Could Russia Join the Southern Gas Corridor?

At this year’s World Economic Forum meeting in Davos, Switzerland, Azerbaijani President Ilham Aliyev told the Russian news agency RIA Novosti that transporting Russian natural gas via the Trans-Anatolian Pipeline (TANAP) is technically possible but that Azerbaijan has never received an official proposal for such cooperation. The Jamestown Foundation reports in its article Could Russia Join the Southern Gas Corridor? The View From Baku that he added that the infrastructure could be jointly used, but the commercial aspects of cooperation should be studied.

The president also noted that the construction of the Trans-Adriatic Pipeline (TAP) to deliver gas from the Turkish border (from TANAP) to Greece, Albania and Italy will likely be completed in the second half of 2020. Interest in using the Southern Gas Corridor (consisting of the linked South Caucasus Pipeline, TANAP and TAP) by Russia’s Gazprom was first expressed in January 2017 when the company noted that, due to the shortage of midstream capacities of Nord Stream Two (presently under construction) and TurkStream (recently concluded), Gazprom views TAP as an alternative export route. Gazprom has repeatedly floated this idea over the last few years.

On November 30, 2019, the Azerbaijani and Turkish presidents inaugurated a link between the Turkish and Greek gas grids, marking the final completion of the 16-billion-cubic-meter-per-year (bcm/a) TANAP pipeline; and on January 7, 2020, the Turkish and Russian presidents launched the 31.5 bcm/a capacity TurkStream pipeline (designed to carry 15.75 bcm to Turkey, and 15.75 bcm to European customers). As President Aliyev confirmed, injecting Russian gas into the SGC, particularly from TurkStream into TAP, is technically straightforward. And it should be possible under European Union regulations. The end point of both TANAP and TurkStream in Turkey is the small border town of Ipsala; the TAP pipeline starts on the opposite side of the border, in Greece. Therefore, it would not be costly to connect TurkStream to TAP. All of the initial 10 bcm/a capacity of TAP has already been contracted by the Shah Deniz Consortium, which operates production at the Shah Deniz field off the coast of Azerbaijan (TAP received third-party entry exemptions from the EU for its initial phase). However, it will take time until the Shah Deniz II extraction project reaches full capacity to produce enough gas to fill TAP. Thus, when TAP becomes operational by the end of 2020, Russian gas could help utilize the pipeline to full capacity.

Russian gas could also be instrumental in the projected expansion of the Trans-Adriatic Pipeline. TAP announced the results of the initial non-binding Market Test for expansion on October 28, 2019. The producers who expressed interest in using TAP were collectively willing to pledge over 11 bcm/a for transit through the pipeline. Consequently, TAP launched a Coordinated Design Phase to study options for expanding the pipeline to 20 bcm/a. The study is expected to be completed in early 2020. The names of the companies who expressed interest have not been released; so it is only possible to speculate whether Gazprom, or one of its subsidiaries, might be among them. The binding Market Test might start already in 2020 (earliest in Q2); thus, the names of the bidders to use the expanded capacity of TAP will possibly be revealed before the end of this year.

Regarding the use of TANAP to export Russian gas, such cooperation would have to be done on a much larger scale, most likely utilizing the entire infrastructure created for the SGC and beyond. Russian gas can be delivered to Azerbaijan via the 13 bcm/a Mozdok–Makhachkala–Kazi Magomed pipeline (Azerbaijan purchased 1 bcm of gas from Gazprom in 2018 via this pipeline—Gazpromexport.ru, accessed February 10), from where it can be injected into TANAP via the South Caucasus Pipeline. However, this will also require the expansion of all three SGC pipelines during the later stages, when the Shah Deniz II project reaches its full capacity. Interestingly, when Mikhail Bocharnikov, Russia’s ambassador to Baku, congratulated Azerbaijan on the inauguration of TANAP, he speculated, “Who knows, maybe our gas will flow through TANAP one day; I would not exclude it."

President Aliyev’s remarks at Davos were in line with Azerbaijan’s long-term strategy of ensuring its infrastructure projects are commercially viable projects rather than the subject of geopolitical competition between bigger powers. Indeed, one of the strategic rationales behind Azerbaijan’s choice of TANAP-TAP over the Nabucco pipeline in 2013 was that the larger-capacity Nabucco was viewed more as a geopolitical project: it had been backed by the EU, although Europe failed to offer this proposed pipeline enough support or guaranties to counter Russian backlash against it. In contrast, the relatively smaller TANAP-TAP was viewed as commercially viable. When it is economically justified and in line with regulations, Azerbaijan has always been open to sharing its infrastructure with other players. For example, upon the completion of the Baku–Tbilisi–Kars (BTK) railway—a project that was supposed carry part of the China-to-EU cargo heretofore transported by the Tran-Siberian Railroad—Russia began to use the BTK to ship its exports to Turkey and, via Turkish Mediterranean ports, to other countries.

The other issue is the competition between Azerbaijani and Russian gas for the same share of the European market. For now, the total contracted capacity of the SGC (10 bcm/a) is quite small compared with what Gazprom supplies to Europe. However, the individual markets in Southeastern Europe, to whom TAP aims to deliver gas, are themselves quite limited. For example, both Bulgaria and Greece have contracted 1 bcm/a from the SGC, while Gazprom exported just over 3 bcm to each of these countries in 2018. The SGC can only become a potential danger to Russia’s domination of European gas supplies following its full expansion—with the planned addition of more compressor stations, TANAP and TAP’s overall annual capacities could eventually be increased to 31 and 24 bcm, respectively. Such a dramatic capacity increase is unlikely until the Trans-Caspian Pipeline (TCP) is built to connect Turkmenistan to the project. But the realization of the TCP is itself highly improbably due to the loopholes in the text of the 2018 Caspian Legal Convention (Russia does not hide its willingness to use them) and Gazprom’s recent resumption of gas imports from Turkmenistan, which is viewed by some as an attempt to discourage Ashgabat from pushing forward with the TCP. As such, Russian gas in the SGC seems to be an alternative that could make expansion commercially viable without provoking backlash from Moscow.