NATURAL GAS EUROPE: US, Europe Enable Southern Gas Corridor

By Gulmira Rzayeva

The first half of 2016 has proved vitally important to the success of the Southern Gas Corridor (SGC), both in terms of the project's physical implementation and also with regard to funding of several segments of the value chain by a number of the project partners, in particular the government of Azerbaijan.

In addition to these successes, the project received enormous and unprecedented political support at the highest level, both from the EU and the US. The question remains why the US administration and EU officials should so vividly demonstrate their diplomatic and political support for this project over the last three or four months.

From the US side, diplomatic and political support has been voiced several times over the last few months. The State Department's Special Envoy and Coordinator for International Energy Affairs Amos Hochstein stated that the SGC is a “long-standing priority for the US government,” and at the Southern Gas Corridor Advisory Council Second Ministerial Meeting in February it was stated that the project is a guarantee of EU energy security.

A month later, at the Nuclear Summit in Washington at the end of March, Secretary John Kerry in a meeting with the president, of Azerbaijan, Ilham Aliev, commented on the role of Azerbaijan in “European energy security as a leader in developing the Southern Gas Corridor.”

He went further, saying that the “US expresses support for Azerbaijan’s efforts to become a regional trade hub.” US Vice President Joe Biden, in his meeting with Aliev, stated that the “US fully support Azerbaijan's efforts to implement" the SGC project, noting that the country would take the necessary measures in this regard.

Last week, at the Caspian Oil & Gas Show and Conference in Baku, the biggest event on this topic in the region, a State Department representative read a message from the president, Barack Obama, emphasising that “Azerbaijan continues to play a crucial role in global energy supply and is a reliable partner in achieving our common goal of increasing regional diversification, market competition and energy security.” He went on to reinforce US support for Azerbaijan in the realization of this project.

The EU has demonstrated enormous support for the SGC ever since the project was initiated and in Regulation (EU) No 1316/2013 (Dec 11, 2013), the EU included it as one of its four priority gas corridors.

One of its components, the TransAdriatic Pipeline, has also been included in the European Commission’s list of 33 priority energy security projects of common interest.

The main message of the UK Prime Minister, David Cameron, speaking at the same event was that “The SGC plays an important role in the diversification of energy supplies to European markets,” and hydrocarbons sourced in Azerbaijan play a crucial role. The SGC and other energy projects will have a centre stage during Aliev’s planned visit to Berlin and his meeting with Angela Merkel.

At the Ministerial Advisory Council Meeting in Baku in February this year, the energy ministers of all seven countries through which the pipelines will pass, as well as four energy ministers of the Balkan region, signed a document committing them to take all the necessary legislative and financial measures to implement the SGC in a timely manner. The document also expressed that “existing and future opportunities for the expansion of the project beyond the EU, including the Balkans will be evaluated.” The EU High Representative for Foreign Affairs and Security Policy, Federica Mogherini, and vice-president of the European Commission for Energy Union, Maros Sefcovic, stated that the EU will take all the measures necessary to ensure the realization of the project in accordance with the schedule.

Having said all the above, it is important to understand why the SGC is gaining increasing importance for the US and EU and has become an ever more vital strategic project for diversification, market competition and energy security within Europe in general and southeast Europe in particular, with Azerbaijan assigned a leadership role in the materialization of the project.

In the current conditions of a changing market landscape, in terms of both the price and supply/demand dynamic, in Europe and elsewhere in the world, it is vital for the EU to create a competitive gas market with fair gas prices across all the countries of the bloc to ensure sustainable and reliable gas deliveries, including, most importantly, from new sources.

According to the main EU energy security objectives, each European country should have access to at least to three new sources of supply, which envisages not only gas deliveries from new country sources, but also through new transportation routes. The SCG fully addresses this objective of the EU.

As the current European pipeline gas suppliers are relatively undiversified, new gas from the Shah Denis Phase 2 field will bring competitive gas prices to the market. As of today, although at a historic low in the market at around $4.3/mn Btu, pipeline gas price is competitive with LNG from new sources, notably from the US.

US LNG is a price taker in Europe, but it is also clear that current gas prices in the market do not incentivize new investments in LNG.

It is worthwhile mentioning that not only the EU and US are interested in this strategic Corridor, but also the resource-rich Central Asian states to the east that see the SGC as a unique opportunity to acquire access to the new route and the large European market, without multi-billion dollar investments in infrastructure. The resource-rich Middle East countries as well as Iran and the eastern Mediterranean countries have similar interests in the SGC for the same reason, namely, having access to strategic infrastructure.

Despite the enormous scale of the project including all its segments, the government of Azerbaijan and state oil company Socar, together with their foreign partners are developing this project based on their own financial and technical capabilities. The partners are implementing the SGC based on international practice, financing part of the investment on their own with the remainder financed from long-term loans from international banking and financial institutions.

The Southern Gas Corridor Company’s capital is, directly and indirectly, wholly owned by Azerbaijan, with 51% held by the ministry of the economy of Azerbaijan and 49% held by Socar which, in turn, is wholly-owned by Azerbaijan. Funding  for Azerbaijan's stake in the SGC has, to date, been achieved primarily by the issuance of bonds due to SOFAZ in the amount of $2.5bn and by an equity injection from the energy ministry and Socar with a total value of $1.7bn.

The SGC Company is planning to raise $7.7bn between 2016 and 2019 in order to fund its remaining share of investment in the projects. Business investors, international banks and financial institutions have demonstrated significant interest in all segments of the SGC, and as a result the Azerbaijani side successfully sold its obligations for an amount of $1bn in March.

In addition, the European Investment Bank, EBRD, World Bank, Asian Development Bank among others have already agreed to issue billions of dollars in long-term loans to finance different parts of the SGC until 2019. Without the political and diplomatic support of the West along with long-term loans from the international banking community, it would not be possible to realize the SGC.

Gulmira Rzayeva is a senior research fellow at the Center for Strategic Studies (CSS) under the President of the Republic of Azerbaijan

NATURAL GAS EUROPE