The members of the Shah Deniz consortium (BP, SOCAR, Statoil, Total, NICO and TPAO) have, as widely expected, reached a final investment decision (FID) over the development of Shah Deniz Stage 2, which would ultimately see Azeri natural gas delivered to Europe.
The project will involve the expansion of the South Caucasus Pipeline (SCP) in Azerbaijan and Georgia and the construction of the Trans Anatolian Gas Pipeline (TANAP) across Turkey and the Trans Adriatic Pipeline (TAP) through Greece, Albania and into Italy. Gas transmission pipelines will also take gas to Bulgaria.
The 16bcm/a expansion project sees Turkey receiving some 6bcm/a of natural gas and Europe 10bcm/a and is targeted to deliver first gas into Turkey late in 2018, with deliveries into Europe expected to be a year later.
The consortium reported that the Shah Deniz Stage 2 and SCP expansion projects are expected to cost USD 28bn. Total project costs are now estimated at over USD 45bn, up from the c USD 40bn reported in June. In our view, Azeri gas is not likely to prove to be a ‘cheap’ source of gas for Europe.
Meanwhile, Statoil and Total announced that they will not be participating as investors in TANAP. Furthermore, Statoil announced that it had sold 10% of its 25.5% share in Shah Deniz and the SCP to SOCAR (6.7%) and BP (3.3%) for a total cash consideration of USD 1.45bn, effective as of 1 January 2014.
At 16bcm/a, this project would represent only a small fraction of total European demand (includes EU, Switzerland and Turkey) at the end of the decade (less than 3%), we estimate, while Europe’s indigenous supply is expected to continue to decline.
Given the volume and project timeline, we do not view the project as competition to Gazprom’s South Stream in the medium term (although we reiterate our cautious view on South Stream in general). As a result, we would rather treat the news as neutral for Gazprom (USD 4.21; TP USD 5.10; Hold).