TAP: Short-Term Windfalls And Long-Term Strategy

Over the next five years , Greece and Albania will reap the lion's share of the benefits from the s election of the Trans-Adriatic P ipeline (TAP) to transport natural gas from the Caspian Sea to Europe. The investment influx for t he two economies will provide a wind fall , especially during the construction phases. Once operational though in 2018 , t he pipeline will achieve the strategic coup of diversifying European supply a way from dominant supplier Russia. A t 10 bcm annual capacity, it will initially make only a small contribution towards meeting the 370bcm average annual demand from Central and Western Europe anticipate d in our forecasts for the next decade. Even when it is ramped up to 20bcm annual capacity, the contribution to annual European demand will be about 5%. Crucially though, it marks the first building block of what will become an entrenched infrastructure backbone in the r egion that could in the long term enable a diversification of sources of supply, through feed-ins with Iran - where an agreement is already in place - Kurdish Iraq , Turkmenistan and the Eastern Mediterranean.

Considering that the pipeline will be operational in 2018, over the next decade the most tangible implications of this will be the financial bene fits to the transit countries.

2015- 2019: Investment Windfalls

Several studies ( both independent and commissioned by TAP) and government announcements have cited different figures for the economic benefits the construction and operation of the pipeline will yield for these two countries.

The s e are broadly separated into two phases : The economic benefits during the construction phase between 2015 and 2018, as well as the economic benefits during the 50 - year operation phase, when transit fees will provide annual income. For Albania, the construction phase benefits are estimated to be around EUR60mn in added value to GDP over the three years. For Greece, the value cited is EUR1.5bn - earmarked for the construction of the nearly 500km Greek section from Kipoi to the border with Albania. According to the Greek Foundation of Economic and Industrial Research (IOBE) , TAP will create gross added value of EUR210mn per year once operational in 2018.

While the pipeline project is still contingent on a Final Investment Decision (FID) from the Sha h Deniz II Consortium ( expected later this year ) , the potential added value to the two economies has generated high exp ectation s . We have upgraded our forecasts for the Greek Oil and Gas pipelines infrastructure industry value for the duration of the construction phase to reflect the expected added value of about EUR150mn from the construction of the pipeline itself. Given the small current value of the industry sector the construction of TAP will have a very strong growth effect, doubling industry value in 2015.

TAP-ping Potential
Greece Energy and Utilities Infrastructure Industry Value, By Sub-Sector

The transit fees that Albania and Greece will receive, as well as the tie-ins and spur opportunities TAP provides for their domestic distribution networks, will be the most obvious benefits of the venture. Moreover, subject to meeting construction completion timelines, they will have the opportunity to acquire small holdings in the TAP consortium itself (for instance up to 5% for Greece).

It is worth noting that Azerbaijan's SOCAR concluded its bid for the purchase of Greek natural gas transmission owner and operator DESFA in late-June, providing SOCAR with control over not just the supply of the TAP (through its stake in the Shah Deniz II field), but also the entire transmission and distribution network via its stakes in the Trans-Anatolian Gas Pipeline (TANAP) (80%) that feeds into TAP and now DESFA as well. Other members of the Shah Deniz consortium as well as European clients are also expected to join the pipeline. Existing TAP shareholders are Statoil (42.5%), E.ON (15%), and Axpo (42.5%) from Switzerland, wholly owned by the cantons of North Eastern Switzerland and their cantonal utility companies. They will divest some of their stakes in order to include the Shah Deniz consortium members (SOCAR, BP, Total), as well as Belgian gas transmission company Fluxys.

Another beneficiary from this project will be the nascent upstream sector in Albania ( see 'Shell Shows Exploration Momentum Rising', 25 June). TAP cuts right across the offshore Duressi block, where AIM-quoted independent San Leon currently owns a 100% stake and is planning a major drilling campaign and farm-in from an IOC. This major piece of international infrastructure considerably de-risks the plays onshore and offshore Albania, which are estimated to hold gas as well as oil, therefore adding further momentum to Albania's upstream sector.

TAP Wins The Southern Corridor Race
Map of Rival Pipelines

2019: Long - Term Strategic Benefits

Over the longer term, the strategic benefits for European supply could rise significantly, especially since the establishment of the southern corrido r - TANAP and TAP, initially - creates a backbone for future feed-ins from different sources in the much broader Central Asian and Middle East region. Most important potential sources are project supply feeds from Turkmenistan, Kurdistan/Iraq, East Mediterranean and Iran; however, all are subject to a variety of political constraints and downside risks. In this respect, an intriguing insight into TAP's long term strategic planning, is a 2008 deal between an AXPO subsidiary, EDL and the Iranian National Export Agency to deliver 5.5bcm of Iranian gas via TAP (after TAP's start-up phase).

TANAP 's capacity is designed to be scalable to up to 50bcm per year (compared to an initial 16bcm that will feed TAP), and it is therefore designed for a much more extensive gas influx, with Sha h Deniz II and TAP potentially only the first tie - up. Therefore we cannot exclude the possibility of Nabucco West (or a version of it) materialising in the fut ure. Echoing this possibility, the president of SOCAR, Rovnag Abdullayev, told a news conference on June 28 that "We clearly see the Nabucco pipeline corridor as the natural market for our future volumes of gas. [...] We expect that the ability of the southern corridor to bring new sources of supply to European markets will extend beyond the immediate areas transited by TAP" .

This article is tagged to:
Sector: Oil & Gas, Infrastructure
Geography: Azerbaijan, Albania, Greece, Italy, Turkey

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