Shah Deniz: A Step Closer To Relieving Eastern Europe

BMI View: With the pipelines chosen and the gas sales agreements in place, BP are now poised to imminently take the final investment decision on the Shah Deniz Stage 2 project. This development w ill open the Southern Gas Corridor transporting Azeri gas to Europe providing a new source of gas to the region. While the project is only set to bring in 10bcm of new gas supplies it is expected to have a substantial impact on diluting Russia's current dominance in the region and could hinder the progression of the South Stream pipeline .

Shah Deniz is among the top twenty largest non-associated gas fields in the world with 1 trillion cubic metres of gas in place. BP operate the field and currently produce around 9bn cubic metres (bcm) a year, as well as 50,000 barrels per day (b/d) of condensate from Stage 1 of the Shah Deniz development. Currently, the gas is sold domestically, with exports to Georgia and Turkey. The field has considerably more production scope and will be a critical resource in diversifying European, and in particular Eastern European, gas supplies from the dominance of Russia.

Stage 2 development of the vast Shah Deniz field in Azerbaijan, took a step closer to final investment decision (FID) after a major sales agreement was struck. Stage 2 of the Shah Deniz project would open up the Southern Gas Corridor, bringing Azeri gas to Europe via the Trans- Anatolian Pipeline (TANAP) from Azerbaijan to Greece, and the Trans -Adriatic Pipeline (TAP) from Greece to Italy. Current plans for the TANAP pipeline capacity set it at 1 6 bn cubic metres (bcm), of which an agreement to sell 6bcm was made with Turkish company BOTAS in 2011 . The TAP pipeline is expected to have a capacity of 10bcm, but according to the consortium leading the pipeline ' s development , c apacity could be quickly expanded to 20bcm annually should supply and demand justify.

Azeri Gas To TAP Into Italy
Southern Corridor Pipeline Route

Shah Deniz: A Step Closer To Relieving Eastern Europe

BMI View: With the pipelines chosen and the gas sales agreements in place, BP are now poised to imminently take the final investment decision on the Shah Deniz Stage 2 project. This development w ill open the Southern Gas Corridor transporting Azeri gas to Europe providing a new source of gas to the region. While the project is only set to bring in 10bcm of new gas supplies it is expected to have a substantial impact on diluting Russia's current dominance in the region and could hinder the progression of the South Stream pipeline .

Shah Deniz is among the top twenty largest non-associated gas fields in the world with 1 trillion cubic metres of gas in place. BP operate the field and currently produce around 9bn cubic metres (bcm) a year, as well as 50,000 barrels per day (b/d) of condensate from Stage 1 of the Shah Deniz development. Currently, the gas is sold domestically, with exports to Georgia and Turkey. The field has considerably more production scope and will be a critical resource in diversifying European, and in particular Eastern European, gas supplies from the dominance of Russia.

Stage 2 development of the vast Shah Deniz field in Azerbaijan, took a step closer to final investment decision (FID) after a major sales agreement was struck. Stage 2 of the Shah Deniz project would open up the Southern Gas Corridor, bringing Azeri gas to Europe via the Trans- Anatolian Pipeline (TANAP) from Azerbaijan to Greece, and the Trans -Adriatic Pipeline (TAP) from Greece to Italy. Current plans for the TANAP pipeline capacity set it at 1 6 bn cubic metres (bcm), of which an agreement to sell 6bcm was made with Turkish company BOTAS in 2011 . The TAP pipeline is expected to have a capacity of 10bcm, but according to the consortium leading the pipeline ' s development , c apacity could be quickly expanded to 20bcm annually should supply and demand justify.

The latest round of agreements has secured the sale of the remaining 10bcm to a seri es of major European companies including Bulgargaz , DEPA , Enel , E.ON , GDF Suez and Shell . Of the 10bcm, 1bcm each will go to suppliers in Bulgaria and Croatia, while the remaining 8bcm will be shipped to Italy and largely into central Europe . First gas to Turkey from Stage 2 is expected by 2018, while shipments to Europe could begin by 2019.

Azeri Gas To TAP Into Italy
Southern Corridor Pipeline Route

This development will help further diversify gas supply sources to Central and Eas tern Europe, as well as Turkey. This will improve security of supply by reducing reliance on Russian gas, while providing a further by-pass around major transit countries where past political divergence has caused supply inconsistency in the past. This will be a critical development for Central and Eastern European nations as they remain among the most dependent on Russian gas for imports due to the Soviet legacy.

Eastern Europe Dependence On Russian Gas Imports 2012, %
Country Import Dependency %
Source: BP Statistical Review of Energy 2013, BMI Research * Figures from 2010 may have changed slightly due to greater inter-European trade, but are unlikely to be significantly different.
Bulgaria 100%*
Romania 98%*
Croatia 96%*
Slovakia 92.60%
Greece 79.30%
Hungary 78%
Turkey 70.20%
Czech Republic 66%

However, d espite the advent of Azeri gas , Russia will still remain a key gas provider to this part of Europe , though it s influence will be increasingly diluted . Our gas production and consumption forecasts for the countries most likely to benefit from Azeri gas show demand is expected to grow strongly and widen the net import gap. It should be noted that Turkey significantly impacts the below chart, creating over 50% of consumption demand.

Growing Demand Gap To Be Filled By Azerbaijan
Central And Eastern European Countries* Gas Production, Consumption And Import Requirement, bcm

Gas consumption in Turkey is expected to rise from an estimated 47.8bcm in 2012 to a 63.9bcm in 2022 , while production will remain insignificant . The 6bcm deal with BP will cover around 37% of this 16bcm increase, while Turkey is also looking to Iraqi Kurdistan and Israel to source new gas supplies rather than increasing its heavy Russian quota.

Gas consumption in the selected Central and Eastern European countries is not set to grow as strongly as Turkey, however production is in decline. As a consequence we forecast the gas import requirement to increase from around 30bcm in 2012 to 48bcm in 2022. Of this 18bcm increase, Shah Deniz would be able to supply 10bcm or 56% of the demand increase, though it should be noted that not all gas supplies will be consumed in the countries outlined.

Furthermore, there is considerable upside for Romania to become self-sufficient in its gas supplies if appraisals at the Donimo-1 well prove significant gas reserves. This is not yet factored into our forecast and would reduce net imports by around 6.5bcm by 2022, making the impact of Shah Deniz gas even more important. Interestingly, no Romanian company was involved in the sales agreements reached with BP.

This adds further downside to Gazprom's South Stream project. The US$39bn pipeline is intended to connect Russia via the Black Sea to Bulgaria and further into Central and Eastern Europe, providing up to 63bcm of gas. While there is gusto behind Russia's rhetoric to push forward with the project, there could be limited interest in purchasing gas following the latest sales agreements signed from Shah Deniz. Gas demand in Central Europe has weakened and it remains unknown where the market for as much as 63bcm of gas would be found - though Bulgaria and Serbia have shown interest. Further questions regarding the financing of the project have also been raised (see, Gazprom Taps Domestic Funds For South Stream, Aug 18).

The coming together of the TANAP and TAP pipelines, along with the sales agreements from European companies with the Shah Deniz Consortium, provide a major step forward in the European Union's strategy to reduce dependency on Russian gas by increasing diversity of supply.

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