What Do TAP Gas Deliveries from Azerbaijan Mean for European Markets?

TAP will catalyze further infrastructure connectivity in Southeast Europe (SEE) and the western Balkans through the building of new interconnectors.
East platform of the Azeri-Chirag-Guneshli Oilfield. Photo: Elnur/Shutterstock

In November 2020, the Trans Adriatic Pipeline (TAP) started a commercial operation. That marks a final milestone in the Southern Gas Corridor, a megaproject that, for the first time, will allow Azerbaijan to deliver gas directly to Greece and Italy plus Bulgaria once dedicated Greece–Bulgaria Interconnector (IGB) is completed (July 2021).


Price, Security & Competition

Diversification is a major positive for both the price and supply security for countries that have been highly reliant on a single source: Russia’s Gazprom had previously provided 60% of Greece’s gas and a whopping 97% of Bulgaria’s. Lacking competition, Sofia’s weak bargaining position ensured that Bulgaria’s gas prices were often amongst Europe’s highest.  The effect of new competition had already been seen in 2020 when Bulgaria started Liquid Natural Gas (LNG) imports, resulting in a further 40% Gazprom discount. Henceforth, with TAP allowing Azerbaijan’s Shah Deniz (SD) gas to provide up to 33% of Bulgarian gas demand, Sofia’s bargaining position will be stronger still. SD gas is also expected to provide Greece and Italy with 22% and 12% of their respective natural gas demand (1 and 8.5 bcm/year from Azerbaijan, respectively).


Regional Competition

Gas coming from new sources will also stimulate a more general competition between pipeline gas suppliers and spot-LNG suppliers, especially in Italy and Greece, which directly access LNG imports. Current SD gas prices for Bulgaria and Greece are about 20% cheaper than those in most European natural gas liquid hubs (natural gas virtual and physical trading centers). Note that gas pricing for 25-year long-term contracts is partially linked to oil derivatives, with a six-month lag, and oil prices were at a minimum half a year ago.


TAP and Energy Transition

Countries of the Western Balkans region, especially Bulgaria, are still reliant on coal-powered generation and hydropower. Diversification of gas supply options can help facilitate an optimal coal-to-natural gas switch, contributing to a cleaner energy mix.


Cheaper, more reliable supplies of natural gas also open the way to produce cutting-edge new fuels being developed in line with the EU’s Green Deal policy. An example is “blue hydrogen”: clean-burning hydrogen that would be made from hydrocarbons in a process that relies on new technology allowing carbon capture and storage if it is to be truly planet-friendly. In the future, sourcing and assessment withstanding, hydrogen could also be transported using TAP and the more comprehensive pipeline network.


TAP, as a European project, could bring the EU “green” energy discourse to Azerbaijan. Broad discussions around decarbonization, value chain emissions, methane leakage, etc., could also impact Azerbaijan’s energy sector. Baku should be ready to provide a timely regulatory response to the EU’s green policies.


Looking Forward

TAP will catalyze further infrastructure connectivity in Southeast Europe (SEE) and the western Balkans through the building of new interconnectors. As we’ve seen with Bulgaria, the importance of new supply options for countries heavily relying on Russian-sourced gas can’t be overstated. TAP also offers a massive opportunity for gas suppliers from Azerbaijan and elsewhere, and one that is set to grow rapidly: TAP’s capacity will double from 10 bcm/year to 20 bcm/year during 2021.