The recent SOCAR-DEPA gas deal demonstrated Greece’s and Azerbaijan’s political support for ITGI at the highest level. The gas sale contract to Greece via Turkey implies the official opening of the Southern Corridor, and that the long-awaited strategic choice of SOCAR and the Shah Deniz Consortium will likely be ITGI and TAP. Thus, the Southern Gas Corridor could open with these two projects instead of Nabucco. The EU should encourage the ITGI and Nabucco consortia to cooperate in securing Azerbaijani gas for both projects so that the Southern Corridor can start with ITGI southward in a first phase and then follow Nabucco's planned route northward to Austria in a second phase.

BACKGROUND: On April 5, Greece’s national gas company DEPA and Azerbaijan’s State Oil Company SOCAR signed a long-awaited Memorandum of Understanding during an official visit by the Greek President Karolos Populias to Azerbaijan. According to the MoU “Bota?, DEPA and SOCAR agreed to consider the assignment of Bota?’ rights and obligations under the Bota?-DEPA gas sales contract to the entity in Azerbaijan (SOCAR or Azerbaijan Gas Sale Company AGSC) subject to the relevant parties’ consent”. Thus, Bota? may approve to re-assign the Botas-DEPA gas sale contract to SOCAR or AGSC, following the signature of the contract between Bota? and SOCAR in June 2010.

With the tacit approval of Turkey, Caspian gas will now flow to European markets directly from a Caspian gas producer – Azerbaijan. The physical transportation route of Azerbaijani gas to Greece will run through the Turkey-Greece Interconnector (ITG), connecting the natural gas networks of Turkey and Greece since 2007. There will in practice be no new supply to Greece, but rather the reassignment of an existing supply contract between Bota? and DEPA. Greece will initially require 500-700 million cubic meters (mcm) of Azerbaijani gas per year, with the possibility of increasing the amount significantly during the contract term to fill any emergent gap between supply and demand. The structural demand trend for gas in Greece remains upward and by 2015 annual demand is forecast to rise to between 5.7 billion cubic meters (bcm) and 8.1 bcm from 3.5 bcm in 2010, according to the Greek regulator RAE. Currently, the lion's share of Greece’s gas imports – 66 percent – is provided by Russian Gazprom, which has a contract to supply 3 bcm annually to DEPA via Bulgaria. This contract will run out in 2016. Of the remaining annual gas imports, 760 mcm is composed of Algerian LNG imported to Greece’s LNG terminal Revithoussa, while another 500 mcm comes from Bota?. However, the supply/demand balance in Greece will be disturbed if all its proposed additional gas-fired power generation is implemented over the next few years. If that happens, larger volumes need to be imported from other sources to secure the balance.

Of particular importance for DEPA is to position Greece as a gas transit country between gas-producing Azerbaijan and gas-consuming countries in the EU and Southeastern Europe, an objective clearly stated in the Memorandum. This ambition will bring some commercial and transit dividends to Greece, which is still recovering from the financial crisis. The construction of the interconnector Greece-Bulgaria with a total capacity of 5 bcm has started and it is expected that the 140 million Euro-project will be completed by 2013. With the help of the Greece-Italy Interconnector and/or TAP, Greece could also be the entry point of up to 12 bcm of Azerbaijani gas per year to Albania and Italy if all these projects are implemented. Macedonia, which is currently 100 percent dependent on Russian gas, will also be able to benefit from gas sourced from Azerbaijan via Greece with the help of the existing Greece-Macedonia Interconnector.

IMPLICATIONS: It has been almost a year since SOCAR opened negotiations with European gas buyers within the Southern Gas Corridor – this process began immediately after the Azerbaijan-Turkey agreement was signed in June 2010. The negotiations have focused on determining which buyers will provide the most valuable commercial offers, and which of the three transportation routes through Turkey to Europe will provide the most viable transportation tariffs and conditions. Although the EU officially supports all three projects of the Southern Corridor equally, Nabucco is described as the most strategically important pipeline as it has the largest capacity of 31 bcm annually and is specifically intended to lessen Eastern and Central Europe’s dependence on Russian gas. Thus, the EU would prefer to see the promised 10 bcm of Azerbaijani gas output available for export in the western direction after 2017 (when the second phase of Shah Deniz will come on stream) directed toward Nabucco rather than ITGI or TAP. There are no such strategic preferences for Azerbaijan, which is interested in all profitable commercial offers and is moreover very keen to access the nearest gas markets directly. The EU is anxiously awaiting SOCAR’s decision on “Shah Deniz 10”.

Either Nabucco or ITGI can provide such an opportunity for SOCAR. Through Nabucco, SOCAR could have direct access to its prospected participants and more Balkan countries could also be linked to the pipeline. On the other hand, if ITGI is chosen, SOCAR can access the lucrative Italian market with an annual gas consumption of up to 78 bcm, apart from the east and west Balkan Interconnectors to Bulgaria, Macedonia, Albania and Serbia via Greece. Up to 30 percent of hydrocarbons consumed in Italy come from North African energy producers and the Middle East. It remains to be seen how the European market will react to the political turmoil in these important energy exporter countries. Certainly Libya, one of the largest hydrocarbon producers in the region, has moved from stability to a highly unstable state in recent months. This could be a good opportunity for SOCAR to enter the Italian market, replace potentially unreliable gas exporters, and strengthen its position there for years to come. ITGI and/or TAP is the easiest and shortest way to reach the Italian market.

The recent statement by Russian Prime Minister Vladimir Putin on the prospects for accessing the Italian market through South Stream via the Balkans and under the Ionian Sea encouraged both Athens and Baku to sign the Memo. Presently, Russia and Algeria each supply roughly 23 bcm per year to Italy. Additional Russian gas entering the Italian market via South Stream would likely lessen SOCAR’s opportunities for accessing Italy. However, it is not yet entirely clear how the gas for South Stream will be supplied. As currently proposed it will also be one of the most expensive pipelines ever built at a cost of 23 billion Euros. Thus, project financing may also be a challenge. 

CONCLUSIONS: With the signing of the Memorandum of Understanding between SOCAR and DEPA, Azerbaijan and Greece demonstrated their political support for ITGI and TAP. It is clearly stated in the Memo that the “SOCAR-DEPA gas sale contract to Greece, via Turkey, will serve, among others, as a breakthrough movement for the establishment of direct energy links between Azerbaijan and Greece” and most importantly “an official opening of the Southern Corridor”. Thus, the Southern Corridor will start with ITGI and TAP instead of Nabucco. The EU should encourage the ITGI and Nabucco consortiums to work together in securing Azerbaijani gas so that both projects can come on stream within the Southern Corridor, starting with ITGI southward in a first phase and then follow Nabucco's original planned route northwards to Austria in a second phase.

Azerbaijan clearly aims to become one of the main players in the European gas market after 2017 when Shah Deniz 2 will come on stream. However, Azerbaijan is a new and small player, which has to make its way in a highly competitive market. It neither expects special political treatment, nor any monopolistic position. SOCAR’s target is to access multiple buyers, multiple pipelines, and multiple transportation routes both inside and outside the region. Azerbaijan wants to gain importance to the EU as an energy state – it wants to build a reputation as a reliable supplier and commercially focused partner rather than as a player of ultimately pointless geopolitical games.

AUTHOR’S BIO: Gulmira Rzayeva is a Research Fellow at the Center for Strategic Studies (CSS) under the President of the Republic of Azerbaijan.