Reuters

BRUSSELS/MILAN, Feb 14 (Reuters) - Gazprom's bid to tap into a pipeline meant to wean Europe off Russian gas threatens to undermine a pillar of European energy policy and slow plans to develop rival deposits in the east Mediterranean.

As the European Union struggles against the "iron embrace" of Russian pipelines, it has made opening a new Southern Gas Corridor to carry gas from Azerbaijan by 2020 a priority.

The 10 billion cubic metre (bcm)-capacity Trans Adriatic Pipeline (TAP) is the project's end piece, joining up with the Trans Anatolian Pipeline at the Turkish border, then crossing Greece and Albania to reach Italy.

Construction work on TAP gives EU officials the first non-Russian gas pipeline to supply Europe since Algeria's Medgaz link nearly a decade ago, paving the way for diluting Gazprom's large one-third share of Europe's gas market.

That at least was the plan, until Gazprom's deputy head Alexander Medvedev last month said the company was considering pumping gas through the link under an auction system giving equal access to any would-be supplier.

Medvedev questioned Azerbaijan's ability to fill the pipeline, saying Russia could step in to plug any shortfalls once the link is expanded. "It won't lie empty," he said.

"That would be very bad," one EU official said. "It would be totally contrary to everything we have agreed with partners."

The EU worries Gazprom has abused its dominant position to overcharge central and eastern European states, some of which are nearly wholly reliant on Russian gas.

It foiled Russia's South Stream project to pump gas to south-eastern Europe under the Black Sea by insiting on anti-trust rules banning suppliers from owning pipelines, without giving other vendors access.

Taken together with separate Russian plans to double its Nord Stream pipeline to Germany, EU nations must fend off "this iron embrace from the North and from the South," another EU official said.

While the first phase of TAP's capacity will be filled by the BP-led consortium developing Azerbaijan's Shah Deniz II gasfield, TAP says any gas supplier can bid for another 10 bcm of capacity through so-called Open Season auctions.

Some of TAP's shareholders - including Italy's Snam and Belgium's Fluxys - said they would welcome Gazprom's entry, and EU sources admitted there may be little they can do to keep Gazprom from bidding when the pipeline is expanded after 2020.

"We see the Southern Gas Corridor foremost as a major source of diversification: new gas, new route, new supplier," European Commission Vice President Maros Sefcovic told Reuters.

EU sources said Russian gas flows via TAP may jar with the terms set by its financial backers, such as the European Investment Bank. The bank said it is carrying out due diligence.

At most, officials say they could extend an exemption from EU anti-trust rules to TAP in order to keep Gazprom out, but Brussels would require the firms and governments concerned to initiate the move.

Intervening may also run counter to the bloc's goals of promoting an unregulated gas market. And it risks triggering a backlash from Moscow, whose plan to join TAP still hinges upon the construction and expansion of a major gas link to Turkey.

 

 

'CLEVER STRATEGY'

By accessing TAP, Gazprom is seeking to defend market share by flooding Europe with cheaper piped gas than would-be challengers, including from the east Mediterranean and North Africa, industry sources say.

"The hub around Israel, Cyprus, Egypt could compete, but if Russia can saturate the TAP, it won't be easy," a senior Italian industry source said.

Last year Gazprom pursued another pipeline scheme – the Interconnector Turkey Greece Italy (ITGI) Poseidon, first backed by the EU as an alternative to Russian imports - for its own use.

"In the geopolitical game around Turkey and the EU, Russia is trying to keep all its options open," said Kirsten Westphal of the SWP Foundation in Berlin. "That is clever ... because it makes it hard for others to take decisions on projects."

Regional instability has already chipped away at the bloc's grand plan of pooling gas from Azerbaijan, Kurdistan, Iraq and Iran into a huge 100 bcm/year delivery system.

While BP says additional volumes from Shah Deniz II could be pumped into an expanded TAP, analysts are sceptical as domestic gas demand soars and oldfields fail.

But Azerbaijan's state firm SOCAR, whose gas is contracted for TAP, dismissed concerns Shah Deniz could run dry.

"Gazprom is not SOCAR's rival in TAP," a source at SOCAR told Reuters, saying half of the pipeline capacity would be reserved for Azeri gas. (Additional reporting by Vera Eckert in Frankfurt, Stephen Jewkes in Milan and Nailia Bagirova in Baku, editing by David Evans)

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