Why The EU's Attempts to Diversify Natural Gas Imports May Be Too Little Too Late
by Dr. Bruno Sergi and Dr. Ernesto Gallo
Europe today is a significant importer of natural gas and crude oil which remains dependent on the major regional producer, Russia. EU demand for Russian gas imports has increased since 2015, a fact which reflects Europe’s condition of dependency, which in fact originated in the early 2000s when President Vladimir Putin had promoted the opening to Europeans of the Russian energy market. On the EU’s side, however, there are significant energy security risks, that is, insufficient diversification of supply routes, not supplier risk. 53% of Russian gas delivered to Europe is transported via pipelines through Ukraine (down from 80% a few years ago). Any disruption along this route is the biggest threat to supply. On the Russian side, there is an ongoing effort to secure Western investment, technological capability, and technical expertise so Gazprom can replace and modernize their natural gas infrastructure. Only Germany seems to enjoy exclusive and close relationships with the Russian energy industry. The new EU energy policy, by contrast, is to diversify the geography of oil and gas imports. At the same time, the new imperative of the United States is to bring shale oil and gas to the world market starting in 2018, which is an enormous competitive challenge for Russia.
In Italy, this issue is gaining momentum in the media and public opinion due to the ongoing works on the TAP (Trans Adriatic Pipeline), which will connect Southern Italy (in particular, the beautiful and sun-kissed Salento) to Albania and ultimately Azerbaijan, from where natural gas will be sourced. Environmentalists’ protests over the pipeline construction have been going on for years and the new Italian government, elected in June 2018, at first dubbed the project “pointless,” changing its mind after Prime Minister Conte’s meeting with President Trump on July 30, when the latter urged Italy to proceed with it. At the moment, TAP seems to be firmly on Italy’s agenda, but the country’s political uncertainty does not help. A lot will eventually depend on the overall state of West-Russia relations.
The West-Russia confrontation on energy has moved from the “South Stream” vs. “Nabucco” pipelines to the new “Turkish Stream” vs. “Southern Gas Corridor.” In the 2000s, the European Union and the United States backed the Nabucco pipeline, which would have originated in Azerbaijan, transiting through Turkey. Although this proposal seemed to have a better chance of success, the U.S. and the EU argued that while they were no longer able to reduce Central Asia’s dependency on Russia, they could still help Europe, which was relying too much on Russian natural gas. Later, the “South Stream” project emerged as a rival, a $39 billion and 1,500-mile pipeline that would carry Russian gas to the heart of Europe The effort gained particular momentum after 2006, in light of Russia’s natural gas transit disputes with Ukraine.
However, Nabucco and South Stream would be incompatible; regarding both supply and demand, only one could be successful. Meanwhile, smaller players emerged that muddied Nabucco’s prospects for success in Azerbaijan. Among them is the Southern Gas Corridor (six countries from the Caspian Sea, i.e., SCP (South Caucasus Pipeline),TANAP (Trans Anatolian Pipeline), TAP (Trans Adriatic Pipeline) that would carry just one-third of the volume promised by Nabucco.
After the collapse of the US-EU backed Nabucco pipeline, the prominent issue concerning the Southern Corridor became that of gas production in Azerbaijan. After all, the whole project is dependent on Azerbaijan’s gas supply, whose production prospects are now in decline. A few years ago, Dr. Vitaliy Baylarbalov, Deputy Vice-President of SOCAR (Azerbaijan’s state-owned oil and gas company), spoke about the possibility to scale up the Corridor’s capacity to 60 billion cubic meters (bcm), but now the estimates of what Europe will receive are a modest 10 bcm; doubling the pipeline, as is often proposed, is not an easy option. Azerbaijan had a significant supply squeeze in the early 2010s and even started importing gas from Russia. The Shah Deniz II field, which will supply the corridor, started producing in June but is expected to reach a peak of maximum just 16 bcm. There are several other gas fields in the country, but they are currently poorly or not developed, due to a range of economic, technological, and financial issues.
Moreover, domestic gas demand from Azerbaijan and its closest customer, Georgia, has been rising. It is thus rather unlikely that, in the years to come, Europe will receive more than 10 bcm, which corresponds to just 2.1% of the total gas consumed in the EU in 2017; less than 14% of Italy’s total. There are two options: the expected 10 bcm that will cross the Italian coast are either distributed all across the EU or entirely demanded by Italy that would retain all the new gas for itself. While 10 bcm would be a significant amount of natural gas for Italy, it would be much less if Italy were to distribute the gas among all EU countries, and definitively 2.1% of total consumption needs is an insignificant amount for a European Union seeking to rebalance its energy mix in favor of more natural gas. That is, the expected 2.1% would make an even smaller impact should the European energy mix change in favor of more gas consumptionNor would the impact on average gas prices be of any significance.
As illustrated by Dr. Simon Pirani (OIES, University of Oxford), an extension of the Corridor’s capacity (including its doubling) looks unlikely until new investments start, and in a rosy scenario it might only become a reality in the 2030s. Other countries’ – including Iran, Iraqi Kurdistan, and Israel -- participation would be welcome but could take time and provide modest benefits. Turkmenistan, which is resolving its issues with the other Caspian states, has massive reserves but is committed to selling them to China (which connected via pipeline as early as 2009) and might resume gas trade with Russia, which could then re-export it to Europe cheaply; it is unlikely it will attempt to connect to Azerbaijan via a sub-Caspian route . The recent significant finds in the Eastern Mediterranean are mainly in Egypt, which looks poised to become a gas hub itself rather than connecting to networks such as the Southern Corridor
In other words, the Southern Corridor that is expected to arrive on the Italian shore through Albania and all the way to its origin in Azerbaijan with its three components seems to provide modest benefits to Europe’s diversification from Russian imports. Too little, too late, and too costly perhaps for what the EU dubbed a “key infrastructure priority.”
Image: European Union
Courtesy of Motiqua / Flickr
Dr. Bruno S. Sergi is an Instructor at Harvard University, Scientific Director of the Lab for Entrepreneurship and Development (LEAD) at Harvard, and Associate of Harvard University Davis Center for Russian and Eurasian Studies. Concurrently, he teaches International Economics at the University of Messina. He holds a Ph.D. in economics and is an Associate Editor of The American Economist.
Dr. Ernesto Gallo received his PhD from the University of Turin. He has lectured in several British universities, among which the Birkbeck College and the University of Birmingham, and is currently based at Regent’s University. Dr. Gallo has published in English and Italian on issues of international relations and political theory, globalisation, empire, and Eurasian politics.
