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Luis Colasante & Serge Mazodilla

Luis Colasante & Serge Mazodilla

Luis Colasante is the Group Energy Manager and Head of Economic Research at Sogefi Group. He is in charge of developing the Group energy strategies and policies; as…

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Is This The World’s Most Critical Pipeline?

Gas

The Southern Gas Corridor, connecting Azerbaijan to the world’s largest economic block, is one of the most important infrastructure pipeline projects worldwide, bringing Caspian gas into Europe.

Europe wants to become less dependent on Russian gas and use more clean energy, taking advantage of the technological advances made in the renewables sector, along with the use of natural gas.

After 2016’s 7 percent growth, European gas consumption continued to rise through 2017. Consumption levels showed a year-on-year increase of 6 percent in the first quarter, supported by low temperatures.

The Southern Gas Corridor is around 80 percent finalized, with the first gas flow for Europe expected around 2020. That’s great news not only for Europe, but also for the Azerbaijan economy, which stands to benefit from improved exported gas volumes, with the oil and gas sector accounting for up to 45 percent of their GDP and around 75 percent of state revenues.

Europe’s natural gas import needs will continue to increase through the next 10 years, a result of the Netherlands and United Kingdom’s shift from gas exporters to importers, and Norway’s energy policy to freeze new oil and gas offshore projects.

Azerbaijan will play an essential role in European energy security, not only as a European partner with a stable economy, but also a supplier with growing export potential of the much-needed commodity in a world of rising energy prices. And while the Southern Gas Corridor won’t replace Europe’s need for Russian gas, it will, however, be an outstanding actor for Southern European countries supplied by liquefied natural gas (LNG) carrying higher shipping costs.

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With gas traders exploiting the price arbitrage between the global LNG market and piped gas coming through the Southern Gas Corridor, we forecast that LNG’s market shares will continue to increase in Europe, as new fields were funded in Israel and Egypt.

The Turkish Stream project into Europe will not be a competitor of the Southern Gas Corridor — that is the priority of the European Commission. The Turkish Stream project highlights several political and legal issues, exposing the region’s energy security and strategies aimed at rendering Europe less dependent on Russian gas.

Assuming that negotiations will need to take place between Russia and Europe in the following months or years, if Russia doesn’t receive an iron-clad guarantee from the European Commission, it’s very likely — in line with Gazprom’s shift to the East — they’ll walk away from the project.

Speaking of Europe’s Russian dependency, in light of the Southern Gas Corridor project’s potential impact on Europe, Russia’s pivot toward the East — Gazprom exports to China — means any additional or new supply flows into Europe will be of much use, helping the region replenish flows that will be redirected toward the growing and higher paying Asian markets of South Korea and Japan, and newcomers like Pakistan and India.

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The Southern Gas Corridor will not only offer supply into Europe, but also help dampen future upside price risk as the cost of wholesale energy (in Europe) becomes significantly susceptible to global LNG markets — a change in market dynamics affected by the region’s transition from gas exporting to importing, as seen with the United Kingdom.

Despite the fact that expected volume flows may not necessarily be threatening to the dominant position of Russia within the region, global natural gas prices have been weak further out on the curve (NBP Sum’20 contracts onward) as ongoing Australian and Qatari LNG projects come into operation, flooding global markets — alongside the goliath that is U.S. shale gas post-2020 — with new LNG exporting capacities.

By Luis Colasante & Serge Mazodila

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  • Douglas Houck on January 25 2018 said:
    This is an interesting article that nowhere states
    1) the volume of gas expected to flow through the pipeline ,

    2) nor that the Russian Lukoil whose CEO is an Azerbaijani businessman owns a 10% stake in the Azerbaijani gas field which is the source of the expected gas,

    3) nor that on "January 24, 2017, during the European Gas Conference in Vienna, the Deputy CEO of Russia’s Gazprom Alexander Medvedev said the company plans to use the capacity of TAP (a part of the South Corridor) in order to deliver more than 100 billion cubic meters (bcm) of extra gas annually to Europe. The reason is, according to Medvedev, that the planned capacity of Turkish Stream will not be sufficient to carry all this gas."
    see: http://cacianalyst.org/publications/analytical-articles/item/13437-russian-gas-in-the-southern-gas-corridor-could-undermine-the-eu

    Seems there is still a lot of unknowns/uncertainties about this "world's most important pipeline".

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