Courcy's Future Threats - May 2013

The principal role of Courcy’s Future Threats is to horizon scan for emerging risks, and so it is a rare pleasure to cover an important piece of risk mitigation. Six countries across Mediterranean Europe, the Balkans and the Caucuses are taking steps that will help shore up some economies and most importantly, we believe, diversify the energy supply to Europe as a whole, thereby providing a buffer against future energy risks.

On 23 May Montenegro, Bosnia and Herzegovina, Albania and Croatia signed a memorandum of understanding (MOU) for cooperation on the implementation of projects, principally the Trans-Adriatic Pipeline (TAP) and the Ionic-Adriatic Pipeline (IAP), in Tirana, Albania.

The proposed TAP will be approximately 870km long, enabling the transport of gas from the Caspian Sea via Greece, Albania, the Adriatic Sea, and the Italian region of Puglia into Western Europe. The IAP, at approximately 520km in length, will establish a gas network connecting the Balkan countries.

The MOU obliges the contracting parties to provide support for: the development, funding and implementation of the TAP and IAP projects; the preparation of internal markets to receive gas from Azerbaijan and the Caspian region; and the interconnection of the IAP with the TAP.

These two linked projects represent a significant diversification of European energy supplies by transporting natural gas from the Caspian basin, which should upgrade energy security for the whole of Europe, not just the parties to the MOU.

The TAP represents a bolstering of energy security, as it will mean gas can be brought directly into Europe from Azerbaijan without passing through Russia or Iran. Russia, in particular, has a track record of playing politics with energy supplies, having cut off gas supplies to Europe via Ukraine in 2006 and 2009, and supplies via Belarus in 2010.

As well as increasing energy security, the TAP will increase the potential supply of gas to Europe by between 10% and 20%.

Playing politics

On several occasions Moscow has cut off supplies of gas to Europe due to disputes with ‘downstream’ countries. In January 2006 and January 2009 the supply via Ukraine was interrupted, and in June 2010 the supply via Belarus was cut down.

The most damaging for Europe as a whole were the Ukraine interruptions, particularly the 2009 incident. Approximately 80% of supplies from Russia come through Ukraine, and the drop represented a 60% decrease in the total supply from Russia; six countries reported an immediate drop in pressure.

On this occasion a sufficient supply was maintained to prevent a disaster on the continent, but had the winter been as unusually harsh as the following year’s the situation would likely have been different.

Even though supplies were maintained, the price rocketed. It was an especially worrying time for energy prices as the Russian move coincided with Israel’s Operation Cast Lead in Gaza, which boosted the price of oil. All in all, it demonstrated the vulnerability of Europe to energy crises.

On the face of it, Russia had good reason to sanction Ukraine for non-payment of debts, but cutting the gas supply went against agreements that both Russia and Ukraine had with Europe. The timing of Moscow’s action was interesting – it could have been taken at any time, but by coinciding with Israel’s moves in Gaza, Russia, whose largest export is oil, was able to take significant advantage of the raised prices.

Energy hub

Although it is not a signatory to the MOU Greece has a vested interest in the success of these projects, and has welcomed the recent developments.

Peter Mihalos, Greece’s Foreign Ministry’s Secretary General for International Economic Relations and Development Cooperation, said that thanks to the TAP project “Greece will go from being a destination country of secondary importance to being a pan-European energy hub, and will draw an influx of an estimated EUR 1.5bn in investment capital.”

There have been calls recently for the European Union (EU) to more actively support mitigation measures for energy security risks. The EU has officially backed the TAP, which it termed a “project of common interest” in the framework of the Southern Gas Corridor.

However, it would be wise for potential customer countries of the new supply, and countries such as Greece who are looking forward to the income associated with the infrastructure, to look to the long term for the benefit rather than a supposed project completion date (which, in any case, has not yet been decided).

The Shah Deniz gas field, discovered in 1999 and the source for the proposed TAP supplies, started to produce gas at the end of December 2006, three months later than expected, but was forced to close briefly in January 2007. Azerbaijan then announced that the field had resumed output only to admit that it had been forced to shut down for a few weeks due to start-up technical issues. The shutdown forced Georgia to buy emergency gas supplies from Russia at a market price. It would, perhaps, be safer to just bank on the long-term benefits, and accept any short-term boons as gravy.