greek economy and 10,600 – 11,700 jobs in the Greek manufacturing and services sectors during the construction phase of the pipelines, Greece will also gain a significant opportunity to become a major European energy hub.

Interconnector Turkey-Greece-Italy (ITGI)
The ITGI project is developed jointly by the Greek Public Gas Corporation (DEPA) and Edison, the second largest Italian power and gas company, with the aim of bringing gas from the Caspian basin to Italy and Europe via Turkey and Greece.

The pipeline consists of the current operational Interconnector Turkey-Greece (ITG), connecting Turkey to Greece by means of an approximately 300km-long pipeline, and the planned Interconnector Greece-Italy (IGI), itself comprised of two components. Namely the 600km-long onshore pipeline that passes through Greek territory and is under development by DESFA (Greek Transmission System Operator), and the 200km-long offshore pipeline known as Poseidon, which will connect the Greek and Italian natural gas transportation systems across the Ionian Sea. IGI’s throughput capacity will amount to around 10 bcm/year—expandable through expansion of the pipeline itself—while its initial investment cost is expected to reach up to 2 billion Euros.

In order to contribute to security of supply, the project is planned to allow reverse flow opportunities from Italy. To the same end, the project’s developers also envisage a connection with IGB, a pipeline between Greece and Bulgaria planned to deliver around 3-5 bcm/year to Southern European and Balkan countries.

ITGI is underpinned by a set of intergovernmental agreements between Greece, Italy and Turkey and is said to have obtained almost all regulatory and environmental permits required for its construction and operation. In this respect it has also been granted a Third Party Access exemption for a period of 25 years. In terms of financing, ITGI has been selected for funding under the European Energy Programme for Recovery (100 million Euros for the offshore IGI and EUR 45 million for IGB).

The project is slated to become operational in 2017 when the first gas from SDII will come on stream.

Trans Adriatic Pipeline (TAP)
The Trans Adriatic Pipeline has been designed to bring gas from Shah Deniz via Greece and Albania and across the Adriatic Sea to southern Italy and further into Western Europe. At the helm of the project are three global energy companies,  Norway’s Statoil (42.5%), EGL of Switzerland (42.5%), and Germany’s E.ON Rurhgas (15%), whose extensive know-how in pipeline projects, as well as financial strength, are deemed apt to ensure TAP’s financial viability.

The pipeline’s planned route is 805km long, of which 473km will go through Greece. At an investment cost projected to amount to 1.5 billion Euros, the project is said to represent the most cost-effective option of all the Southern Gas Corridor pipelines for a number of reasons. It crosses the Adriatic Sea at the shallowest water depth and over the shortest distance and it has scalability, a key feature thought to differentiate it from the other pipelines in terms of meeting the Shah Deniz consortium’s requirements. Namely, TAP’s expandable capacity is aligned with the timeline of production at Shah Deniz, as it is scheduled to initially transit 10 bcm/year, which will be expanded to 20 bcm by adding additional compression, as more natural gas comes on stream from Shah Deniz.

In a bid to enhance security of supply further, TAP envisages the development of underground natural gas storage in Albania and offers the possibility of reverse flow for up to 80% of its capacity. Once completed, the pipeline will also tie with the Ionian-Adriatic Pipeline (IAP), which will enable TAP to offer gasification opportunities to the entire Western Balkan region.

Across the whole range of its activities, TAP complies with the standards of the EBRD, the IFC and the EIB, widely held as benchmarks for performance optimisation. TAP is said to have completed 90% of its permitting process, allowing it to initiate construction in 2013 and be operational in 2017 to receive first gas from Shah Deniz.

Nabucco
Nabucco was initially proposed by the USA in the early 1990s as a means to reduce European reliance on Russian gas, thus representing the oldest pipeline project in the Southern Gas Corridor.

Since the beginning, Nabucco has enjoyed strong political support from the EU not only for its contribution to European energy independence but also for advancing the objective of European integration. As a matter of fact, the pipeline is the largest European infrastructure project in terms of countries involved. Running for around 3,900km from Turkey via Bulgaria, Romania and Hungary to Austria, where its planned route is scheduled to end, it is also the longest pipeline among competing projects. Nabucco is the only project that will not be relying on the existing Turkish infrastructure but will lay its own pipes all across its way from the eastern borders of Turkey to Europe.

The pipeline’s capacity at 31 bcm per year is triple the amount of gas that will be supplied by the Shah Deniz field at the initial stages of its operation. In this regard, the feeder line concept of the pipeline that includes two separate connections, one to the Turkish/Georgian border and another to the Turkish/Iraqi border, has been designed to reduce dependence on the Azeri gas, by transporting gas from other energy sources, including in the Middle East and Egypt. However, political volatility in the envisaged areas of additional energy sources has meant that to date the pipeline has not managed to secure the required gas volumes that will allow it to operate at maximum capacity. As a result, Nabucco’s total investment, initially projected at 7.9 billion Euros, is currently under revision.

The project has secured funding from the EU, in the order of 200 million Euros under the European Energy Recovery Programme. According to the project’s managing director Reinhard Mitschek, construction of the pipeline is scheduled to begin in 2013 and Nabucco would be operational by 2017.

The consortium in charge of developing Nabucco features equal shareholding by Bulgarian Energy Holding of Bulgaria, Turkish Botas, Hungary’s MOL, Austria’s OMV, Germany’s RWE, and Romanian Transgaz.