As Italian government decides to review TAP gas project, Azerbaijan should weigh up pros and cons

Fuad Muxtarlı Analysis 7 June 2018
As Italian government decides to review TAP gas project, Azerbaijan should weigh up pros and cons

Prime Minister Giuseppe Conte comfortably won a confidence vote in the lower house of parliament on Wednesday, confirming his government's majority after promising tough negotiations with Europe over the economy.

Conte, backed by the anti-establishment 5-Star Movement and the far-right League, won an initial vote in the Senate on Tuesday and can now forge ahead with his coalition programme, which includes tax cuts, benefit hikes and justice reform. A plan to build the final stage of a $40 billion international gas pipeline in Italy is under review, the country’s new environment minister said, calling the project “pointless”.

A plan to build the final stage of a $40 billion international gas pipeline in Italy is under review, the country’s new environment minister said, calling the project “pointless”.

The League does look favorably on the Trans-Adriatic Pipeline (TAP), the westernmost section of the Southern Gas Corridor, which will bring Azerbaijani gas to Italy via Georgia, Turkey, Greece and Albania and should help southeastern Europe reduce its dependence on Russian natural gas. But the Five Star Movement wants to block the TAP project because of environmental concerns. More generally, the two ruling partners have said nothing about Italy’s potential role as an energy hub in the Mediterranean region, a cornerstone of the previous government’s energy policy.

Azerbaijan has alternative options for the supply of natural gas to European countries, if the new Italian government decides to disrupt plans for the commissioning of the Italian section of the TAP in time.

One of the leaders of the 5-Star Movement, who won the March 4, 2018 election in Italy, comedian Beppe Grillo, organized NO to TAP committee (no to the Trans-Adriatic gas pipeline), makes every effort to disrupt the construction of the pipeline through which Azerbaijani gas must be supplied to European countries.

The leadership of the 5-Star Movement can initiate litigation under the pretext of damaging Italy's environment, which, if not completely buried, at least, this might disrupt all terms of putting it into operation. Moreover, in the joint program of action of the League and the Five-Star Movement, the issue of the environment is among the top priorities, along with combating corruption and reforming the labor market.

For Azerbaijan, a new political alignment of forces in Italy is clearly disadvantageous, where Euroskeptics are coming to power, ready to review the financial relationship with the EU leadership, and even in the case of the "obstinacy" of official Brussels, they are threating to launch the procedure of withdrawal from the eurozone. That is, for the skeptical new Italian government it will be difficult to prove that gas from Azerbaijan will serve the energy security of all EU countries.

In the current situation, the lobbyist for the supply of Azerbaijani gas to Europe - Vice President of the European Commission for the Energy Union Maros Sefcovic will find it difficult to negotiate with Italian officials and representatives of the regions on the need to timely commission the TAP pipeline in 2020.

Meanwhile, as early as June 12, 2018, the official ceremony of commissioning the Trans-Anatolian gas pipeline (TANAP), according to which Azerbaijani gas will be delivered to Turkey, is scheduled. Recall that the continuation of TANAP is the TAP pipeline, through which the lion's share of eight billion cubic meters of gas per year should go to Italy in 2020. Thus, there is a threat that Azerbaijan will not be able to fully export gas extracted from the Shah Deniz field under Stage-2.

But Azerbaijani gas is in demand in European countries, and even if the deadline for completing the construction of the TAP in Italy is disrupted, it would be important for Azerbaijan to complete work on the territory of Greece and Albania. In this case the country has options to change the direction of the flow of natural gas. One of these options was discussed during the fourth ministerial meeting within the Consultative Council of the Southern Gas Corridor. In Baku, on February 15, 2018, the State Oil Company of Azerbaijan (SOCAR) signed an agreement with Albanian company Albgaz, Montenegro Bonus Montenegro and Croatian Plinacro on the creation of a new company for designing the Ionian-Adriatic Pipeline (IAP).

In addition to the IAP, there is also the opportunity to pump additional volumes of gas in a different direction, as mentioned by Sefcovic. He said that along with Bulgaria, the desire to receive Azerbaijani gas through new connecting pipelines was expressed by Romania.

Thus, if Italy refuses gas from Azerbaijan, the Azerbaijani leadership, together with the partner companies for the development of Shah Deniz, will decide to increase the volumes of gas via connecting pipelines in the direction of Greece-Bulgaria-Romania-Hungary-Austria, and also on the route Albania-Montenegro-Bosnia and Herzegovina-Croatia. That is, Azerbaijani gas will still flow to the markets of Central and Western Europe, but on a different route.

The Southern Gas Corridor (SGC) is a pipeline system that provides for the supply of Azerbaijani gas produced within Phase-2 of the Shah Deniz gas condensate field development project to Turkey and the European Union countries. The initial throughput capacity of SGC pipelines is expected to be 16 billion cubic meters of gas per year. About six billion cubic meters will be delivered to Turkey, and the rest - to Europe.

The delivery of Azerbaijani gas will be carried out through the South Caucasus pipeline, passing through Azerbaijan and Georgia; construction of the Trans-Anatolian gas pipeline (TANAP) through Turkey, and the construction of the Trans Adriatic gas pipeline (TAP) through Greece, Albania and Italy.

Addressing the Italian parliament, Italy’s new Prime Minister Giuseppe Conte said his government, recently formed by the anti-establishment Five Star Movement and the Eurosceptic and anti-immigrant League party, was in favor of an opening toward Russia.

The Kremlin expressed satisfaction with Conte’s words. In their “government contract,” which sets the boundaries of their cooperation, the Five Star Movement and the League reaffirm Italy’s commitment to the North Atlantic Treaty Organization (NATO), with the United States as a “privileged ally”; but at the same time, they emphasize Russia must be viewed as a “significant” economic and trading partner, not a military threat. As a result, the two ruling parties say they will work to lift economic and financial sanctions the European Union imposed on Russia in response to its annexation of Ukraine’s Crimea in 2014, and following armed intervention in the Ukrainian Donbas.

The League (formerly known as the Northern League) is particularly hostile to the sanctions regime. Matteo Salvini, the party’s leader and new interior minister, claims Russian counter-measures are damaging his country’s industries.

Italian exports to Russia declined between 2014 and 2016, and sanctions certainly had a negative impact on mutual trade. However, it is just as certain that the fall in Italy’s sales to Russia during that period coincided with the shrinking of the Russian economy, driven in large part by low oil and natural gas prices.

Now that the Russian economy has slightly improved, thanks to the recovery in energy prices, Italy’s exports to Russia have increased. A similar trend can be observed in Russia’s trade with China. Beijing did not pass any sanctions against Russia in the past few years. Nonetheless, Chinese exports to this country decreased to $34.7 billion in 2015, from $49.6 billion in 2013, according to the World Bank. They started recovering in 2016 ($37.3 billion), eventually reaching $42.9 billion in 2017.

Last year, the League signed a cooperation agreement with United Russia, the party of President Vladimir Putin. Salvini has repeatedly spoken positively of Russia’s annexation of Crimea as well as its military campaign in Syria. Some Italian media outlets have speculated the League is financed by Moscow, like certain other far-right forces in Europe. Salvini has always denied it, and there is no evidence at the moment that his party is on the Kremlin’s payroll. What is known is that the League has connections with a number of opaque associations promoting Russia’s political and commercial agenda in Italy.

Five Star’s positions are more nuanced when it comes to Russia. Reportedly, party leaders had previously met Russian political figures linked to Putin. Moreover, Five Star’s current leadership is ambiguous on Crimea’s status, while its founder, comedian Beppe Grillo, supported the referendum on the peninsula’s separation from Ukraine, despite it being illegal according to international law. In a diplomatic balancing act, Luigi Di Maio, the party’s political chief and new trade and labor minister, has tried to build up stronger relations with the United States over the past year.

All that said, the new Italian government’s stance toward Russia is not so different from that of its predecessor. With few exceptions, all political forces in Italy oppose sanctions, including the progressive Democratic Party (DP), which headed a ruling coalition until this spring. Unlike the Five Star Movement and the League, however, the DP has always maintained that easing or removing trade restrictions on Russia must be tied to the latter’s respect for the Minsk ceasefire agreements, the diplomatic framework for fostering an end to the Ukraine conflict.

According to Five Star and the League, Russia does not constitute a threat and remains a potential partner for NATO and the EU. In their government contract, the two parties say Italy’s foreign policy focus should be on the Mediterranean area and the fight against illegal immigration and terrorist organizations. In this context, Russia is not seen as a geopolitical rival, but as a stabilizing force that contributes to eliminating the root causes of human trafficking and Islamist terrorism in North Africa and the Middle East. It remains to be seen whether this geopolitical vision will translate into concrete actions-such as reducing Italy’s participation in NATO deterrence operations in Central-Eastern Europe or drawing down its involvement in US-led military missions in Syria, Iraq and Libya.

In their political contract, the League and the Five Star Movement do not address the problem of the EU’s gas procurement. This is an important omission given Italy’s important stake in energy negotiations between the European bloc and Russia-Moscow is the EU’s largest supplier of natural gas. For instance, the two governing parties have no clear position regarding the doubling of Nord Stream, a conduit that pipes Russian gas to Germany via the Baltic Sea.

Putin is likely in a wait-and-see mode regarding Italy’s new government. The two ruling parties disagree on many issues, and their political alliance could be short-lived. After all, electoral slogans are one thing, while governing is another. Meanwhile, according to the EU Lisbon Treaty, a sanctions regime against a third country can be modified or eliminated only by a qualified majority of member countries. Salvini, who appears to be the true leader of the new government in Rome, said he will ally with Hungarian Prime Minister Viktor Orban - who is sympathetic to the Kremlin - to change Brussels’ policy. But he will still need the backing of 14 other member states to remove Europe’s penalties against Moscow - wishful thinking given the current distribution of forces within the EU.