The Southern Gas Corridor, a Broken EU Project: Recent Developments and Current Status

BY BABAKEN MATEVOSYAN, PHD

The Southern Gas Corridor (SGC) is an initiative by the European Commission created in 2008, aimed at diversifying the EU’s natural gas supplies while easing dependency on Russia. Currently, imports from Russia account for approximately 30% of the EU’s overall demand (roughly 130 of 410 billion cubic meters annually (bcma)). The original intent was to engage Azerbaijan and energy exporters from Central Asia, as well as potentially Iran, in order to supply the EU through various sets of pipelines or liquefied natural gas (LNG) terminals. All proposed supply lines combined, would provide 60-120 bcma. This amount would counter Russian influence in the European market, ultimately alleviating energy dependency on Russia as a political tool used by Kremlin. The project has been widely criticized by environmentalists and human rights defenders, as it implies cooperating and creating dependency on authoritarian regimes while harming the natural environment.

Since its initial creation, the situation has changed dramatically, and Azerbaijan remains the only probable supplier of the SGC through the Trans-Anatolian Natural Gas Pipeline (TANAP, 16 bcma capacity) extended by the Trans-Adriatic Pipeline (TAP, 10 bcma). Approximately 5-10 bcma has been planned to reach European markets with an estimated 45 billion USD unnecessarily being invested, part of which is funded by EU public funds. This volume, which would be supplied by the SGC to EU, would cover only 1 to 2 percent of European natural gas demand. Ultimately, the initial plans for the delivery of the volume of gas to the EU have downgraded approximately tenfold as outlined in the current version of the project.

These statistics pose the question of identifying what went wrong, and whether the EU still has a need for the SGC.

Inflated ambitions, and the SGC as a political tool                   

Back in 2008-2009, the initiative was comprised of three core projects: the NABUCCO pipeline from the Caspian Sea to Europe, Interconnector Turkey-Greece-Italy (ITGI), and White Stream (a Georgia-Ukraine-EU gas pipeline). These pipelines were anticipated to deliver over 74 bcma combined to the EU.  Azerbaijani exports at the time were only 5.5 bcma, making it vital to involve additional suppliers. For various reasons, all three core projects failed.

The political risks of engaging additional countries were apparent. Since its inception, involvement of Turkmenistan, and Kazakhstan in the SGC have been hindered by several factors including: (1) Undecided status of the Caspian Sea that prohibits construction of any pipeline crossing it, such as the proposed Trans-Caspian pipeline; (2) Russia’s harsh foreign policy against these plans, and its influence in the Central Asia region; (3) More feasible and economically rational orientation of these suppliers toward eastern markets. In the case of Iran, regardless of current political conditions and sanctions, engagement in the project was improbable due to technical and economic hurdles. Most Iranian fields are located in its Southern shores, and building domestic infrastructure that would allow for such exports would require substantial investments. Taking all of this into consideration, priority to LNG technology would be more rational for Iran in the long-term.

Another political risk for many of the proposed suppliers, as well as the EU, has been the role that Turkey would potentially play. Considering the current political status of Turkey, it may not be strategically wise to grant an additional point of influence to Erdogan’s regime. This became especially relevant after the failed coup d’état in July 2016, and the subsequent actions taken by the Turkish government towards the European Union and its member states.

Political support for the SGC remains as strong as it was in 2008. During the Inter-Parliamentary Meeting of the European Forum for Renewable Energy Sources (EUFORES), the Vice-President of the EU Commission (as well as head of the Energy Union) Maros Šefčovič called the SGC “an excellent example to a new source of energy for Europe” and “one of the priority energy projects for the EU.” A few months earlier, Jonathan Elkind, Acting Assistant Secretary for International Affairs at the U.S. Department of Energy, and Ambassador Mary Bruce Warlick, Principal Deputy Assistant Secretary of State for the Bureau of Energy Resources, reiterated U.S. support for SGC, with Amb. Warlick highlighting that the plan could “greatly improve European energy security.”

This political support could be predominantly explained by two factors: (1) Countering Russia’s aggressive security and energy policies in the wider Black Sea area.  This includes the proposed South Stream, Turkish Stream projects, and aggression in Georgia and Ukraine; (2) Staying engaged in Azerbaijan, as well as other potential partner countries. This engagement is necessary to ensure stability near European borders.

The governments of Turkey and Azerbaijan have strongly advocated for the project. Large corporate stakeholders have also voiced their interest, while coinciding with the deterioration of relations between Russia and the West. Azerbaijan has spent millions of dollars lobbying in European countries, institutions, and the European Commission. NGOs observing the process noted that the SGC was the most frequently mentioned subject during recent meetings involving EU Commissioner on Climate and Energy Miguel Arias Cañete, and its Vice-President Šefčovič. According to the aggregated data, 71% of these interactions were with business representatives of 170 different lobby groups, which included SOCAR, BOTAS, and the Trans-Adriatic Pipeline Consortium. During 1.5 years in office, these energy policy officials had 258 meetings with representatives of fossil fuel interests, and only 29 with renewable/energy efficiency interests. Involvement in other international scandals, including links to the Panama Papers, has added to the speculation on credibility of these individuals.

While the European Union ratified the Paris Agreement on Climate Change on 4 October 2016 with promises to reduce emissions by at least 40% by 2030, shares of renewable energy have continued to decline on an international level. Notably, this decline has been most significant throughout Europe. The biggest factor of this decline has been caused by an increased fear of nuclear energy, and the potential devastation of a disaster within that realm. Many countries have chosen to rely on natural gas, with continued advocacy pressure by energy corporations such as BP and EURELECTRIC adding to the decrease of alternate energy acceptance.

As Azerbaijan remains the only viable contributor of natural gas towards the SGC, it is important to understand its energy production capabilities, and the political risks that emerge from supporting a dictatorship. According to the U.S. Energy Information Administration, natural gas production in 2014 for Azerbaijan was around 17 bcm, 12.5 of which covered domestic market – the rest being exported to Georgia, Turkey, and Iran. The TANAP/TAP project is set to be supplied by Azerbaijani Shah Deniz field Phase 2, which would increase natural gas production by an additional 16 bcma. Per the Oxford Institute for Energy Studies, it would reach a peak of 25 bcma in 2022-2023. Taking into account the growing demand in Turkey (estimated at an additional 10-15 bcma by 2025), low prices of Azerbaijani gas for Turkey, and favorable political conditions in comparison to Russia-Turkey relations, Turkey would most likely absorb additional amount of gas from Shah Deniz Phase 2. This shows that even small 5-10bcm annual quantities of natural gas are at risk for the EU.

In Azerbaijan, the ruling Aliyev regime needs the SGC project for political reasons, both domestic and foreign. Presenting itself as an EU energy security provider helps soften the criticism of Azerbaijani repressive government. In the future, it could serve as justification for arguments in a war of narratives with the West over conflicts such as the Nagorno-Karabakh. Azerbaijan has used political and economic tools to support its interests in the Karabakh conflict during negotiations over the past 20 years.

Is the Southern Gas Corridor still relevant?

When discussing the relevance of the SGC project, several factors should be considered:

  • Even those 10 bcma of natural gas that can reach the European Union may not be necessary. The EU has an overall surplus of natural gas importing capabilities and according to the EU 2050 Energy Roadmap, demand will continue to decrease under current outlined scenarios. LNG infrastructure would seem more politically and economically desirable for diversifying supplies while backing up renewable sources.
  • Although the SGC was presented as a solution to reduce dependency on Russia, the current proposed small volumes would not serve its intended purpose. Reliance on Turkey as a transport country for energy imports would strengthen Ankara’s bargaining position vis-a-vis Brussels. It is important to note that Russian state company Lukoil Overseas has acquired significant stakes in Shah Deniz Phase 2 project, and could directly benefit from European public money despite sanctions against Russia.
  • Authoritarian developments and instability in Turkey and the South Caucasus present significant risks for Europe. Implementation of the project would hardly be compatible with EU key values and deepening relations could imply accepting a partnership with an increasingly autocratic Azerbaijani government. Adding to the controversy, revenues from energy exports could be used to militarize for potential armed conflict against Nagorno-Karabakh or Armenia. While Brussels has limited influence on internal developments in these countries, it could prevent financing them through fossil fuel purchases, while strengthening its energy independence by investing financial resources into domestic energy efficiency and renewable sources.
  • As long as giant fossil fuel companies continue to influence and shape energy policy decisions, the EU will delay its transition towards a carbon-free economy. By maintaining its reliance on hydrocarbons, the EU will make undesirable compromises with countries that may present negative repercussions.

The SGC project is not only very expensive, but unnecessary for the EU’s general energy diversification and demand projection. It is harmful towards the environment, hinders geopolitical stability in the EU’s neighborhood, and falls short on bringing energy independence from Russia. Taking these factors into consideration, it is important reassess both the desirability and rationality of the project moving forward.

References

  1. Cooking the Planet since 2014: Big Energy’s Year of Privileged Access to Europe’s Climate Commissioners. Rep. Corporate Europe Observatory. N.p., Apr. 2016. Web. Nov. 2016. https://corporateeurope.org/sites/default/files/attachments/canetesefcovic_small.pdf
  2. European Commission. Commission Staff Working Document: Impact Assessment. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. A Policy Framework for Climate and Energy in the Period from 2020 up to 2030. 40% scenario.p., 22 Jan. 2014. Web. Oct. 2016. http://ec.europa.eu/ energy/efficiency/events/doc/2014_eec_ia_ adopted_part1.pdf
  3. European Commission. Commission Staff Working Paper. Communication From The Commission To The European Parliament, The Council, The European Economic And Social Committee And The Committee Of The Regions. Energy Roadmap 2050. N.p., 15 Dec. 2011. Web. Nov. 2011. http://ec.europa.eu/energy/energy2020/roadmap/ doc/sec_2011_1565_part2.pdf
  4. European Commission. Communication from the Commission to the European Parliament and to the Council. European Energy Security Strategy. N.p., 28 May 2014. Web. Oct. 2016.
    http://www.eesc.europa.eu/resources/docs/european-energy-security-strategy.pdf
  5. European Parliament and of the Council of the European Union. Regulation (EU) No 1316/2013 of 11 December 2013 Establishing the Connecting Europe Facility, Amending Regulation (EU) No 913/2010 and Repealing Regulations (EC) No 680/2007 and (EC) No 67/2010. N.p. EUR-Lex. Web. Oct. 2016. http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32013R1316 http://www.ensec.org/index.php?option=com_content&view=article&id=566:us-experts-southern-gas-corridor-critically-important-crucial-for-europe&catid=146:cenrg&Itemid=439
  1. Pipe Dreams: Why Public Subsidies for Lukoil in Azerbaijan Will Not Reduce EU Dependency on Russia. Rep. CEE Bankwatch Network. European Union, Charles Stewart Mott Foundation, European Climate Foundation, International Visegrad Fund, Sigrid Rausing Trust, Jan. 2015. Web. Oct. 2016.
    http://bankwatch.org/sites/default/files/PipeDreams-LukOil-21Jan2015.pdf
  2. Pirani, Simon. Azerbaijan’s Gas Supply Squeeze and the Consequences for the Southern Corridor. Publication no. NG 110. Oxford Institute for Energy Studies, University of Oxford. N.p., July 2016. Web. Nov. 2016.
    https://www.oxfordenergy.org/wpcms/wp-content/uploads/2016/07/Azerbaijans-gas-supply-squeeze-and-the-consequences-for-the-Southern-Corridor-NG-110.pdf
  3. US Energy Information Administration. Country Analysis Brief: Azerbaijan: Update June 2016. N.p., June 2016. Web. Oct. 2016.
    http://www.ieee.es/Galerias/fichero/OtrasPublicaciones/Internacional/2016/EIA_Azerbaijan_22jun2016.pdf
  4. ZAJICOVA, NATALIE. “US Experts: Southern Gas Corridor Critically Important, Crucial for Europe.” Journal of Energy Security. N.p., 6 Feb. 2015. Web. Oct. 2016.

Image source: Natural Gas Europe

About the Author 

Babken Matevosyan holds a Ph.D. from SNSPA in Bucharest, Romania. His research focuses on democratic transitions, security in European eastern neighborhood, frozen conflicts, etc.

DISCLAIMER: The views and opinions expressed in the article are solely those of the author(s) and do not necessarily reflect the official policy or position of the ERA Institute.

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