TAP impact in European and Italian natural gas

market

Authorsi:

Gianmaria Casilli

Francesco Morroni

SUMMARY

1. Introduction ……………………………………………………………………………2

2. Natural Gas market …………………………………………………………………3

2.1 Europe Natural Gas market…………………………………………….....6

3. Southern Gas Corridor …………………………………………………………….9

3.1 Trans Adriatic Pipeline………………………………………………………11

4. TAP: Advantages and Drawbacks……………………………………………13

5. Conclusion……………………………………………………………………………..15

Bibliography……………………………………………………………………………...16

1
1. Introduction

In this paper we have decided to analyze natural gas market, because natural gas is the cleanest
available fossil fuel, so it is fated to be used more than oil and coal over the next century.
Furthermore, natural gas supplying is a problematic but also a crucial theme for European and
Italian energy system.

Specifically, we have focused our attention on TAP project, which involves the construction of a
pipeline to provide natural gas for European energy system. This pipeline passes through Puglia
coast, it aroused different reactions in Italy, public opinion was divided in two parts. First party
really support the infrastructural work and accounts it as an important project for the
development of Italian and European energy system, and as an opportunity to became
independent from the Russian natural gas (Russian pipelines are the first supply channel for the
European market). Second party of public opinion strongly criticized the pipeline, because of
environmental impact, and others several reasons that will be deepen later. This debate became
rapidly a national political argument, for this reason we have decided to deepen technical aspects
of the TAP, to really understand positive and negative side.

In the first part of this paper we will define the natural gas as a fossil fuel and we will write about
the importance of it in the worldwide energy market, more specifically for the European and
Italian system.

In the second part we will introduce the Southern gas corridor, the infrastructural project that
accounts the TAP construction, then we have focused our attention on the TAP, talking about
advantages and drawbacks of this infrastructural work.

Finally, we will show our results and present our considerations and conclusions to understand if
TAP is necessary or not, what it represents for European natural gas market and others possible
solution for UE gas market future.

2
2. Natural Gas Market

In order to understand what Natural Gas is, we think that it is really important to
provide a definition about it:

“Natural gas is a fossil fuel like oil and coal. It is a mixture of hydrocarbons, mostly methane,
and other gaseous substances such as carbon dioxide, nitrogen, hydrogen sulphide and, in some
cases, helium, radon and krypton. The mixtures that are mainly composed of methane are
called dry mixtures, whereas those mainly containing hydrocarbons such as propane, and
butane are called wet mixtures. Before being distributed for use, natural gas is treated to
eliminate carbon dioxide and nitrogen, which make it less flammable, and hydrogen sulphide, a
corrosive and toxic gas. The result is mainly methane. Methane is the simplest gaseous
hydrocarbon and is characterized by the smallest molecule, including one carbon atom and four
hydrogen atoms (CH4).”1

Natural gas is used for many aims, it is mainly a source of electricity generation through the use
of cogeneration, gas turbines and steam turbines, but natural gas is also used for domestic
consumption (ex. cooking) and as a cheaper alternative to other automobile fuels such as
gasoline and diesel.

How we can see in the following chart (figure 1.1) natural gas is the third source of energy in all
over the world. The chart shows the forecast about primary energy demand worldwide from
2007 to 2030, divided by type of source.

Figure 2.1 - Global energy source, measured in million of TOE, tonne of oil equivalent

Base year 2007 2015 2030 2007-2030

annual growth
Coal 3.184 3.828 4.887 1,9%
Petrol 4.093 4.234 5.009 0,9%
Gas 2.512 2.801 3.561 1,5%
Nuclear 709 810 956 1,3%
Hydroelectric 265 317 402 1,8%
Biomass 1.176 1.338 1.604 1,4%
Renewable 74 160 370 7,3%
Tot. 12.013 13.488 16.789 1,5%
Personal data processing, data source:”Energia, la follia mondiale”, C. A. Bollino, 2010

The data are based on forecast calculated in 2009, following the BAU Scenery2 by the IEA
(International Energy Agency).

Actually there have been some political agreement from 2009 to now that could change that
forecast (not so much) especially about decarbonisation process, but this theme is not the
focus of our work, and the overlying chart is provided only to show natural gas relevance in
energy economics nowadays and in the future. Moreover there are many different researches
about how many natural gas fields will be discover in the next decades, so it’s difficult to
estimate clearly when natural gas will run out, but surely it will have a life longer than oil.

1
“Natural gas knowledge”, Eniscuola.
2
A scenery in which the governments don’t change the political approach to energy issues.
3
The mainly problem about usage of natural gas is the transportation. The pipelines are the
most developed way to transport Gas. Pipelines are generally a cheap way to transport gas
but it’s impossible to built them crossing the oceans (too high cost), moreover international
pipeline pass through different countries, who could stop the flow for geopolitical reasons. It
is possible to transport the Gas also by ship, but it is necessary to liquefy the gas, this
technique is called LNG.

The figure below (figure 1.2) shows the global trade of natural gas (bcm), Pipeline cover the
75% of trade on average, LNG 25%, the usage of LNG is consistently increased over the last 15
years.

Figure 2.2 - Natural gas global trade

Source: CEDIGAZ, International association of natural gas

LNG is generally considered more expensive compared to pipeline, and there are also issues
related to the environmental security, but now the difference in terms of cost depends on the
miles distance, and there are different types of Pipeline, the charts below (figure 1.3) show the
cost function (relationship cost-distance). Over 4500 miles LNG is cheaper then each kind of
pipelines, but Europe geographical position has allowed to build many strategic pipelines, from
C.I.S. countries, Middle East and Norway, so for the European market LNG covers only the 15%
of import.

Figure 2.3 - Gas transportation costs

Source: Gas Natural, noticias, informacion y Acualitad Energetica (Gas Natural World press)

4
The charts below show where are principal gas fields and principal producers all over the world,
in order to clarify natural gas market composition.

Figure 2.4 - Gas fields geographical distribution

Source: CEDIGAZ, International association of natural gas

Figure 2.5 (Recent trends in marketed natural gas production by major geographic zone, bcm)

Source: CEDIGAZ, International association of natural gas

As we can see 77% of oil fields are situated in middle east and C.I.S. countries, but US and
Canada are still the first producer in the world, but the life expectancy for North America fields
is limited while in C.I.S. and middle east that fields will be available for a long time.
Nevertheless US situation is changing because of the new business of shale gas3, in the past US
needed to import natural gas to satisfy internal consumption, but now it’s going to became a
net exporter of natural gas thanks to shale gas process. US expects to export LNG to Asian
market, and US does not count the opportunity to trade LNG also to Europe significant.

3
Shale gas refers to natural gas that is trapped within shale formations. Shales are fine-grained sedimentary rocks
that can be rich sources of petroleum and natural gas. Shale gas was over 20% of US natural gas production in
2010 and the U.S. government's Energy Information Administration predicts that by 2035, 46% of the United
States natural gas supply will come from shale gas.
5
The other important aspect about natural gas market is the price, it has decreased so much
during last years (from 2014 to 2017), there are several reasons that explain this trend, but
generally we can say that it is bond to oil trend (in particular for Asian and European market).
Indeed we can divide the world principally in four different markets, North America, Europe,
China - India and Japan.

US natural gas price is really slow because North America get the self-sufficiency thanks to
shale gas and new fields; in Europe the price is consistently higher because it depends on major
supplier strategy; for China market the price level is similar (little bit higher) to Europe and it is
fated to increase because of geopolitical issues and internal demand growth; for Japan and
Korea market the price is the highest in the world because these countries don’t have any
internal filed and they have to import totally by LNG. The chart below (figure 2.6) shows the
price level in these different markets (is not showed the difference between China and Japan)
and forecasts about it.

Figura 2.6

Source: U.S. Global Investors

2.1 Natural gas market in Europe

As regard UE system, Europe is not independent about gas production, and it’s necessary to
import gas from different countries, European countries approximately consume 460 bcm
per year4, there have been a decrease during last 3 years, but these trend is now changing,
and it will slowly grow in the coming years. About 67% of usage is bonded to import from
different countries (Russia 27%, 23%, Nord Africa 9%, 8% LNG)5. Nevertheless, according to
many forecasts import growth rate will increase faster than consumption rate. A report
published by Cassa, Depositi e Prestiti6 estimates that Europe will import about 80% of usage
in 2030, and Italy more than 90%.

4
Source: “Europa ed approvvigionamento di gas: alcuni possibili scenari per il prossimo decennio”, Prometeia,
2014.
5
Source: “Europa ed approvvigionamento di gas: alcuni possibili scenari per il prossimo decennio”, Prometeia,
2014.
6
“Il gas naturale in Italia: dinamiche del mercato e sviluppo delle infrastrutture”, Simona Camerano, 2013, Cassa
Depositi e Prestiti.
6
 In the two tables below are reported some forecasts by Prometeia. The first table (figure 2.7)
show forecast about consumption, production and import of natural gas in Europe over the
next decade, and the second table (figure 2.8) show the distribution of principal providers
which serve European system.

Figure 2.7 (UE Natural gas balance, bcm)

2013 2025 Spread Growth rate

(annual)
Consumption 462 500 38 0,7%

Import 306 365 59 1,5%

Production 156 135 -21 -1,2%

Personal data processing, data source: Prometeia “Europa ed approvvigionamento di gas: alcuni possibili scenari
per il prossimo decennio”

Figure 2.8 (UE Principal Provider, bcm)

2013 2015 Spread Growth rate

(annual)

Tot Import 306 365 59 0,7%

Russia 123 150 27 1.7%
Norway 105 100 -5 -0,4%
Algeria (LNG - P) 36 30 -6 -1.5%
SGC - 10 - -
Libya 6 8 2 2.4%
Qatar (LNG) 23 50 27 6.7%
USA (LNG) - 5 - -
Others LNG 13 12 -1 -0,7%
Personal data processing, data source: Prometeia “Europa ed approvvigionamento di gas: alcuni possibili scenari
per il prossimo decennio”

The second table shows that two crucial UE providers such us Algeria and Norway are starting
to decrease their production, so Russia relevance for UE supplying will grow in the next
decade. This scenery is really dangerous for European gas market because of geopolitical
issues, especially due to difficult relationship between Russia and Ukraine.
Indeed the most important Russian pipeline (managed by Gazprom) passed through Ukraine
area, and in extremely crisis case Ukraine could stop gas flows, so Europe should be ready to
face up to this scenery, managing gas storage and finding new supplying channels. Moreover
Europe should try to diversify the supplying to make competitive the market and get a
reduction in price level.

7
 In the picture (figure 2.9) below we can see supplying channels that provided natural gas to
UE, TAP capacity is forecasted as 20 bcm, it could be possible over few next years but actually
the project expects only 10 bcm, and it would be necessary an upgrading to adjust the
capacity. At present South stream project was cancelled, and now it is replaced by the
“Turkish Stream” Project, that should have a capacity of 32 bcm. Moreover there are also
other new pipelines project.

Figura 2.9 (Channels Map)

Source: Prometeia “Europa ed approvvigionamento di gas: alcuni possibili scenari per il prossimo decennio”

Watching situation, it is clearly that UE strongly need to change this scenery, also because
Russian market power is constantly increasing (it is almost a monopolistic power), and it is
really important for European system to guarantee a stable supply and to find alternative in
order to promote a competitive and efficient energy market, that represents an important UE
objective. In order to understand Italian role, it is important to show (figure 2.10) the Italian
supplying map that should be early revise with TAP (and not only…).

Figure 2.10

Source: “Il gas naturale in Italia: dinamiche del mercato e sviluppo delle infrastrutture”, Simona Camerano, 2013,
Cassa Depositi e Prestiti

In that map we can see that our country has a maximum supplying capacity of 115 bcm per
year, compared to 71 bcm of usage7. It’s clearly that LNG has a really few market share, and
that there are mainly two big providers Russia and Algeria.

8
Nevertheless new pipelines are going to be built in Italy, firstly TAP, but also IGI and GALSI
pipelines. GALSI is a facility that will connect Algeria to Italy going through Sardinia and it has a
capacity of about 8 bcm per year, according to Edison plan GALSI should be completed by the
end of 2018 but actually the work has not yet begun. IGI is a pipeline that connect Puglia to
Greece, and it should be connected to TANAP or/and Turkish grid pipeline to have access to
Caspian fields, for a capacity of 10 bcm per year. Furthermore ENI discovered a huge gas field
(Zhor) between Cyprus and Egyptian coast, it could be another important source for Italy.

Actually, in our opinion it’s crucial to analyze the situation watching the entire UE market,
because one of the most important UE object is to create a unique and competitive market 8.
According to this view Italy could became a South Europe Gas HUB thanks to his own strategic
position that allows to connect European system to North-Africa and Caspian fields. Those gas
fields could guarantee around 100 bcm per year9, but it would be necessary to build new
pipelines.

After that we’ve analyzed EU natural gas market situation, in the following paragraph it is our
interest to understand TAP impact for Italy and EU, deepening advantages and drawbacks of it.

3. Southern Gas Corridor

The SGC is the EU strategic infrastructure that will make the first direct link between the large
Caspian gas reserves (Shah Deniz II) and the Italian coasts, with a view to diversifying,
increasing and streamlining the flows of Gas, for the benefit of European energy security (it is
currently the EU's only infrastructure being built from a "non-OPEC, non-Russian and non-
Arab" source).

It consists of 3 different sections:

1. The expansion of the South Caucasus Pipeline Expansion - SCPX (Caspian-Azerbaijan-
Georgia);
2. Trans Anatolian Gas Pipeline - TANAP (Turkey);
3. The Trans Adriatic Pipeline - TAP (Greece - Albania - Italy).

7 Source: http://www.qualenergia.it
8 There is different problem that need to be overcame to realize this object, firstly about fiscal aspect.
9
Source: Il gas naturale in Italia: dinamiche del mercato e sviluppo delle infrastrutture”, Simona Camerano,
2013, Cassa Depositi e Prestiti

9
This picture (figure 3.1) describes the SGC path.
Figure 3.1

Source image: www.TAP-ag.com

To this will be added an interconnector Greece-Bulgaria (IGB), while the hypothesis of

extension is already studied in the Ionian-Adriatic region, starting with Montenegro and
Croatia.

The infrastructural work was selected in June 2013 and in the following September were signed
in Baku, with eleven European companies (including the Italian companies Enel and Hera
Trading) long-term natural gas sales contracts for a total of US $ 100 billion, over a period of 25
years.

The SGC, with its about 3,200 km in length, provides a total investment of US $ 45 billion and is
currently considered one of the largest investments in the world in the energy sector. In the
shareholding of three consortia (SCPX-TANAP-TAP), participate eleven large multinationals
(primarily Azerbaijan SOCAR and BP, but also SNAM Italians, who have recently entered TAP
with 20%). The governments concerned (the seven transit countries, plus Bulgaria and the two
observers of the Ionian-Adriatic region, as well as the EU Commission, UK and US, which has
always supported its strategic value for European energy security) coordinate within a special
Advisory Council meeting annually at the level of Energy Ministers (for Italy PDC and MISE).

The initial workload is 16 billion cubic meters of gas annually, of which six are for Turkey and
ten for the EU countries. It also has the potential for an expansion of 20-30 billion cubic meters
(additional supplies could come from Turkmenistan, or Iran, or even northern Iraq, or the
eastern Mediterranean and Egypt) over the long term.

The annual European demand in 2015 of just under 500 billion cubic meters and expected to go
around 600 billion in 203010, SGC could become the third source of import by 2030 in Europe,
after Russia's gas and LNG, and before North-African gas.11

10
Source: BP global, Energy Economics, statistics.
11
http://www.ambbaku.esteri.it/ambasciata_baku/it/ , - “Scheda Corridoio Meridionale del Gas”

10
3.1 The Trans-Adriatic Pipeline

Trans Adriatic Pipeline (TAP) is one of the most important infrastructural developments of
recent years in the Italian energy landscape. The gas pipeline, once realized, would guarantee
the import of 8-10 billion cubic meters (bmc) of natural gas per year from the Shah Deniz field
in Azerbaijan. This is a very significant amount, well above 10% of the Italian annual
consumption and therefore able to increase the Italian energy security, especially at a time of
persistent instability along the other two important supply routes of our country: the North-
African and Russian-Ukrainian ones.

TAP is completely built by many private companies operating in natural gas market
(production, transport, storage, regasification etc.). The chart below (figure 3.2) shows TAP’s
shareholders composition.

Figure 3.2 (TAP’s shareholding)

Personal data elaborating, data source: https://www.TAP-ag.com/about-us

However TAP will not own or sell the gas it transports. Gas sales agreements have been
negotiated directly by the Shah Deniz Consortium with gas buyers in Europe 12.

In Italy, the pipeline will land in San Foca (in the south of Puglia) after 878 Km route, of which
105 submarines. Eight kilometers of land route on Italian territory, from which, with a further
gas pipeline of about 60 km, under design by SNAM, TAP's supplies will connect to the SNAM's
national gas network, which will guarantee its inflow towards the rest of Europe. This is
possible with the innovative use of reverse flow, in other words the ability to handle supplies in
both directions, in order to guarantee a greater integration, diversification and security of the
entire European gas network.

12 https://www.TAP-ag.com/about-us

11
At present, between Albania and Greece are laid underground and welded about 173
kilometers of pipes, compared to 878 kilometers overall, of which a submarine part under
Adriatic Sea. According to a TAP’s evaluation, the 173 kilometers located across the Adriatic
coast make up about 21 times length of the Italian stretch. It will cross the Melendugno area, in
Salento up to Mesagne, a small town near Brindisi, where the pipeline will leap to the SNAM
gas network.

The start of TAP's work has already begun in Greece and Albany and the work in Italy should
start until 2017 end. The date of arrival of "first gas" in Italy is set for January 2020.

The following picture (figure 3.3) illustrates closely the last stretch of TAP in Italy.

Figure 3.3

Source: Ansa-Centimetri

If we compare the two situations, in Italy, the only intervention is a preliminary work, i.e. the
relocation of 200 olive trees from the area where the microtunnel will be built to specific
greenhouses. In Greece and Albania, however, the companies have designed 51% of the route.
The microtunnel is the 1.5 km infrastructure that will accommodate the pipeline to prevent this
from crossing the Melendugno beach. Before the microtunnel, will be built the push shaft
where the excavator and builder machine will be lowered13.

At the end of the internal procedures, in May 2015, the final approval of the TAP project was
adopted by the MISE, after the decision of the Council of Ministers. However, the authorization
process has met the persistent opposition of the Puglia Region, at the time focused on the
question of the removal and relocation of 200 olive trees, which were already authorized by
the Ministry for the Agricultural and Forestry Policies.

13 PALMIOTTI D., “Gasdotto TAP: a un anno dall’avvio Italia ancora ferma”, Il Sole 24 Ore, 17/05/2017.

12
After the approval of TAP project was born a No-TAP association, formed by environmentalist,
part of Melendugno citizen and some political institutions who administer those areas.
Specifically M. Emiliano (president of Puglia Region), as spokesman of No-TAP, asked to the
Italian Government to change the TAP route from San Foca to the industrial district of Brindisi.
Nevertheless this petition was denied by Council of State sentence which explain that Brindisi is
a dangerous area14.

However the project is completely approved, NO-TAP association has continued his struggle,
and there were physical protest by local citizen during the removal of olive trees, last month.

On the other hand Ian Bradshaw, managing director of TAP, says:

“TAP remains fully committed to restoring the land in its original condition, if not better."

According to that declaration the company goal is to complete the work in Greece and Albania
in a year and place and cover about 65 percent of welded pipes. Finally, the company
announces 55 million investments in social and environmental programs between Greece,
Albania and Italy, with 70 new projects for 15 million Euros to be launched in the coming
months.

At present, it is expected that TAP will remain in operation for 40-50 years, the time span
within which the Azerbaijani methane deposits will be depleted. However, its useful life could
be extended if the pipeline with gas coming from other and richer fields of the Caspian and
Middle East (Turkmenistan, Iran and Iraq) could be fueled in the future.

4. TAP: Advantages and Drawbacks

From a general point of view, the benefits of the project can be summarized as follows:

• A strategic contribution to the diversification and energy security of Italy and the whole
European Union;

• Opportunities for our country, thanks also to the role of the SNAM network, to become
a regional gas hub in southern Europe;

• Great work already entrusted, along the three sections of the project, to Italian
companies, for design, construction and supply of materials. The overall (and non-
definitive) benefit can currently be estimated at about $ 5 billion;

• The increase of competition in the Italian (and European) 15 gas market, reducing gas price
and consequently costs for businesses and families. ENI , the more important Italian
player in the sector, doesn’t take part in the project, so his market power should seek to
reduce and consequently competition should grow.
• Job creation in Puglia and further opportunities for the local production system (last
year, TAP met about 130 Apulian companies, illustrating the opportunities arising from
the realization of the project);

14 “area a rischio di incidente rilevante” ex. direttiva Seveso III.

15 ENI, is the first player for gas import in Italy, with a 50% market
share, and it is the first producer with an 80%
market share. Source: N. Rossetto “La TAP e L’Italia: le opportunità di una nuova infrastruttura”, ISPI

13
 • The wide availability of the TAP consortium to "corporate responsibility" initiatives, to
be agreed with local governments and communities, to support projects of social
relevance and general interest in the areas concerned.

The drawbacks highlighted by No-TAP association and other opponents can be summarized as
follows:

• The TAP construction in the specific region will affect tourism and several businesses
which depend directly on tourism and on the sea, such us fishing;

• The TAP spoils the environment and the landscape;

• The TAP is antidemocratic, because Italian government didn’t pay attention to citizen
requirements;

• The TAP is not a strategic project, because the Azerbaijan fields will finish soon,
according to some analysts, and transport capacity is too low;

• Italian natural gas usage is decreased over the last 10 years, and the actual
supplying system is enough to satisfy the demand.

14
5. Conclusion

In this paper we have decided to deepen the natural gas market because it is the cleanest fossil
fuel, and in each future scenery gas usage will surely grow up over the next century, opposite
to coal and oil. We have analyzed UE condition and main issues related to gas supplying, we
have especially deepened TAP impact over Italian and European market, trying to understand
advantages and drawbacks that aroused a strong public debate in Italy.
In our opinion TAP project is an important opportunity for Italy and UE, indeed the drawbacks
are actually limited. Especially according to many experts environmental and landscaping
impact are really low, so TAP consequence should be almost nothing over tourism and others
business bond to the sea, and on the contrary can be a development opportunity for Puglia
economics. Moreover Azerbaijan fields are available for at least 50 years, and there will be also
the opportunity to increase TAP capacity and to reach others Caspian fields through SGC
infrastructure in the future. Another important positive side is that this public utility
infrastructure is totally financed by private company.
On the other hand it is true that Italian gas consumption has already totally covered,
nevertheless there are some risks for Italian (and European) energy security, because of
geopolitical issues related to Russia and North Africa instability. Then expecting a UE single
market Italy could have a strategic role to diversify supplying, becoming a Southern European
HUB.
Diversification should guarantee a stable supplying increasing security for UE energy system
and it could create an efficient and competitive market decreasing prices level in a long run
view. According to our analysis TAP has an important role, but it is necessary also to build
other facilities, such as IGI pipeline, and especially developing LNG trade to get a stable,
competitive and efficient UE natural gas market.

15
Bibliography
- Bollino C. A. ”Energia, la follia mondiale”, 2010

- Bonamici S., “Il mercato del gas naturale nell’unione europea tra liberalizzazione e
confronto geopolitico”, 2014

- Camerano S., “Il gas naturale in Italia: dinamiche del mercato e sviluppo delle infrastrutture”,
2013, Cassa Depositi e Prestiti

- Eniscuola “Natural gas knowledge”

- Palmiotti D. “Gasdotto TAP: a un anno dall’avvio Italia ancora ferma”, Il Sole 24 Ore,
17/05/2017

- Prometeia, “Europa ed approvvigionamento di gas: alcuni possibili scenari per il prossimo

decennio”, 2014

- Rossetto N. “La TAP e l’Italia: le opportunità di una nuova infrastruttura”, ISPI, 2014

Websites consulted
-http://www.usfunds.com

- http://www.cedigaz.org

- http://www.sviluppoeconomico.gov.it

- https://www.TAP-ag.com

- http://www.ambbaku.esteri.it

- http://www.qualenergia.it

- https://naturalgas.wordpress.com

- http://rienergia.staffettaonline.com

- http://espresso.repubblica.it

- http://www.bp.com

- http://www.ansa.it

- http://www.snam.it

i
The authors are students of Economics and Business at LUISS Guido Carli in Rome. The present work has been
carried out as an in-depth analysis of a current topic to the Energy Economics course.
16