Southern Gas Corridor: upgrading the status

Unprecedented subversion in the Baltic Sea resulting in bringing out of operation Russian trunk gas pipelines Nord Stream 1 and Nord Stream 2 jeopardized the energy security of Europe suffering from severe shortage of energy over the recent year. Gazprom acting through its official representative Sergey Kupriyanov informed it was looking for the solutions enabling to restore the operating capability of the Nord Streams; at the same time, at the current stage it was impossible to estimate the required time. S. Kupriyanov correctly stated that Europe «lost one of the key routes for importing valuable energy for an indefinite term».

Hardly anyone could imagine such a scenario. In the environment of approaching winter, which may turn out long and cold, Europeans are even more active in searching for reliable exporters and routes of natural gas supplies. The value of the Southern Gas Corridor (SGC) is growing against this background, as well as of Azerbaijan, which has been exporting natural gas to a number of European countries for two years and now promises to increase the supplied volumes.

The relations between the European Union and Azerbaijan in the energy sphere

The relations between Brussels and Baku have been developing rapidly over the recent years, and their cooperation in the energy sphere plays the key role. After the Southern Gas Corridor was completed and commissioned, these contacts got to a whole new level, and Azerbaijan received the status of strategic partner of the European Union. SGC is a project targeted at diversifying the routes and sources of gas supplies to the Old World’s markets. Back in 2008, Brussels characterized SGC as one of the highest priorities for the European energy security. The European Commission promoted SGC as the key infrastructure project for energy supplies to the EU and the necessary element if decreasing the dependency on other gas exporters. That is why from the very beginning SGC received political and financial support on behalf of the European Union. [1]

Brussels granted significant preferences to SGC, such as relief from observing the Third Party Access Principle (by way of exception). This rule of the European Union targeted at prohibiting the monopoly and increasing the competition; it requires to make the energy infrastructure accessible for other gas suppliers.

SGC consists of the following four elements: the second phase of Shah-Deniz gas field development, South-Caucasus pipeline (SCP) Azerbaijan – Georgia, Trans-Anatolian natural gas pipeline (TANAP) across the territory of Turkey, and Trans-Adriatic pipeline (TAP) across Greece, Albania and Italy. [2]

SGC has complex gas transportation infrastructure consisting of the three above-mentioned trunk gas pipelines with the overall length of 3,500 km.

The 691-km South Caucasus pipeline (Baku – Tbilisi – Erzurum) was launched in the end of 2006 starting gas supplies from Shah-Deniz field (phase 1) to Georgia. Six months later, SCP started supplying Azerbaijanian gas to the Turkish market. The initial throughput capacity of the pipeline was 7.4 bcma. After the extension effort, it was increased up to 16 bcma. In case of need, the throughput may be increased up to 31 bcma. The South Caucasus Pipeline Company (SCPC) consortium is the operator of the pipeline, its shareholders are: BP (29.99%), SOCAR (14.35%), SGC (6.67%), Lukoil (19.99%), NICO (10%) and TPAO (19%).

The central part of SGC is 1,850-km Trans-Anatolian natural gas pipeline running across the territory of Turkey and achieving the Western border with Greece through dozens of cities and hundreds of other residential settlements. The TANAP construction cost was USD 6.5 bn. The shareholders are: Southern Gas Corridor SGC (51%), BOTAS (30%), BP (12%) and SOCAR Turkey Energy (7%). The first volumes were delivered to Turkish consumers by Trans-Anatolian pipeline on 30 June 2018, however, its official launch took place much later – on 30 November 2019. The initial throughput capacity was 16 bcma with an option of doubling it.

Azerbaijanian gas reaches the European markets via Trans-Adriatic pipeline, the third element of SGC. The trunk pipelines starts at the Turkish-Greek border and runs for 880.8 km (551.5 km across Greece, 215.9 km across Albania, 105.0 km across the Adriatic Sea, and 8.4 in the territory of Italy). The initial throughput capacity was 10 bcma. It also may be doubled. The project cost was EUR 4.5 bn. The TAP shareholders are: BP – 20%; SGC – 20%; Snam – 20%; Floxys – 19%; Enagas – 16% and Axpo – 5%. After more than 4 years of construction, TAP was commissioned in mid-November 2020, and the fist commercial supplies of gas commenced on 31 December 2020.

Currently, SGC supplies natural gas from Azerbaijan to Georgia, Turkey, Greece, Bulgaria, Albania and Italy. The expectations are that after commissioning the Greece – Bulgaria interconnector (IGB), the Azerbaijanian gas could be transported to other countries as well.

The ceremonial commissioning of IGB took place on 1 October 2022 in Sofia. The participants of the opening ceremony were the Presidents of Azerbaijan, Bulgaria, Serbia, North Macedonia: Ilham Aliyev, Rumen Radev, Aleksandar Vučić, and Stevo Pendarovski, as well as the President of the European Commission Ursula von der Leyen, and the Prime Ministers of Greece and Romania.

«The Southern Gas Corridor changed the energy map of Europe and is one of the biggest infrastructure projects of the continent. Azerbaijan is proud for being the SGC initiator»,  President Ilham Aliyev stated in his speech at the Interconnector opening ceremony. He also emphasized that for many years Azerbaijan has proven to be a reliable supplier of oil to the international markets, and first of all – to Europe, and now it is becoming a reliable supplier of gas. «This year our export will grow up to more than 22 bcm, of which 11.5 bcm will go to European consumers. As I already mentioned, this July we signed the MOU with the European Commission during the visit of Ms. Ursula von der Leyen to Azerbaijan, which is a very substantive document. Based on that, we intend to double our natural gas supplies to Europe by 2027. We have all the required capabilities for that», the President of Azerbaijan said. [3]

According to Ilham Aliyev, the export of Azerbaijanian gas in 2021 was circa 19 bcm, including 8.2 bcm supplied to Europe. This is 40% plus versus the preceding year.

The MOU mentioned by Ilham Aliyev pertains to strategic partnership in the energy sector between Baku and Brussels and stipulates for doubling the volumes going from Azerbaijan to the European Union. According to the achieved agreement, starting from 2023, Baku will be supplying 12 bcma of natural gas to the EU. By 2027, the volumes may achieve 20 bcma. [4] In addition, MOU stipulates for the commitments of the parties to expand the Southern Gas Corridor.

Earlier in September, speaking at the 5^th Romanian International Gas Conference, Parviz Shahbazov, the Minister of Energy of the Republic of Azerbaijan, informed about the contribution of his country into diversifying the supply sources and balancing the energy markets to eliminate the energy crisis. He called the expansion of the SGC gas transportation capacity in the horizon of five years «the next step in the energy security assurance». According to Shahbazov, for increasing the supplies from Azerbaijan up to 20 bcma we need investment into pipelines throughput expansion and into producing natural gas, as well as execution of contract and implementation of engineering solutions. [5]

The first SGC branch lines

«We already started consultations with our partners on expanding the TANAP throughput capacity from 16 up to 32 bcma, and TAP throughput capacity from 10 up to 20 bcma. Without that, it will be difficult to assure additional gas supplies», President Ilham Aliyev said at the ceremonial opening of the gas interconnector in Sofia.

IGB runs from Komotini in Greece to Stara Zagora in Bulgaria. Its length is 182 km, of which 31 km are in the territory of Greece. This pipeline connects Bulgaria with the Southern Gas Corridor and allows for supplies from different sources to the South-East and Central Europe countries.

The EUR 240 mln project is implemented by ICGB AD, an investment company incorporated in Bulgaria in 2011, together with the shareholders – Bulgarian Energy Holding and Greek IGI Poseidon, which have equal interest in the project. The throughput capacity is 3 bcma. In future, it may be increased up to 5 bcma by way of building a compressor plant in the territory of Greece, which would also allow for reverse supplies.

Bulgaria will be receiving 1 bcma of Azerbaijanian gas via IGB. With this purpose, Bulgargaz EAD signed the respective agreement. Bulgaria intends to cover 25-30% of its natural gas needs at the expense of Azerbaijan supplies.

SGC becomes strategically important for energy security of a whole series of other countries in South-Eastern Europe. On September 30, within their joint statement for the press with Ilham Aliyev, Rumen Radev, the President of Bulgaria, announced that three other European countries (Romania, Hungary and Slovakia) wanted to receive and transport additional volumes of natural gas from Azerbaijan. According to him, Bulgaria, Romania, Hungary and Slovakia «offered their pipelines for faster delivery of the Azerbaijanian gas to Europe». [6]

Aleksandar Vuèiæ, the President of Serbia, who also delivered a speech at IGB opening, highlighted that the pipeline was very important for his country as well. «Without participation of our friend Ilham Aliyev, each of us could hardly hope for diversification of gas and electricity supplies», Vuèiæ emphasized. The politician drew the attention of the participants to the growing popularity of the President of Azerbaijan in Europe: «Dear friend, as I can see, you are becoming really famous in Europe. I would like to talk to you. I had numerous talks with him. He became very popular in Europe. I do not know, what he has done in reality, but I have to recognize that I would like to know this», Vuèiæ addressed the Azerbaijanian leader. [7]

The interconnector between Greece and Bulgaria provides for Serbia the opportunity to diversify its gas suppliers including the Caspian Region, and Azerbaijan in particular. It should be noted that as of today this former Yugoslavian Republic buys all its gas from Russia. Until the January of 2021, the only route for supplying Russian gas to Serbia was the pipeline running through Ukraine and Hungary. After the Turkish Stream trunk pipeline was launched, Serbia started receiving a part of Russian gas via Bulgaria. Currently, the construction of gas interconnecting pipeline is underway for connecting the city of Niš (South-East Sebia) and Dimitrovgrad (a settlement at the Serbian-Bulgarian border); this pipeline will be integrated into SGC. This EUR 89 mln project is supported by various financial and political institutions of the European Union. [8]

Serbia and Bulgaria started building the 109-km gas interconnector with 1.8 bcma throughput capacity in early February 2022. The completion is expected next year. Earlier in June Parviz Shahbazov, the Minister of Energy of Azerbaijan, had a meeting in Baku with Zorana Mikhailovich, the Vice-Premier and the Minister of Mining and Energy of Serbia, resulting in signing the bilateral intergovernmental cooperation agreement in the sphere of energy and mining. [9]

Serbia plans to receive natural gas from Azerbaijan in 2023 already via Niš – Dimitrovgrad pipeline. [10] Next year Belgrade intends to purchase up to 40% of gas from Baku.

As for Hungary, which also would like to diversify its energy importing routes, Budapest is in negotiations with Baku about supplying natural gas from mid-2020. Thanks to the interconnector between Greece and Bulgaria, this Central European country also will be able to connect to the Southern Gas Corridor. Hungarian authorities expect that they will receive gas from Azerbaijan in the following two years. [11]

IGB and Niš – Dimitrovgrad gas interconnectors are just the first branches of ÒÀÐ. Due to the fact that the Trans-Adriatic Pipeline has exit points in the territories of Greece, Albania and Italy, the geography of supplies through this trunk pipeline may be significantly expanded with time by way of building other interconnecting lines. And many of them will be able to operate in the reverse mode.

Today we know about the 516-km Ionic-Adriatic Pipeline (IAP). This pipeline will be running across Albania, Montenegro, Bosnia and Herzegovina, Croatia will be its ending point. IAP will have 5 bcma throughput capacity. [12]

The other pipeline – BRUA (Bulgaria – Romania – Hungary – Austria) with Romania – Bulgaria interconnector provides the link between SGC, Central Europe and the Balkans. It will create a new route for transporting natural gas at the regional level from different suppliers including the Caspian Region. Another interconnector will connect Northern Macedonia and Greece. Starting from the gas distribution plant close to the border in Evzonoi (Gevgelija, Northern Macedonia) the pipeline will be connected to TAP.

Shah-Deniz: the backbone of gas production in Azerbaijan

Currently, the main source of gas supplies from Azerbaijan is a giant gas/condensate field Shah-Deniz. Its proven reserves are estimated as 1.2 tln cubic meters, the anticipated reserves – circa 3 tln cubic meters.

During the first eight months of 2022, 30.6 bcm of gas were produced in Azerbaijan, which is 9.7% more than in the preceding year. This was reported by Parviz Shahbazov, the Minister of Energy of Azerbaijan. The gas production will keep growing from year to year until 2026. This is shown in the previously published mid-term forecasts of Azerbaijanian Government in the sphere of hydrocarbons production. Thus, in 2023 they will make 47 bn 757.4 mln cubic meters, in 2024 – 49 bn 210.1 mln cubic meters, in 2025 – 49 bn 728.1 mln cubic meters. By 2026, the strategic goal will be achieved – 50 bcma.

In the near future, the production will be growing due to development of Shah-Deniz field (phase 2). The production peak there is expected by 2026. This year 22.8 bn cubic meters of gas will be produced at Shah-Deniz, which is 7% more than last year. [13]

According to the Minister of Energy of Azerbaijan, in January-August 2022, 14.4 bcm of gas, which is 23% above the similar period of the previous year.

By the way, BP, which is in charge of Shah-Deniz development, claims that the main gas field used for exporting gas is not capable of satisfying additional demand. During his recent speech in Bulgarian capital, Ilham Aliyev informed, that soon natural gas production was to start at several other gas fields of Azerbaijan allowing for increase of the supplies.

The new fields to be brought on stream:  gas/condensate block Umid-Babek (phase 2), promising structure Shafag-Asiman (drilling is underway and the «second Shah-Deniz» is expected), Karabakh and Absheron fields. The off-shore gas field Absheron is believed to be the most promising one, the start of its development is planned for the next year. Its estimated reserves constitute 350-360 bcm of gas, it was discovered in 2001. It is expected that at the first phase 1.5 bcma of gas will be produced at Absheron field, and gradually the production will achieve 5 bcma. The expert community of Azerbaijan believes that at least five years will be required to start the supplies from Absheron. According to Ilham Shaban, the Head of the Oil Research Center, in the best case scenario one year will be required for detailed engineering, and four more years – to build the respective platform and the subsea infrastructure, and to drill the wells. [14]

In case the contract about SGC expansion and Absheron field development is signed in 2023, Ilham Shaban believes, the actual SGC enhancement and supply of new volumes from Azerbaijan will be possible in five years. «In 2028, we will be able to bring at least 5-6 bcm of gas to European markets, and in case of additional investment – up to 10 bcm», Sputnik agency quotes.

Baku does not intend its contribution to the European energy security just by exporting traditional energy. Azerbaijan has tremendous potential in the field of renewable energy sources, mainly – the wind and the sun.

During his welcoming speech in Sofia, the President of Azerbaijan expressed his confidence in his country soon turning into a reliable electricity supplier. «Our confirmed wind energy potential only at the Caspian Sea makes 157 GW. Currently, we are discussing with our European partners the possibility of supplying this energy to the European continent», Ilham Aliyev said.

Baku plans to create the infrastructure required for exporting electricity to the «Old World» markets. The Azerbaijanian authorities pay special attention to developing wind farms in the Caspian Sea. The Georgian-Romanian Black Sea project of subsea energy and digital communications is among the future «green» corridors. This project includes laying the 1,500-km subsea cable at the Black Sea bottom. Potentially, Azerbaijan will be able to export the wind energy of the Caspian Sea along this line.

Azerbaijan needs additional funding sources for SGC

Julian Bowden, the senior research associate of Oxford Institute for Energy Studies (OIES), believes that filling additional SGC capacities by 2027 only with gas from Azerbaijan is challenging. According to the expert, gas from Turkmenistan also may be used – either by swap via Iran, or via Trans-Caspian Pipeline. It will be impossible for Europe to overcome the current gas supplies crisis without launching this supply chain, Bowden writes. [15]

As for swop deals to bring gas from Turkmenistan to Azerbaijan via Iran, this scheme has been in use already from early this year from the moment of trilateral agreement between Azerbaijan, Iran and Turkmenistan came into effect. It was executed in November 2021. According to this agreement, Ashkhabad undertakes to supply 1.5-2 bcma of gas to Azerbaijan via Iran. [16]

This June, during the Energy Forum in Baku, the parties agreed to double the swap supplies volumes. In future, they may be increased again. 

Turkmenistan with its giant gas reserves was initially viewed by the EU as the main supplier for SGC. According to BP World Energy 2020 Statistics Review, this country has 600 mln bbl. of proven oil reserves and 19.5 tln cubic meters of proved natural gas reserves.

Brussels has been trying to develop effective energy dialogue with Ashkhabad for a long time, but so far without success. The idea of building the Trans-Caspian Gas Pipeline (TCGP) was conceived around 20 years ago with the purpose to deliver natural gas from Turkmenistan to Azerbaijan, and from there directly into the SGC system. However, different barriers of geopolitical, financial, economic and environmental nature appeared, and eventually the pipeline remained on paper. Nevertheless, the EU does not remove this project from the agenda. In 2019, European Commission included TCGP into the list of priority international energy projects. Ashkhabad, in turn, despite the fact that his current priorities for supplying natural gas are the Chinese and South-Asian markets, does not hurry to abandon this idea. During the 8^th ministerial meeting of the SGC Consultative Council in Baku in February 2022, Atamyrat Chariyev, Deputy CEO of TurkmenGas state corporation, stated that Turkmenistan had all technical capabilities and resources for organizing export of natural gas to the West.

During her July visit to Baku, Ursula von der Leyen emphasized that the European Union was looking at Azerbaijan as a venue for building the connections with Central Asia and beyond. «We are monitoring with great interest the discussions and ideas about Trans-Caspian connections, and we plan to contribute to this discourse», the Head of the European Commission remarked. One can assume that «the Trans-Caspian connections» assumed the actively developing relations between Baku and Ashkhabad, where energy partnership plays the key role. After many years of disputes around the Dostluk («Friendship») oil/gas/condensate field at the continental shelf of the Caspian Sea, on the maritime border between Azerbaijan and Turkmenistan, the two Caspian countries finally achieved the compromise and decided to jointly develop these hydrocarbons reserves. This field could be a potential source for the Southern Gas Corridor.

On top of that, official Baku several times stated that it was not against the transit of natural gas from Turkmenistan to Europe. Azerbaijan is waiting for specific proposals on the Trans-Caspian Gas Pipeline.

In his recent interview to Il Sole 24 Ore (Italy), the President of Azerbaijan Ilham Aliyev emphasized that Baku was ready to support implementation of this project if the Turkmenistan authorities make such a decision. He remarked that Azerbaijan did not intend to initiate this construction. [17]

Turkish interest towards European market

Turkey shows great interest towards the European markets; and it is in a much more beneficial position and does not have a shortage of gas, contrary to the EU member countries. Recently Recep Tayyip Erdogan, the President of Turkey claimed that Europeans are themselves to blame for the problems they will be facing this coming winter due to restrictions in gas supplies from Russia. According to his words, «Europe is sleeping in the bed it has made for itself». Erdogan emphasized that his country had «no problems with gas supplies». [18]

Indeed, Ankara is not facing such problems. During the recent years, Turkey was actively diversifying its energy import sources. The United States are among the major supplier of LPG to the Republic of Turkey. Recently Erdogan announced the Turkish plans to increase the LPG volumes from the USA referring to beneficial terms. The Turkish President remarked that Ankara was ready to cooperate in supplying American LPG to Europe. [19]

Periodically Ankara claims it is ready to «contribute into transporting natural gas from Turkmenistan to Turkey and from there – to Europe». Turkey has been demonstrating its interest towards rich gas reserves of Turkmenistan for several years, which can be explained by its long-held aspiration to become a regional gas hub.

Earlier in July, Fuat Oktay, the Vice-President of Turkey, during his visit to Ashkhabad informed that Turkmenistan and Turkey were exploring three options for supplying natural gas from Turkmenistan to Turkish consumers. Oktay mentioned such alternatives as using TANAP running under the Caspian Sea, SWAP Agreement or transportation by sea to the pipeline. [20]

Meanwhile, according to Türkiye newspaper, the only alternative to the damaged Nord Streams for Europeans is the Trans-Anatolian Gas Pipeline. «Turkey will be the best opportunity for Europe, which is looking for various alternatives to overcome the gas crisis and survive through the winter season», the newspaper writes emphasizing that only TANAP can guarantee the most profitable gas price. 

After the European Union and Azerbaijan signed the MOU in July and agreed to increase the export volumes, Turkish information agency Anadolu informed that Europe needed the agreement with Ankara to increase supplies from Azerbaijan transiting the territory of Turkey. Anadolu is referring to the agreement between Turkey and Azerbaijan about supplying gas via TANAP dated 26 June 2012. This document stipulates that Turkey has the right of preference for additional throughput capacity of this pipeline. In particular, there are clauses 8 and 9 of Article 7 of the Turkish-Azerbaijanian inter-governmental agreement. The first clause (7.8) of the document reads: «The states directly agree that all the gas volumes owned by the Republic of Azerbaijan and planned for supplies via TANAP, exceeding the initially set throughput of sixteen (16) bcma, will first be offered to the customers in the Republic of Turkey». The second clause (7.9) states that «The expansion of the TANAP system above the initially established throughput capacity of thirty-two (32) bcma shall be subject to mutual agreement of the states». [21]

Conclusions

Prior to the energy crisis break-out, which is an especially acute challenge for the «Old World», the political and symbolic meaning of SGC for the EU exceeded its economic benefits. The supplies of 10 bcma constituted just a part of the European consumption of natural gas (the total being circa 500 bcma). The volumes of supplies from Azerbaijan could not compete with the volumes of Russian gas export to the European Union. In 2021, Russia supplied to Europe 155 bcm of gas, of which 140 bcm were transported via pipelines. In the environment of the growing shortage of gas in the «Old World» SGC acquires strategic value for a number of countries of South-Eastern Europe. Thanks to supplies from Azerbaijan, these countries can cover their needs for natural gas to that or another extent.

It must be said, that given the commitment of Baku to double gas supplies to Europe, this will take certain time. Azerbaijan clearly stated to Europeans that it was ready to supply more natural gas subject to the demand and execution of respective contracts.

Probably, gas from Turkmenistan could turn the tables and become an additional source of supplies for the Southern Gas Corridor. However, the scenario of Ashkhabad and Brussels implementing together the Trans-Caspian Gas Pipeline project by 2027 so far looks rather unlikely.

Europe has difficulties to accessing the gas reserves of Turkmenistan due to strong competition on behalf of China, which accounts for the main volume of gas export from Turkmenistan. With account of constantly growing demand for energy in the domestic market, Beijing is willingly investing into both exploration and development of gas fields, and into export capacities in the territory of Turkmenistan.

Turkey could assist Europeans in the current situation, as its favorable geographical location is its most important geopolitical asset. Recep Tayyip Erdogan tries to use this extremely important and beneficial situation to the full extent. Political influence of Ankara in the Caspian Region also rises the importance of Turkey for the energy security of the European Union. As we can observe, Turkey is engaged in dialogue with different hydrocarbons exporters, both in the Caspian Region and in the Middle East. Turkey is ready to perform as the transit country for delivering energy to the European markets.