A long-running competition between two strategic energy projects to channel natural gas from Azerbaijan's Shah Deniz II field to Europe appears to be ending. On June 28, a consortium of energy companies developing the Caspian Sea field — including BP, Total and Azerbaijani state-owned SOCAR — is expected to officially announce the Trans-Adriatic Pipeline has been chosen as its link to the Continent via the route known as the Southern Corridor. On June 26, the consortium behind the rival Nabucco West project announced that it had not been selected.
Though either project would have supported Europe's efforts to diversify its energy supplies and import routes from Russia, the Trans-Adriatic project is smaller in scale and more manageable than Nabucco West, and its more southern supply route — which will run from Turkey to Italy — poses less of a strategic threat to Moscow. The pipeline will increase Azerbaijan's access to European energy markets, and choosing it rather than the more ambitious Nabucco West project mainly reflects an understanding between Baku and Moscow that will allow Russia to maintain a strong energy foothold in Europe.
Azerbaijan has long served as a key player in Europe's energy markets. Western-backed investment into the Azerbaijani energy industry in the 1990s allowed the country to become a significant producer and exporter of oil and natural gas. In 2003, the Southern Corridor Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines came online, allowing Azerbaijan to export oil and natural gas to Europe through Georgia and Turkey. While Azerbaijani oil production has been slowly declining since reaching a peak of 1.02 million barrels per day in 2010, the country has been working to increase natural gas production, primarily from the Shah Deniz II field in the Caspian Sea. The field is set to provide an estimated 16 billion cubic meters of natural gas per year when it comes online around 2017 or 2018 — an especially attractive development for European countries eager to diversify their supplies from their traditional provider, Russia, which currently provides roughly 130 billion cubic meters of natural gas to Europe each year.
While several consortia have expressed interest in Shah Deniz II, the Trans-Adriatic Pipeline and Nabucco West (which is already a scaled-down iteration of the earlier, more ambitious Nabucco project) emerged as frontrunners earlier this year. Nabucco West was designed to run from the Turkish-Bulgarian border to the Austrian natural gas hub of Baumgarten via Bulgaria, Romania and Hungary. The Trans-Adriatic Pipeline will run from Turkey to Italy via Greece and Albania. Support for each project corresponded generally to its proposed route: Nabucco West was backed mainly by Central and Eastern European countries, while Trans-Adriatic received most of its support from countries in the southeastern Balkans.
The Trans-Adriatic Pipeline's Advantages
The Trans-Adriatic Pipeline was chosen over Nabucco West for several reasons. The first issue was cost: The latter pipeline was expected to run some 1,300 kilometers (roughly 800 miles), compared to around 500 kilometers for Trans-Adriatic. It was expected to transport 23 billion cubic meters per year, compared to the 10 billion cubic meters of its rival project. As a result, Nabucco West was expected to cost some 8 billion euros ($10.4 billion) to build — nearly 6.5 billion euros more than the Trans-Adriatic project.
The second issue was Russia. Though the Kremlin opposed both Southern Corridor projects, Nabucco West was seen as more threatening to Russian interests since it passed through Central and Eastern Europe — the region most reliant on Russia's natural gas supplies — before connecting to the distribution hub in Austria. Moscow sought to undermine Nabucco West by negotiating lower natural gas prices with many of the countries along its route, making the pipeline commercially unviable. Moscow also lobbied for its own South Stream project, which would originate in Russia and cross the Black Sea before covering essentially the same route as Nabucco West. In addition, Nabucco West lost a key shareholder when German power company RWE sold its 17 percent stake in the project shortly before the Shah Deniz Consortium's decision was expected to be made.
Sensing that the hurdles facing Nabucco West were rising, Azerbaijan moved aggressively in recent weeks to bolster the position of the Trans-Adriatic Pipeline. On June 21, for example, SOCAR acquired a controlling stake in Greek natural gas transit firm DESFA, shortly after Russia pulled its own bid for the firm. The move was seen as a key boost to the Trans-Adriatic Pipeline, since it was logical for Azerbaijan to control transit if it was going to invest in the pipeline. Thus, in light of the pressure Russia had placed on Azerbaijan, the Shah Deniz Consortium's choice can be viewed as a compromise between Moscow and Baku.
The Trans-Adriatic project is still facing several questions such as how price-competitive Azerbaijani natural gas will be and how long it will take to bring Shah Deniz II supplies online. Moreover, the consortium's decision comes amid a period of sweeping changes to energy dynamics in Europe, with increasing liquefied natural gas supplies and unbundling efforts expected to impact energy players throughout the region. Still, the choice of the Trans-Adriatic Pipeline over Nabucco West demonstrates Russia's continued ability to influence energy dynamics on the Continent in the current context.