Construction will begin next year in Turkey on an 1,800-kilometer stretch of pipeline, part of a long-sought plan called the Southern Corridor that would link the Shah Deniz gas fields on the Caspian Sea in Azerbaijan with Italy. In terms of Europe’s overall gas needs, the southern corridor pipeline will carry only slightly more than a trickle. It is expected to deliver at most 3% of the European Union’s annual needs, now hovering around 500 billion cubic meters. (Turkey will get a significant percentage of the new pipeline supply.) And it won’t start producing until 2018 at the earliest.
The southern corridor pipeline, which is designed to include another nearly 900-kilometer section snaking through Greece and Albania before traversing undersea across the Adriatic, represents an enormous investment, however. It will cost $45 billion at last count, and represents the largest gas infrastructure project in Europe. It also has gained outsized attention because of the current crisis in Ukraine, one fought against a backdrop of Europe’s energy needs, where Russia lords over the continent’s oil and gas supplies. “The Ukraine crisis has accelerated the need for the southern gas corridor,” says Anthony Livanios, CEO of Energy Stream CMG GmbH, an oil-and-gas advisory based in Frankfurt am Mein. “Everyone realizes there’s no more time to waste.” In Europe, pipeline politics looms large. Already, pipelines crisscross the continent, providing Europe’s most important energy lifeline. To counter Russian threats, energy companies are now rushing to retrofit an old pipeline in Slovakia to provide gas to Ukraine through what is called reverse flows. An examination of some of the various other pipeline projects and proposals shows just how much is invested in this transport mechanism. “Gas is here to stay for Europe,” says Richard Mallinson, geopolitical analyst with Energy Aspects, a London-based research consultancy. “All sorts of things are pointing to more rather than less.” Yet, no one, save the Russians, now believes Russian gas will suffice. Diversifying supply becomes critical. While pipelines provide the most logical avenue for this shift, they are hugely expensive and run smack into the most challenging geopolitical issues imaginable. In solving over-dependence on Russian gas, “the south corridor is going to have to be a part of the puzzle, but only one part,” says Harald Heubaum, assistant professor in global energy and climate policy at the University of London’s Centre for International Studies and Diplomacy. Not that everyone is necessarily enamored with the southern corridor project, which has ballooned in cost, been mired in cross-border tussles and seen potential investors and operating partners come and go. Some analysts remain skeptical the southern corridor pipeline will actually get built, at least according to schedule. Officials in Italy’s Puglia region, where the pipeline will reemerge onshore, have yet to sign off and legal challenges are expected. While the Turkish government of Prime Minister Recep Tayyip Erdogan has enthusiastically backed the pipeline and rode roughshod over opponents, “there’s still scope for the Italians to cause difficulties,” says Mallinson. Norman Anderson, president and CEO of CG/LA Infrastructure, a Washington-based advisory and analytics firm focused on global infrastructure, dismisses the project as a “Hail Mary pass.” Even critics of the southern corridor pipeline, however, stress Europe must confront its dependence on Russian oil and gas and do so quickly, as the lead time for energy infrastructure projects are so long and the amount of capital required so enormous. “This requires a complete rethink, how you address your electricity needs and it’s a complex rethink,” says Anderson. Industry experts continue to debate the relative merits of various pipelines, weighed against more LNG from Qatar, LNG export terminals in the US, hydrofracking in Poland, France and the UK, even renewed use of coal. While trumpeting one approach over another, they all stress there are no easy outs for Europe’s current energy situation. “All options on the table are not short-term fixes,” says Heubaum. “For five years or more, realistically, there’s no running away from Russian gas.” Russia last year accounted for 27% of the EU’s gas supplies, according to Eurogas, an umbrella association representing the gas industry in Europe. However, that figure doesn’t capture the true dependence of some countries. Russia supplies more than half the gas needs to 12 of the EU’s 28 nations. The Baltic nations of Latvia, Lithuania, Estonia and Finland are completely dependent on Russian gas. Years before Russia annexed Crimea and accelerated efforts to destabilize Ukraine, Europe’s unhealthy dependence on the pipeline came into graphic relief. In 2006 and again in 2009, Russia temporarily cut off the gas tap to Ukraine over pricing disputes. Because most Russian gas flows through Ukraine, the cutoff caused temporary shortages elsewhere in Europe and triggered widespread panic. However, rather than initiate moves to wean dependence off Russian oil and gas, the EU agreed to a Russia-sourced pipeline that simply circumvented Ukraine. The $10 billion Nord Stream pipeline became operational in 2011. Although that pipeline is running at less than half capacity, the percentage of gas now carried into Europe via Ukraine is down from 80% to about 50%. Meanwhile, the Europeans dithered on a pipeline tapping into Azerbaijani gas. More than a decade was spent in wrangling between the Southern Corridor and a rival proposal called the Nabucco pipeline. A scaled-down version, Nabucco-west, would have run through Turkey, Bulgaria, Romania and Hungary to Austria. Various European nations and their energy concerns lined up in opposing camps, but the EU declined to endorse either. Only in June 2013 did the Shah Deniz consortium, led by Azerbaijan’s state oil company SOCAR, and including BP as operating partner, give its nod to the southern corridor. Russia openly opposed Nabucco, fearing this was part of a grand design to somehow make Russian gas immaterial. To counter this, Russia, through Gazprom, floated its own south-oriented pipeline proposal called “South Stream.” That envisions Russian gas being carried by pipeline across the Black Sea, then through Bulgaria, Serbia, Hungary and Slovenia. Construction is scheduled to start in June. However, both the European Commission and European Parliament have moved to block the pipeline, a stance hardened by the Ukraine crisis. “Europeans are not going to give the necessary licenses,” says Livanios, flatly. Russia has also vehemently opposed another pipeline project that can tap the much more extensive gas fields of Turkmenistan, which sits on mammoth gas reserves. The proposed Trans-Caspian pipeline would carry Turkmenistan gas undersea to Baku, in Azerbaijan, where it could link up with the southern corridor. The project makes economic sense as it significantly enlarges the potential amount of gas the southern corridor can carry. But it also runs squarely into a minefield of bickering territorial claims as well as strategic concerns. Iranian gas could also flow into the southern corridor. But that would require resolving even more intractable issues (such as US sanctions). There’s also talk of constructing a pipeline that could transmit gas from Israel’s Leviathan field to the Greek part of Cyprus, but that will encounter stiff opposition from Turkey. On top of various political issues are some equally substantive economic concerns. Simply put, private sector concerns are expected to largely foot the bill, but they must first be convinced such mega-projects will garner an appropriate return. They’re not there yet.