Europe's southern gas corridor: The great pipeline race

Several pipeline projects are competing with one another to bring to life the southern gas corridor – a vague blueprint to supply Europe with gas from the Caspian and the Middle East. EurActiv takes a look at the various European initiatives, including their common competitor: Russia's South Stream project.


1 Jan. 2006: First 'gas war' between Russia and Ukraine. Moscow briefly interrupts gas supplies to Ukraine over a payment dispute, triggering criticism in the West that the Kremlin is using energy as a political tool.
16 Oct. 2008: EU summit endorses report on energy security, inviting EU countries and institutions to diversify energy sources and supply routes.
13 Nov. 2008: Commission publishes EU Security and Solidarity Action Plan, outlining several initiatives, including a southern gas corridor.
1 Jan. 2009: Second 'gas war' between Russia and Ukraine. Crisis ended on 20 January when deliveries resumed with higher gas prices for Ukraine. Several European countries were severely hit by supply cuts.
8 May 2009: Czech EU Presidency hosts southern gas corridor summit in Prague. Event was largely ceremonial.
13 Jan. 2010: European Commission President José Manuel Barroso signs deal with Azerbaijan to bring ten million cubic metres of gas per year to Europe.

The 'Southern Gas Corridor' is seen as part of the 'New Silk Road' of transport and energy links between Europe and the Caspian region. EU politicians gave the project its name, while energy companies and governments are attempting to breathe life into it by pushing for concrete projects.

> Nabucco Pipeline Map
The best-known pipeline project in the southern gas corridor is Nabucco. But other smaller projects, such as the Trans-Adriatic Pipeline (TAP), the Turkey-Greece-Italy Interconnector (ITGI) or the Azerbaijan-Georgia-Romania Interconnector (AGRI) all have the potential to be an important element of the southern gas corridor and even call into question the future of Nabucco.

Some, like Russia's South Stream, even have the potential to becoming Nabucco 'killers' by making the flagship EU project irrelevant.

South Stream, a planned pipeline carrying Russian gas to Europe, has a bigger capacity than Nabucco, similar target dates for completion and would largely reach the same Central European clients (see details in 'Issues'). In theory, South Stream could also carry gas from the Caucasus, as Russia's energy state monopoly Gazprom offers competitive prices to gas-producing countries such as Azerbaijan or Turkmenistan.

Alongside South Stream, a little-publicised project known as White Stream, a Ukrainian initiative, could also be seen as a competitor in the southern gas corridor, as it aims to bring gas from the Caucasus across Georgia and Ukraine to Romania with further supplies to Central Europe.

For Europe, building too many pipelines would make little sense. Although they would potentially introduce competition between different suppliers, the high construction costs would also likely inflate prices for consumers. On the business side, returns would be too small to justify several projects, meaning some will have to be abandoned.
Political dimensions

However some governments, and Russia in particular, are pushing for their projects irrespective of their cost-efficiency. Indeed, some of the pipeline projects could be seen as more 'political', while others appear to make more business sense.

Politics are an important factor when considering the routes for the different projects. AGRI, for example, would transport liquefied gas by ship across the Black Sea, bypassing both Turkey and Ukraine. Russia's South Stream would also bypass Ukraine, via a large offshore section which avoids the country's territorial waters. Nabucco, for its part, is highly dependent on its transit arrangements with Turkey, as about half of the planned pipeline stretches across the country.

Politics also play a role in the fact that some projects like Nabucco are recognised as being 'of European interest'. However, other projects that do not enjoy the same status, like South Stream, have received backing from some EU member countries: Bulgaria, Romania, Hungary and Greece. If both were to be launched, it is unclear what the positions of those countries and of the EU would be.
Overlapping routes

All the pipeline projects, including Nabucco and South Stream, incorporate sections of existing pipelines. When all the projects are put on the same map, a clear overlap between several different projects - which use the same existing sections - becomes visible. What becomes apparent too is that many of the planned new sections are very similar from one project to another.

> South Stream On The Map Of Europe
Specifications of the South Stream Project

The greatest political factor, however, is who would ultimately secure supplies. The European Commission's blueprint mentions Azerbaijan and Turkmenistan, as well as Iraq and Mashreq countries. Other countries such as Uzbekistan and Iran would be added when political conditions allow.

Significantly, all EU projects currently proposed under the southern corridor rely on gas from Azerbaijan, at least during the first phase. But if, as gas experts admit Azerbaijan were to decide to sell its gas to Russia, the whole philosophy of the Southern Corridor would fall apart    .
Azerbaijan: A reliable supplier?

The potential of these countries as suppliers is questioned by Moscow. Only three countries can be suppliers of pipeline gas in the long term, according to Gazprom CEO Alexei Miller – Russia, Iran and Qatar.

According to the International Energy Outlook 2010, published by the US Energy Information Administration, the world's top reserves of gas are of 6.609 trillion cubic feet. The countries holding the biggest reserves are Russia, with 25.4% of world reserves or 1.680 trillion cubic feet (tcf), followed by Iran (15.8% or 1.046 tcf), Qatar (13.6% or 899 tcf), Turkmenistan (4% or 265 tcf) and Saudi Arabia (4% or 263 tcf).

Iraq ranks 11th, with 1.7 of world reserves or 112 tcf. Kazahstan ranks 15th with 1.3% of world reserves and 85 tcf of estimated reserves.

Azerbaijan is not among the top 20 countries with the largest gas reserves. According to the US administration, in 2008, Azerbaijan produced 572 billion cubic feet of natural gas and consumed 376 billion cubic feet of it. Almost all of Azerbaijan's natural gas is produced from offshore fields.

Azerbaijan's major increases in natural gas production in future are expected to come from the continuing development of the Shah Deniz field. Industry analysts estimate that Shah Deniz is one of the world's largest natural gas field discoveries in the last 20 years.

According to the project's technical operator, BP, the field contains potential recoverable resources of roughly 15 tcf of natural gas. Shah Deniz is located offshore in the Caspian Sea, approximately 60 miles southeast of Baku.

Azerbaijan signed a deal with European Commission President José Manuel Barroso in January 2011.
Will Turkmenistan's 'huge reserves' be accessible?

Turkmenistan's President Gurbanguly Berdymukhamedov said on 30 September that his country's giant South Yoloten-Osman group of fields alone were now believed to contain a total of 18 trillion cubic metres of gas.

He said that Turkmenistan's total gas reserves were estimated at 24.6 trillion cubic metres (868 cubic feet). This represents more than triple the amount estimated so far.

Turkmenistan does not currently supply gas to European countries, with exports going directly to Russia, Iran and China.

Describing Turkmenistan as an authoritarian state, Michael Laubsch, an expert on Central Asia, recently said that the country would be an "unreliable" partner for the EU.
Attracting finance

Another aspect when considering competing projects is that some appear to have little difficulty in raising the finances needed, while others largely rely on public funding.

The financial situation of Gazprom is far from brilliant and it does not have much cash available. The company has accumulated record net debts of $15.2 billion, according to press reports.

It therefore remains unclear how exactly South Stream would be financed. Russia wants the EU to give 'South Stream' the status of 'project of European interest' in the hope that banks will then lend money on better terms.


The Nabucco gas pipeline was originally proposed by the USA in the period immediately after the fall of the Berlin Wall. Its goal was to reduce the dependence of Europe on Russian gas.

Ever since, Nabucco has never enjoyed the favour of Russia or its state monopoly Gazprom.

But it is difficult to say whether the EU as a whole sees Nabucco as a project of strategic importance. Germany and France, for instance, have never shown much interest in the project.

Last year, German Chancellor Angela Merkel confirmed her country's opposition to funding the flagship Nabucco gas pipeline project with European money, stressing that the problem is not financing but finding gas to feed the pipeline.

The Nabucco consortium comprises leading European energy companies: OMV of Austria, MOL of Hungary, RWE of Germany, Bulgargaz of Bulgaria, Transgaz of Romania and Botas of Turkey. But three consortium members – OMV, MOL and Bulgargaz – have already signed up to Gazprom's South Stream pipeline, raising questions about conflicts of interest, or indeed their commitment to Nabucco. 

More recently, Romania has also been considered by Gazprom as a prospective partner for South Stream.

The Nabucco pipeline will be fed from two separate points at Turkey's borders with Georgia and Iraq and run across Turkey, Bulgaria, Romania and Hungary to the Baumgarten gas hub in Austria. The pipeline's estimated lifespan is 50 years.

Its capacity is 38 billion cubic metres per year (bcm/year). Construction is expected to start in 2012, and the first gas could start flowing by 2015.

The consortium behind the Nabucco gas pipeline announced on 6 September that three international public banks are to start due diligence for loans of up to €4 billion. According to the consortium website, total investment in Nabucco is estimated at €7.9 billion, 70% of which will be financed through loans from financial institutions.

In summer 2010, Nabucco took another step forward by ordering engineering work for two feeder lines from Turkey to Iraq and Georgia. However, a third planned feeder line from Turkey to Iran has been put on the back-burner due to political considerations, the consortium announced.

The Economist newspaper describes Nabucco as looking like "an answer to a problem that technology and the market may already be solving".

It mentions the possibility of using compression technology to transport gas via an existing trans-Caucasus pipeline and across the Black Sea, and the Commission's push to liberalise the gas market so that pipelines may be used not only for imports but also for dispersion across the EU.

In September 2010 the Nabucco project won $5 billion in loans from the World Bank, the European Investment Bank and the European Bank for Reconstruction and Development, the newspaper notes.

In February 2011 it emerged that the pipeline would cost more and take longer to complete than originally estimated, perhaps until the end of 2015. This was due to the international tension surrounding Iran’s controversial nuclear programme. The Nabucco consortium decided to divert a stretch of the pipeline to Iraq instead, which would add a further 550km.
South Stream

South Stream is a planned natural gas pipeline bypassing Ukraine, running under the Black Sea to Bulgaria, with one branch going to Greece and Italy, and another one to Romania, Serbia, Hungary, Slovenia and Austria. Russia recently announced that it would more than double its planned capacity from 31 billion cubic metres per year (bcm/y) to 63 bcm/y.

According to the project's official website, South Stream is "aimed at strengthening European energy security" by eliminating "transit risk," as "another real step toward executing the Gazprom strategy to diversify the Russian natural gas supply routes".

Consequently, Gazprom sees South Stream not as a competitor, but as the best project under the EU's southern gas corridor.

The planned route of South Stream starts from the Pochinki compressor station on the Russian Black Sea coast. The pipeline's offshore section, which is around 900 km long and has a maximum depth in excess of 2,000m, will connect the Russian and Bulgarian coasts under the Black Sea. Italy's petroleum company Eni acts as Gazprom's partner in the construction of South Stream's offshore section.

As for the onshore section, Gazprom says that "several possible routes of the onshore section across the EU members are being currently considered".

Like Nabucco, the completion of South Stream is scheduled for 2015.

In March 2010, Italy's Eni proposed that South Stream and Nabucco should join forces in a joint cost-cutting drive. However, the idea was quickly rejected by Russia's Energy Minister Sergei Shmatko, who said South Stream was more competitive than its rival.

The Economist newspaper lists the crucial aspects of the proposed South Stream project that are currently missing: Russia's ill-run and debt-ridden gas industry has little extra capacity, it says, and Bulgaria is still furious about having its gas supplies cut off during the Russian-Ukrainian gas row in January 2009.
Turkey-Greece-Italy Interconnector (ITGI)

The Turkey-Greece-Italy Interconnector (ITGI), the downstream section of South Stream linking Greece to Italy, is a project by Italian company Edison. ITGI features the Poseidon Project: a 200km stretch of offshore pipeline across the Ionian Sea.

The Poseidon Pipeline is under development by IGI Poseidon SA, a joint venture between Edison and Greek company Depa.

In spite of its resemblance to South Stream, the promoters of ITGI are instead presenting the project as representing the 'first phase' of Nabucco.

Presuming that gas demand in Europe remains low until 2015, Edison predicts that Azerbaijan could serve as the only gas supplier from that area, via Turkey. Therefore, ITGI's promoters consider that a medium-sized pipeline is more adapted to Europe's needs than Nabucco in the medium term.

When operational in 2015, ITGI will have a transportation capacity of up to 10bcm/year.

Poseidon aside, other efforts to build ITGI include the realisation of the Interconnector Greece-Italy (IGI), which comprises a 600km pipeline through Greek territory, and the realisation of the Interconnector Greece-Bulgaria (IGB; also known as Stara Zagora-Komotini, partly financed from EU funds). The IBG will have a transportation capacity of 3-5 bcm/year and is expected to be operational by 2013.

For the rest of its route to the Caucasus, ITGI will use existing pipelines. ITGI officials admit that Russian gas could also be imported as well, through the existing Blue Stream pipeline across the Black Sea.

The project's website stresses that the EU has accepted ITGI as a Project of European Interest and included it among the Southern Gas Corridor Projects of the European Recovery Plan, with financing of €100 million.
Trans-Adriatic Pipeline (TAP)

TAP shareholders EGL of Switzerland, Norway's Statoil and E.ON Ruhrgas describe it as the shortest and most-cost-effective gas supply to Italy and European markets.

Budgeted at about €1.5 billion ($1.8 billion), the TAP project is designed to offer the shortest and cheapest way to ship Azeri gas from the Shah Deniz field to Europe.

In comparison, the Nabucco project is estimated to cost €9.7 billion. Officials have so far declined to provide an estimate for ITGI.

TAP will open a new so-called 'Southern Gas Corridor' to Europe and provide a market outlet for natural gas from the Caspian Sea and Middle East regions. The project is designed to expand transportation capacity from 10 to 20 bcm per year depending on throughput, the TAP consortium website says.

TAP will initially have a capacity of 10 billion cubic metres (bcm)/year. The pipeline's transportation capacity can be expanded to 20 bcm/year. In addition, TAP will offer an underground storage facility, which it is currently investigating in Albania, as well as reverse flow capability of up to 8.5bcm that will ensure that countries in the South East European and Balkan region will be in a position to secure the energy they require.

The TAP pipeline, 520km in length, will begin its route in the Greek city of Thessaloniki, crossing Albania before running across the bottom of the Adriatic Sea for 115km to Brindisi in Italy. TAP's offshore section links Italy to Albania, and not to Greece, as is the case for ITGI.

One of TAP's assets appears to be the fact that Statoil is a 25% resource owner at Shah Deniz.

"The TAP pipeline will be ready when Shah Deniz Phase Two starts production," Kjetil Tungland, managing director of the Trans-Adriatic Pipeline project, recently announced.

According to the Statoil website, Phase Two of Shah Deniz gas production is expected to start in 2016.

While peak production from Shah Deniz Phase One is projected at 8.6-9 billion cubic metres, gas production will be increased by another 16 billion cubic metres per year during Phase Two.

"The pipeline will not transport any Iranian gas under the current political circumstances," the TAP consortium clarified.

According to media reports, TAP is ready to discuss joining synergies with ITGI. However, its executives have provided no details as to what this co-operation might involve.
Azerbaijan-Georgia-Romania Interconnector (AGRI)

In September 2010, state-owned energy companies from Azerbaijan, Georgia and Romania signed a memorandum of understanding for a project to ship liquefied Azeri gas to their region.

The Azerbaijan-Georgia-Romania Interconnector (AGRI) was born, joining an already crowded list of projects under the so-called southern gas corridor.

A new company has been created with the initial task of organising a feasibility study and attracting funds.

On 20 September, Hungary announced it could become a shareholder in AGRI. In that case, each country would hold a 25% stake in the project.

According to reports, AGRI will be designed to transport Azerbaijani gas by pipeline to a Black Sea port in Georgia for liquefaction. Further transport will take place via tanker to the Romanian Black Sea port of Constanta. From there, the gas will be pumped through Romania's pipeline system to Hungary and on to the rest of the European market.

The project envisages the construction of a liquefaction plant for LNG exports at the Azerbaijan-owned oil export terminal of Kulevi in Georgia, as well as the construction of a terminal for importing liquefied gas to a re-gasification plant in Romania.

The president of Azerbaijan, Ilham Aliev, said that the next stages of AGRI – completing the feasibility study and raising cash – would be important and urged international financial institutions to get involved in the project.

The president of Romania, Traian Basescu, said that together with Hungary, his country would make the necessary moves for the feasibility study to be co-financed by the European Union as part of the Trans-European Energy Networks Programme.

A survey on the LNG terminal in Constanta, Romania's Black Sea port, is reportedly being finalised. Its conclusions will provide the starting point for the survey on the AGRI project, Basescu said.

Supporters of the AGRI project say it should be the quickest of the projects in the southern corridor to realise. But critics said the port of Kulevi was at "spitting distance" from breakaway Abkhazia, which is practically under Russian control. Russian troops are based there, and Russia could cause damage to the pipeline if it wanted to, critics pointed out.

A mysterious explosion at the Kulevi oil terminal was reported on 20 January by Rustavi, a Georgian media quoted by global intelligence company Stratfor. Investigations are under way.

White Stream
To complete the picture, the Ukraine-backed White Stream project is worth mentioning, although doubts have been raised that it will be able to attract sufficient political support to be realised.

The idea was first presented by the Ukrainian government under former Prime Minister Yulia Tymoshenko in 2005, in the guise of building a Georgia-Ukraine-EU gas pipeline to transport Caspian gas across Georgia to Supsa, a Georgian port near Poti.

From Supsa, the pipeline would run offshore to the Romanian port of Constanta (the final route has not yet been decided upon) and supply Romania as well as European market.

The pipeline's initial capacity is estimated at 8bcm/year. At this stage, the pipeline would be supplied from the Shah Deniz gas field in Azerbaijan.

The project is promoted by London-based firm GUEU, but its supporters are currently unknown.

Mergers or synergies possible

As the promoters of some of the projects have suggested, some of them could pool together their strongest assets and eventually merge. Some smaller projects could become the backbone of bigger projects, when the conditions allow it and if the demand for gas in Europe increases.

In February 2011 EU officials were reportedly pushing for a merger between Nabucco and ITGI, and the European Commission later confirmed that it was encouraging cooperation between projects in the Southern Gas Corridor.

A stronger role by the European Commission appears to be desired by all the project promoters, even those who least rely on EU or public funding. A special summit on the southern gas corridor took place under the Czech EU Presidency in May 2009. The event produced a Declaration but its content was as vague and the envisaged follow-up steps were inconclusive.

Without doubt, both Hungary and Poland will try to put further flesh on the southern gas corridor concept when they assume the rotating EU presidency in 2011.

Further summits are likely, but more importantly than holding meetings, EU leaders should make sure that proper preparations are made and that the Union can prove its added value in projects of strategic importance.

In his 2010 State of the Union address, European Commission President José Manuel Barroso said he would travel to the Caspian region this year "in order to promote the Southern Corridor as a means of enhancing our security of supply," stating that an energy action plan would be introduced next year focusing on security of supply issues.

Barroso described the southern gas corridor as a "key priority project for the EU," saying that Europe would "provide the legal, financial, political framework for companies to do their business".

Speaking at an energy forum in Sofia, EU Energy Commissioner Günther Oettinger said that the EU "wants a direct connection to the Caspian and the Middle East region," whilst "not standing in the way of [the Russian-sponsored] South Stream".

In a speech at the International Odessa Forum, Oettinger called on Ukraine to reform its domestic gas market, which Naftogaz dominates. "I wish for the European view to be well understood," he said. "We consider that the reform of the Ukrainian gas domestic market and gas transit are not separate issues. Transit will not be totally guaranteed as long as the domestic gas system in Ukraine is not financially sustainable and transparent," he continued, saying that "an extraordinary effort" would be needed to open up the southern gas corridor to the EU.

He had previously called for a single EU price for gas imports, in order not to penalise individual member states.

Commenting on an EU regulation on gas solidarity, Polish MEP Jacek Saryusz-Wolski (European People's Party) said the new rules only go "two- thirds" of the way to securing energy security for the bloc. "The regulation omits the role of the high representative and only vaguely refers to the southern corridor or Nabucco, or cooperation with our partners," he said, referring to the European Neighbourhood Policy.

Romanian MEP Adina Valean (Alliance of Liberal and Democrats for Europe) described the bill as a "positive step towards reducing Europe's vulnerability," but warned of the need to "continue diversifying energy routes and supply sources to facilitate competition, access and choice".

According to Jeremy Ellis, head of business development at German energy firm RWE, the Nabucco pipeline provides gas producers in Azerbaijan with "by far the lowest transport costs to the market," resulting in real economic savings of "between €4.1 to €9.1bn per 10bcm of gas over 25 years".

Nabucco's multi-sourcing is also seen as an advantage, whereas TAP and IGI rely on one source of gas like most countries in South-East Europe. "Two different points exist at where Nabucco and IGI could be connected, either in Turkey or Bulgaria, so that Nabucco's benefits - like a stable and secure transportation route through Turkey - may be extended to Greece and Italy," he said.

Commenting on the EU's Communication on Energy Infrastructure adopted on 17 November, Kjetil Tungland, managing director of the Trans Adriatic Pipeline (TAP) group, said that he welcomed the EU's "recognition that the Southern Gas Corridor could help diversify and secure Europe's future gas supply".

"We are pleased to see the recognition of gas in the communication as a highly important part of the future EU energy mix which can also contribute significantly towards the aggressive European climate change objectives," Tungland said, highlighting the "new, simpler and faster permitting procedures as well as new financing mechanisms and incentives for investors" included for building gas infrastructures.

Stressing the important role of commercial decision-makers and the market place, Tungland called on any public incentives to be "based on full transparency and build on the principle of cost-effectiveness".

"TAP is pleased with the political direction [of the] communication," he added, saying he expected the EU and its relevant member states to ensure that competition among alternative projects "can be carried out on transparent and equal terms on a level playing field".

Writing in a paper for the Centre for European Reform (CER), Daniel Gros, director at the Centre for European Policy Studies (CEPS), describes the EU-Russia energy relationship as "a bilateral quasi-monopoly".

"As a (quasi-)monopolist, Gazprom will be able to set its price above the marginal cost of producing gas. The ability of Gazprom to earn a monopoly rent from its privileged position as the main supplier to the European gas market will depend on the degree to which alternative supplies can be brought to Europe," he writes, estimating that the construction of additional pipelines could reduce European gas prices by 10%.

According to the Clingendael International Energy Programme, "the speed with which European companies and governments responded to the Russian's southern pipeline indicates that they are not yet fully convinced of the success of Nabucco".

Investing in alternative projects such as Bluestream I would nonetheless hold "huge commercial risks with a very unclear timetable for investment returns," however, leaving the question of whether simultaneous projects could be built sequenced in time, Clingendael argues.

Writing for the Centre for Policy Studies, a Conservative UK-based think-tank, Peter Dalby states that Nabucco would "incidentally free Western Europe from Moscow's aggressive use of energy as diplomatic bargaining counter".

Dalby, making the case for Turkish membership of the EU, writes that the Caucasus would "continue to be an unstable, impoverished battleground outside of European influence" without it.