Pipeline director: Gas race will have a winner in April

Kjetil Tungland.jpg

The gas pipeline consortium that wins a deal to buy 10 billion cubic metres of Azeri gas next April will become the backbone of the Southern Gas Corridor, Kjetil Tungland, managing director of the Trans-Adriatic Pipeline (TAP), told EURACTIV in an exclusive interview.

Kjetil Tungland joined Statoil in 1986. In 2003 Tungland was posted to Istanbul where he became Statoil’s country manager for Turkey. In April 2010 he was appointed managing director of TAP, a Joint Venture project with EGL, Statoil and E.ON Ruhrgas.

He was speaking to Georgi Gotev, EURACTIV's senior editor.

To read a shortened version of this interview, please click here.

Former Czech Prime Minister Mirek Topolánek, who was a panellist with you at a conference called ‘Europe's Energy Revolution',  has described the Nabucco pipeline project as being 'like the Loch Ness Monster – everyone talks about it, but no one has seen it'. Under the Southern Gas Corridor, there are also smaller projects like the Trans-Adriatic Pipeline (TAP), of which you are managing director. The general public hears much less about TAP, but who knows, maybe we will 'see' such a project one day.Is this the kind of message you would like to convey?

I would like to challenge your description of the Trans-Adriatic Pipeline (TAP) as being a small project and will come back on that point. However, let me just stress that competition between the projects under the Southern Gas Corridor is only limited to getting the gas that is available right now – ten billion cubic metres (bcm) per year from Shah Deniz, in Azerbaijan.

What I mean is that in the wider context of the Southern Gas Corridor, the different pipeline projects don't compete; they complement each other. The European Commission's ambition to have 45-90 bcm flowing through that highway into Europe [by 2020] is also testament to the point that there will be more than just one project needed in the future in the Southern Gas Corridor.

Even if the reserves are there in other countries such as, Iraq, Kazakhstan, Turkmenistan, etc., what the competition is about right now is the conclusion of sales agreements with buyers of Shah Deniz II gas, due to be signed in April 2011. [BP has a 25.5% share in the Shah Deniz group alongside Statoil (25.5%), Iran's OIEC (10%), Total (10%), Russian-Italian joint venture LukAgip (10%), Turkey's TPAO (9%), and Azerbaijan's state oil company SOCAR (10%)].

Nabucco, as I have understood it, has a plan to implement a pipeline with a capacity of 31bcm.. The TAP pipeline, in contrast, will install a tailor-made pipeline to today's available volumes of 10 bcm, but we have in our design the capability to double capacity from ten to 20 bcm as more comes on stream in the future. Ten might be much smaller than thirty, but twenty is not. Our intention is to do this step-by-step. By catering for the first 10 bcm, we can then upgrade to 20 bcm when new reserves become available.

Maybe TAP is not so small after all, but its estimated cost makes it look smaller compared to more 'political' projects, such as Gazprom's South Stream, which faces the technological challenge of laying its pipes under the Black Sea. How would you compare TAP to this project?

Compared with South Stream, TAP not only has the advantage of being tailor-made for Shah Deniz phase two gas volumes of 10 bcm – we are also enabling a new reserve basin – in this case Shah Deniz gas in Azerbaijan – so new sources of gas can flow to Europe.

The way I have understood South Stream, it re-directs existing reserves that are already flowing to Europe in order to avoid similar situations as have occurred with Ukraine [in January 2009, when due to a price dispute between Moscow and Kyiv, several European countries were left in the cold]. This will of course diversify the routes of the gas but not necessarily its sources.

The 'Turkey factor' was mentioned at the conference, meaning that this country could either be a friend or a foe, depending on its prospects for EU membership. Do you think that the TAP project could become hostage to a worsening of relations between Brussels and Ankara?

No, I think that the problem with Turkey is over-estimated. To a very large degree, those problems are already solved. There is an agreement between Azerbaijan and Turkey to not only transit gas but also for Turkey to buy additional volumes from Shah Deniz. The framework and terms and conditions for how and when to do this are there. Therefore, I think that some people put too much emphasis on this being a problem.

Why does it cost so much to build a pipeline?

I don't have the cost of the other projects. TAP has estimated the cost of the project at 1.5bn euros. However, this figure will be revised and the final cost will be known when the shareholders reach their final investment decision.

Nevertheless, straight-line economics work. The typical capital expenditure of a new pipeline involves 30% being allocated to the provision/buying of steel, 20% of costs allocated to the building of compression stations that are needed along any route, 30% of costs go towards the construction of the pipeline and 20% are on additional costs such as personnel, insurance etc.

If you therefore build a pipeline 1,000 km in length, the cost of steel is roughly a third of the overall capital expenditure you have to account for. Currently, in today's market, 1,000 km of pipeline in large-diameter steel would come to 1.5bn euros. For us, connecting to existing infrastructures and therefore being the shortest new-build pipeline and having the shallowest offshore crossing means that we offer the most cost-efficient solution. Longer and large diameter new-build pipelines will obviously cost considerably more.

In addition, if you install a capacity of 30 bcm and you only ship 10 bcm, who will pay for the remaining capacity? It would not make sense for the buyers and sellers of the gas to do so. Someone else will have to pay for it, and I fail to see who that would be. Longer pipelines need more gas and if it is not filled to capacity, who is going to pay for it?

So, to summarise – Nabucco and South Stream are expensive because they are political projects and other projects like ITGI, AGRI and TAP are more cost-effective?

I think that would be a fair way of saying it. I think that the Southern Gas Corridor will not be realised unless the most cost-effective solutions are used. That is TAP's contribution and is why we have put so much emphasis on being cost effective, with the shortest crossing and best crossing over the Adriatic Sea.

The day will come when several holdings such as yours will bid for Shah Deniz gas. Can you suggest when this will happen? The winner will have to make a better offer than the others, not only as to the price, but also on a series of conditions, as well as in timing and duration. Why do you believe you will be in a better position than others?

The information I have is in the public domain. As I understand it,  they have already started negotiations with potential buyers of gas and have a timetable to short-list potential buyers by the end of this year with a view to signing gas sales agreements in April next year.

For us, it is extremely important to be in a position where those companies that intend to transport through TAP can make the best offer to Shah Deniz. This will involve combining the duration, quantities, price and also the technical capabilities to transport the gas from where Shah Deniz delivers – the Turkey/Greek border – and into a market where it can actually be consumed.

For Shah Deniz, it is extremely important that the gas flows and that they can keep the field producing. Therefore, it is not only the best price and negotiation terms that count, but also that any pipeline is technically viable to transport gas when the Shah Deniz II field starts producing gas – currently scheduled, as I understand it, for Q1 2017.

So the pipeline must be ready at some point. Can you be ready on time?

TAP is aligning itself with Shah Deniz II's schedule and will be ready when Shah Deniz II first gas comes on stream. What is important now for Shah Deniz to know is that we have all plans and competences shipshape in order to meet their production start-up.

Technically, that is a matter of trust. They are undertaking a lot of detailed verification with us to assure them that we are ready. If they stick to their current timetable, then the proof will be on the table in April and we will see the best combined offer for being technically capable and offering the best commercial offer. It is not about being there first.

If you were successful, would it mean that the other projects should call it a day and that Nabucco would be dead, for example?

That is not for us to say. It is for the other shareholders to decide what they do next.

The Southern Gas Corridor is not only about one pipeline – that is only the start. The need to fill the Southern Gas Corridor with more gas is clearly there and there are definitely the volumes in countries such as Turkmenistan, Iraq, etc. that will need to be transported in the future. It is just about timing each building block right. We think that it is important that each of the blocks is cost-efficient, technically viable and safe, and I firmly believe that TAP can be the first cost-efficient and commercially-viable step in laying the foundation in the creation of this new energy corridor.

Then the competition is about which pipeline will be the backbone of the Southern Gas Corridor.

The pipeline which wins the Shah Deniz contract will inevitably be the backbone for the Southern Gas Corridor. That will be the 'cornerstone of the building', and you could say that is what the competition is all about. Based on that cornerstone, you then build future connections – countries, suppliers and reserves, as long as you have the basis of a highway into Europe.

Is your project good for consumers?

Absolutely.  Consumers will get their gas from a new source, through a safe and reliable transportation system, delivered by world class energy companies who have been in the business of developing the EU's gas system for a long time.

Remember that Statoil, one of the companies of the TAP consortium, together with EGL and E.ON Ruhrgas, already ensures 14% of Europe's gas supply and has a strong reputation for doing so reliably and safely.

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