Caspian Pipeline “Victory” for Italy, Possibly Russia

Azerbaijan’s choice for the Trans Adriatic Pipeline over Nabucco is good news for Southern Europe.

Natural gas extraction in the Shah Deniz gas field, Azerbaijan, March 2007
Natural gas extraction in the Shah Deniz gas field, Azerbaijan, March 2007 (BP)

Late June, the Shah Deniz consortium chose the Trans Adriatic Pipeline project as its partner of choice for exporting Caspian Sea gas from Azerbaijan to Europe, excluding competing Nabucco West.

The European Union and the United States welcomed the decision as another concrete step toward decreasing the former’s dependence on energy exports from Russia. They would probably would have reacted likewise if Nabucco had won instead.

The news was received even more positively by Italy. Premier Enrico Letta declared it “a great victory.” The reason for this enthusiasm can be easily understood by looking at any map depicting the routes of all the competing projects. They were all designed to link with Turkey’s Trans Anatolian Pipeline, but then each would have taken a different path.

Nabucco would have headed northwest through Bulgaria, Romania and Hungary to connect with existing pipeline infrastructure in Austria and is aimed at servicing mainly Central European countries.

TAP instead heads west through Greece and Albania, crossing the Adriatic Sea to end up in southern Italy. It will mainly serve Southern European countries.

Italy as distribution hub

For Italy, the competing projects meant the difference between being effectively cut off and becoming the key country. Having the pipeline go to Italy gives the government in Rome increased leverage to make sure part of the Azerbaijani gas is sold there.

Second, with Italy the terminal destination of the pipeline, it effectively becomes the main distribution hub as well. Any surplus gas not absorbed by southeastern countries would have to go through the Italian distribution network.

It will also make the country the likely recipient of European energy investments, as well as those from the TAP consortium, to make sure the project reaches fruition, even if only by 2019.

Geopolitical calculation

Why was TAP ultimately chosen? Data on this is incomplete and Italy’s diplomatic weight in the matter shouldn’t be overstated. With Rome embroiled in a domestic politics quagmire, its external reach has been accordingly reduced.

In addition, Italy’s energy heavyweight, Eni, is not even part of the TAP consortium, being linked to Russia’s South Stream instead. The consortium is composed of Switzerland’s Axpo, which instigated the project, Norway’s Statoil and Germany’s E.ON. Shah Deniz consortium members BP, Azerbaijan’s state oil and gas company SOCAR and France’s Total each have options to purchase shares in TAP which, if exercised in full, would give them 50 percent ownership of the pipeline.

Market evaluations from these companies surely played a big role in the decision but there’s another, geopolitical consideration that might have had an effect.

Azerbaijani gas is seen as a threat by Russia because it reduces the market for Gazprom and, as a consequence, Moscow’s influence over European countries, especially in the former Soviet sphere. The more ambitious the European project, the more severe Russia’s retaliation may be.

Nabucco would have served Central Europe, including Germany, the nation Russia wants to keep under its check the most. TAP targets smaller markets and, in Italy’s case, already diversified ones. Italy imports from North Africa roughly as much as it imports from Russia. Rome is also more likely to keep on good terms with Russia regardless of gas imports due to other economic links.

In short, TAP could have been chosen because, in the face of similar European interests, it’s less likely to attract too much unwanted Russian “attention.”

Russia, faced with the inevitable prospect of Azerbaijani gas coming to Europe sooner or later, may have even covertly pushed toward the least threatening solution.

So far, there’s little proof of that and it remains speculation. But it’s a possibility worth considering.