Azerbaijan Looks to TANAP Agreement with Turkey
Energy Brief
19th February 2012

The head of Azerbaijan’s state-owned oil and gas company Socar, Rovnag Abdullayev, said last week that agreements with the government of Turkey regarding the newly-proposed Trans Anatolian Gas Pipeline (TANAP) should be signed in March or April.

Socar and Turkish pipeline company Botas announced in December 2011 a plan to construct a pipeline across Turkey that would carry gas produced in Azerbaijan’s Shah Deniz gas field in the Caspian Sea to Europe. The project will likely be the end of the EU-backed Nabucco Gas Pipeline project, which since 2002 has been proposing to carry natural gas from Azerbaijan, Central Asia and the Middle East to Southeast and Central Europe.

With Azerbaijan and Turkey joining up to provide a system to carry Azeri gas as far as the Bulgarian border, TANAP is expected to receive the contracts from the Shah Deniz partners to transport the 16 billion cubic meters per year (bcm/y) that the Shah Deniz Stage 2 (SD2) is scheduled to produce in 2017. Of this, Turkey would receive 6 bcm/y and the remaining 10 bcm/y would be shipped into Europe. Turkey already receives 6 bcm/y of Shah Deniz gas from the first stage of the project.

Speaking in Istanbul on 13 February, Mr. Abdullayev said the intergovernmental and country host agreements concerning TANAP could be signed in a couple months, while Turkish officials have stated that construction could begin within two years.

TANAP is estimated to cost $5-7 billion, considerably less than the current unofficial cost estimate of around $12 billion for Nabucco. First reports on TANAP capacity were put at 10-16 bcm/y – sufficient to cover SD2 output, but new reports in the media are placing initial capacity for TANAP at 30 bcm/y with the possibility of expansion in the years ahead. Azerbaijan is expected to be producing enough gas by 2025 to export 50 bcm/y. That suggests that Socar will likely expand TANAP capacity for any future gas exports traveling to Europe, thus giving the pipeline the central role in the Southern Corridor and canceling out any opportunity for an alternative pipeline across Turkey, such as Nabucco, to become a feasible project, barring a major development between the EU, Azerbaijan and Turkmenistan on a Trans Caspian Gas Pipeline.

One of Nabucco’s prime shortcomings has been its failure to secure sources of supply for its 31 bcm/y capacity. This, in turn, led to it not being able to secure financing. Besides looking for supplies from Azerbaijan, Nabucco had hoped to secure gas supplies from Turkmenistan and Iraq. While these options remain future possibilities, right now they look like long shots.

Socar is to hold 80% of TANAP while Turkey, through Botas and its upstream petroleum company TPAO, will hold 20%. Mr. Abdullayev said the project would be open to other partners and it is likely that European shareholders in Shah Deniz and possibly some of those involved in Nabucco will look to join. Germany’s RWE, a late-comer to Nabucco, has expressed an interest in TANAP.

“We are talking to BP, Statoil and Total and want their gas to be in this project,” Mr. Abdullayev said, “but Socar will remain as the main shareholder, leader and operator of this project.” Reuters quoted a Turkish energy ministry official as saying: “Socar wants to remain the consortium leader but may be willing to include companies who can strengthen the project. Major energy companies are interested in TANAP, both from Nabucco and the Shah Deniz 2 consortium.”

While it appears that the likely project to carry SD2 gas across Turkey will be TANAP, there is still the question of which consortium will be selected to convey the gas into Europe. The Interconnector-Greece-Italy (IGI) Poseidon project is designed to carry 10 bcm/y of gas across northern Greece and the Adriatic Sea to southern Italy. It also holds the possibility of shipping gas into Southeast Europe through the yet to be completed 5 bcm/y-capacity Interconnector-Greece-Bulgaria (IGB) project.

The Trans Adriatic Pipeline (TAP) is also designed to carry 10 bcm/y (and later 20 bcm/y) to Italy and the southern Balkans. There is also the South East Europe Pipeline (SEEP) proposed last autumn by Shah Deniz operator BP only days before the deadline to contract submissions for SD2 gas. SEEP has yet to come up with a concise proposal, but could be given serious attention as an alternative. SEEP would run from the Turkish/Bulgarian border to Austria, roughly following the proposed Nabucco route.

In the midst of this, Nabucco is reported to be planning a scaled down model of itself in an attempt to stay alive. The consortium plans to cut its capacity by more than half and make the Bulgarian border its starting point.

The situation could result with Shah Deniz partners awarding the SD2 contracts in stages. The changing landscape of pipeline politics with regard to the Southern Corridor has caused a series of delays in awarding the SD2 contracts. But with TANAP seen at this point as the most likely winner of those contracts, the partners may decide to select TANAP and then give further consideration to which pipeline project will win the contracts for carrying SD2 gas into Europe.