Major European bank endorses 500m euros for TAP amid possible blocking of gas project by Italian government

Farid Hajili Analysis 5 July 2018
Major European bank endorses 500m euros for TAP amid possible blocking of gas project by Italian government

The European Bank for Reconstruction and Development (EBRD) has endorsed a loan to the tune of about 500m euros for the construction of the Trans-Adriatic Pipeline (TAP) gas project.

The Trans-Adriatic Pipeline, the final leg of a $40bn worth Southern Gas Corridor project to transport gas from Azerbaijan and likely from Central Asian nations to Italy through several European nations, is a cornerstone of the European Union’s energy security policy to wean the bloc off Russian gas supplies.

Earlier this year the European Investment Bank gave a 1.5bn euro loan for TAP and further contributions from the export credit agencies of France, Germany and Italy are currently under consideration, the EBRD said. The banks believe the pipeline will hugely contribute to the diversification of Europe’s energy supply and help make energy supply for consumers more reliable, as well as achieve significant carbon dioxide reductions by providing a cleaner fuel, as compared to coal.

With the first delivery of gas expected by 2020, it will be the first non-Russian gas pipeline to supply Europe since the Medgaz link which started to deliver gas from Algeria to Spain in 2011. TAP will carry up to 10bn cubic meters of natural gas per year from the Azerbaijan’s Shah Deniz II deposit to Italy by 2020.

Europe has long been concerned about the security of its gas supply sources as gas has long become an instrument of pressure in international relations in addition to petroleum. Europe wants very much to secure hydrocarbon imports and does not want the issue be politicized by major suppliers, namely Russia.

The fear of Russia turning off the gas tap has alarmed European nations and mainly fueled the arguments of some European countries, mostly the newer EU member states that emerged from the former communist bloc, against new Russian pipeline projects. Pressure for developing alternative supply routes and the search for new suppliers, such as Azerbaijan, has intensified and led to a new natural gas supply project to Europe, bypassing Russia: the Southern Gas Corridor.

But has this Russian-centric view neglected other possible supply-disruptive actors and factors in Europe? The outcome of the Italian polls in 2018 revealed that Europe has more to worry than Moscow when it comes to securing its gas supply as the new Italian government to put it mildly is unsure about the role of TAP and thus halted the construction of the last leg of the SGC.

The prospects for the TAP in the context of the political-economic forces surrounding it, circumstances underlined by the recent declaration of new Italian minister of environment that the EU-backed TAP project is “pointless” need to be analyzed to find out major reasons that so far halted its reconstruction.

Over the past two decades, politics and economics have often overlapped and the geopolitical approach to natural gas imports transcended the logic of trade. The gas weapon argument has been brought back to even higher levels of popularity after the annexation of Crimea in 2014, and the subsequent Ukraine crisis has raised heated political and policy debates in the EU over the geopolitical misuse of gas infrastructure. Russia has been accused of using gas exports and pipelines to maintain its political grip on countries formerly in its sphere of influence.

Although a gas weapon argument largely ignores the complexity of mutual interdependence, following the repeated gas disputes between Russia and Ukraine and in the context of the more recent political tensions regarding Crimea and the conflict in Donbas, European countries and specifically the EU made diversification of gas routes and suppliers a priority.

Alternatives to bypass Russia, as well as Gazprom and its pipelines, were sought and various projects were imagined in the past years: developing a Mediterranean gas hub in Southern Europe, building LNG terminals, and constructing new gas pipelines. Among these, while some, like NABUCCO were abandoned, one project has taken shape and been highly promoted as a viable alternative to Russia, as an effective way to enhance Europe’s energy security, diversify its supplies, and reduce dependency on a single supplier: the Southern Gas Corridor.

The SGC is an undertaking of huge importance and is designed to carry Caspian gas from Azerbaijan to Europe, aiming thus to reach a large number of markets through existing and planned pipelines, as well as through interconnectors, the one being the connection to the Italian national gas grid to reach several European destination markets.

The Southern Gas Corridor is made up of three legs - the South Caucasus Pipeline (SCP), in function since 2006 bringing gas from Azerbaijan to Georgia and Turkey; the Trans Anatolian Pipeline (TANAP) inaugurated on June 12, 2018, crossing Turkey from Georgia to Greek border; and the Trans Adriatic Pipeline (TAP), the final leg, yet to be completed. TAP would take over from the Turkish-Greek border where TANAP ends, continue through Northern Greece, Albania and pass through the Adriatic Sea to Italy. And the major concerns of many countries involved directly and indirectly is will it reach the final destination as planned after all matters tackled but only the political will of the new Italian government alleged to be influenced by the Russian government.

The Southern Gas Corridor, an ambitious alternative to Russian gas imports to Europe, has followed the politicized rhetoric of past years and is thus expected to be countered by Russia which, in its own turn, will feel menaced by this new competitive project. However, the final TAP is being threatened to be switched off not in Moscow, but in Rome this time.

Italy’s parliamentary elections in 2018 brought to power an anti-establishment Eurosceptic government led by Giuseppe Conte. Soon after taking office, the new environment minister, representing the 5-Star party, Sergio Costa, called the TAP project “pointless” and declared it was subject to revision.

Costa’s downplay of TAP came shortly before prime minister Conte’s declaration at the European Summit in Brussels at the end of June, expressing Italy’s opposition to the automatic renewal of sanctions against Russia. A (geo)politicized discourse in Europe might rush into expressing concerns regarding the Euroscepticism of Italy’s new government, and might connect its position on sanctions against Russia to the possible decision of blocking TAP, a major EU-backed project seen as a competitor for Russian energy interests in Europe. But could it be that energy transcends politics? And might there be different motivations behind the political discourse? Will economic cooperation prevail over political competition?

Italy imports about 90% of its natural gas, with Russia being the main supplier (51%), followed by Libya, Algeria, Netherlands, and Norway. Contrary to minister Costa’s declaration, Italy’s gas demand increased in 2017 in relation to the previous years, although it is still at lower levels compared to the peak of 2010. With Netherlands’ plans to shut down its gas field at Groningen by 2030, Italy will lose 8% of its gas import supply, while gas demand is forecast to remain on a steadily ascending path. Alternatives such as LNG imports might prove too costly, while expectations of an extension of the Russian-backed Turkish Stream pipeline that would reach the Italian shores would have equal right to raise the same concerns voiced by minister Costa today: uselessness of investment and environmental damage.

Moreover, a geopolitical black-and-white approach to the position of the Italian government, expressed through the TAP project, and seeing Italy taking sides between the EU and its partner Azerbaijan, on the one hand, and Russia, on the other hand, would be limited. The new government in Rome might indeed use TAP as a statement of their increased independence from the Brussels decision-making machine.

This is because, at present, Azerbaijan has the capacity to supply only half of the gas to be transported through the Southern Gas Corridor (6 out of the 12 bcm destined for Turkey and 10 out of the 20 bcm destined for European markets). As a result, Gazprom does not exclude the possibility of shipping Russian gas through TAP, though in the more distant future, Azerbaijan would like to see other producers supplying the Southern Gas Corridor: Iran, Israel, Turkmenistan and Cyprus. Politics might dominate the discourse, but it is likely that economic interests will also weigh heavily in the final decision of the Italian government.