Annual gas supply to Europe via TANAP to increase to $ 31 bln cbm by 2026, Fitch says

Annual gas supply to Europe via TANAP to increase to $ 31 bln cbm by 2026, Fitch says

Baku, Azerbaijan, Aug. 26

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Europe is unlikely to be able to reduce its reliance on Russian natural gas for at least the next decade and potentially much longer, Fitch Ratings says Aug. 26. At best the European Union may be able to avoid significantly increasing its gas purchases from Russia.

"Any attempt to improve energy security by reducing European reliance on Russia would require either a significant reduction in overall gas demand or a big increase in alternative sources of supply, but neither of these appears likely," Fitch said.

The recovering European economy will push up energy consumption in the coming years, helping offset energy efficiency measures, while environmental concerns will limit any further switch to electricity generation from other hydrocarbons or nuclear power.

"Therefore expect European demand for natural gas to grow slightly until the mid-2020s," according to the statement. "After that it is likely to accelerate as gas-fired electricity generation replaces old coal and nuclear capacity, although renewables will also fill some of this gap. Even if coal-fired and nuclear energy were favoured over gas, the impact on energy security would be limited because Russia also supplies 26% of the EU's hard coal and is the sole supplier of fuel rods to nuclear power plants in several countries."

European shale gas remains in its infancy and we believe it will take at least a decade for production to reach meaningful volumes. By that point it would probably only offset the decline in production from Europe's conventional gas wells.

Piped gas imports from markets other than Russia are also likely to remain limited. We believe the Trans Anatolian Gas Pipeline is the only viable non-Russian pipeline under consideration. This could provide 31 billion cubic metres of gas a year by 2026, but that is not enough to cover the incremental increase in gas demand we expect over the period, let alone replace any supplies from Russia.

"A third alternative source is liquefied natural gas, as global liquefaction capacity is set to increase by around 70bcm a year by end-2017. But much of this new capacity is tied to long-term supply contracts and spare capacity in global LNG is likely to remain tight, in the tens of bcm. We do expect new LNG supplies to be signed up by Europe, but the LNG market is unlikely to be large enough to gain market share against Russian gas," according to the statement.

The TANAP project envisages transporting gas from the Shah Deniz field through Turkey up to the country's border with Europe.

The pipeline's initial capacity is expected to be 16 billion cubic meters per year. About six billion cubic meters of gas will be delivered to Turkey and the rest to Europe. The pipeline's capacity can be further expanded to 31 billion cubic meters of gas per year.

TANAP pipeline is planned to be put into operation in 2018. TANAP project's cost is estimated at $10 billion to $11 billion.

SOCAR and Turkey's state-owned Botas Pipeline Company have signed a contract for the sale of SOCAR's 10 percent share in the TANAP project.

After completing the deals with BP and Botas, SOCAR's share in the TANAP project will be equal to 58 percent. And the shares of BP and Botas will be 12 percent and 30 percent, respectively.

On December 17, 2013, a final investment decision was made on the Stage 2 of the 'Shah Deniz' offshore gas and condensate field's development. The gas produced at this field will first go to the European market.

Partners operating for Shah Deniz field's development, which has reserves of 1.2 trillion cubic meters of gas, include SOCAR with a share of 16.7 percent, British BP (28.8 percent), Norwegian Statoil (15.5 percent), Iranian NICO (10 percent), French Total (10 percent), Russian Lukoil (10 percent) and Turkish TPAO (nine percent).

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