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TAP Has the Most Attractive Cost Offer
Mr. Michael Hoffmann, External Affairs Director, Trans Adriatic Pipeline
AUTHOR: Atanas Georgiev

In two consecutive interviews of and Utilities Magazine, you can see the points of view of the two competing companies for Shah Deniz II gas. In addition to the interview with Mr. Michael Hoffmann, you can also read on our website the interview with Mr. Christian Dolezal (Nabucco).

Mr. Hoffmann, what are the latest developments of the Trans Adriatic Pipeline? Could you share with our readers the most recent achievements and possible setbacks?

- TAP has progressed extremely quickly during the last year. TAP was the first of the Southern Gas Corridor projects to be selected by Shah Deniz last February 2012, when they chose TAP as their preferred southern route option to deliver gas to Italy. TAP then went on last year to sign a cooperation agreement in June, a funding and equity agreement in August, and conclude a shareholder agreement in November last year with members of the Shah Deniz Consortium (SDC). In addition, TAP signed a Memorandum of Understanding with TANAP in November last year and has been meeting with them regularly since then to ensure technical and commercial cooperation.

Major political achievements for the TAP project recently include the MoU on TAP between Italy, Greece and Albania signed in New York in September last year and the Intergovernmental Agreement for the TAP project, signed in Athens on the 13-th of February this year. Another major political milestone for TAP has been to conclude the Host Government Agreement with the Albanian Government this January.

An important point to stress is that TAP is also the first pipeline project ever to get the approval of the three national regulatory authorities– from Italy, Albania, and Greece – under the European Union’s Third Energy Package with respect to Third Party Access exemption application. So we are very excited that the Exemption has been granted by the national authorities for the initial 10 bcm of Shah Deniz gas volumes through TAP. Furthermore, on Tuesday this week, (5-th March) TAP met with the European Energy Commissioner Gunther Oettinger. This was a very fruitful meeting, where the Commissioner underlined his strong desire to open up the Southern Gas Corridor quickly and concluded by saying that this year is an important one for key decisions, and we fully share that view with the Commissioner. We are now looking forward to the EC processing and approving TAP’s third-party access exemption application within the next two months. I think we have received good support from the Commission in this respect and we would like to thank them for their continuing support of our project.

Another important element for the decision support package is the Front-End Engineering and Design (FEED) process that is now complete. This is a critical element for the selection process as it provides the Shah Deniz consortium with an accurate cost estimate of the project which in turn translates into a transit tariff. TAP will put all of these elements and many more together and will submit a very compelling decision support package at the end of March this year.

So, in terms of engineering, commercial processes and political processes – we have done extraordinary well in the last year and I believe that we are now “ahead in the game.”

What other advantages of your project are crucial in terms of the competition with Nabucco West?

- Cost or commerciality remains the key principle in the selection process. In this respect, the pipeline business is very simple; cost is a factor of length, so the longer the pipeline, the more steel and therefore the higher the cost. Because TAP is around 800 km long, or around 500 km shorter than our competitor, we believe that our project will be able to offer the most attractive commercial offer. Indeed, with the entire value chain approaching USD 45-50 billion, including offshore field development, the South Caucasus Pipeline (SCP) upgrade, the TANAP pipeline and the final European section, any cost savings will be a major benefit for Shah Deniz to ensure them the best net back or profit.

TAP has other geo-strategic opportunities. For example, should TAP be selected, we are currently examining how we can support gas deliveries to South Eastern Europe. There are a multiple of planned and existing pipelines linking Greece with Bulgaria. We’re already discussing options with our Greek colleagues at DEPA, a shareholder in the planned IGB pipeline, and DESFA, which operates a pipeline to the west of the country at Kula-Sidirokastro, to ship anything from 1 to 2 bcm to Bulgaria from TAP.

Beyond that in Albania we have a connection point whereby we can link to the Ionian Adriatic Pipeline (IAP) and from there to the rest of the Western Balkans with whom we have signed various agreements. These countries either do not have any gas at all, or are almost 100% reliant on Russia. From this point of view we therefore believe that TAP offers a variety of strategic advantages for the region.

Then we come to Italy, the second largest gas market in continental Europe. TAP is a long-term project and buyers will sign up to 25-year contracts, and we believe that there is potential for future growth as European domestic gas production declines. But the supply chain does not have to end there. There has been a tremendous amount of work taking place on the system in Northern Italy (Transitgas). As a result, the network will be able to deliver a planned 15bcm/a by 2018 to Switzerland, Germany, France, Benelux and the UK. In addition, the TAG system in northern Italy can supply gas to Austria, Hungary and other central European countries.

TAP has one other strategic advantage over its competition. Greece is member of the Eurozone and I think it is crucial to demonstrate that large, foreign direct investments such as TAP can create jobs there, helping to boost the economy and make it more secure for further investment. TAP will be spending 1.5 billion Euro in Greece, creating 2,000 direct and 10,000 indirect jobs. Local suppliers will benefit from that and we believe it is a very important and strong signal in support of the Eurozone and the EU.

And last, but not least, our shareholders. They are A credit-rated, have a market capitalization of more than 100 billion Euro and will be able to finance TAP relatively easily. Their technical competence is also unrivalled having built more than 20,000 km of onshore and offshore pipelines (E.ON and Statoil). I think that speaks for itself.

What is the nature of relations between TAP and IAP until now?

- We have an excellent relationship with the IAP and have an agreement with the IAP and the countries along its route. I believe that TAP provides a unique strategic opportunity to supply gas to the region. Two things are important to clarify however. First, any gas sales in the region will have to be negotiated with Shah Deniz – TAP itself does not sell gas. Second, we are cooperating and supporting IAP as we share similar aims, but TAP is not a shareholder in IAP and it is the project’s developer Plinacro, which will take the final decision to implement the project. The Energy Community wants to see the Western Balkans connected and we support that objective.

Nabucco has offered up to 50% participation in the project to SDII consortium. Does this change the situation?

- We actually reached our funding and equity agreement with Shah Deniz last August (a full six months earlier), so our plans are significantly more advanced. However, we are in a slightly different position in terms of ownership. While we also offered 50% (to BP, SOCAR and Total), Statoil already holds a 42.5% shareholding in TAP, so it’s likely that the consortium will have a much larger total shareholding in TAP than 50%. Through our various agreements with Shah Deniz, we hold regular formal meetings with their team as potential investors.

Is there a possibility for both projects – TAP and Nabucco, to be implemented simultaneously?

- In the long term, yes, both projects could be realized, but in the immediate term no. With the 10 bcm of gas that will be supplied, it is only possible for one project to be built. And that project has to be the one that offers the most reliable commercial and technical option, as well as guarantees that it can be built on time. Under those criteria I strongly believe that TAP will open the Southern Gas Corridor. As more volumes become available – from various Caspian fields such as Absheron, ACG (Azeri-Chirag-Guneshli) and Babek, etc., from Northern Iraq and even from OMV’s Romanian offshore exploration – then there is a possibility for a “Nabucco-West” type of project to be developed subsequently.

So you expect in the first years only Azeri gas to flow to the West?

- I think it is important to remember that the decision is made by Shah Deniz, so clearly commercial considerations will play a part. However, scalability is also important. SCP, TANAP and TAP have all been designed to cater for additional volumes, anything from 20 to 30 bcm.

What those next volumes are going to be is hard to say. The fact that Absheron’s shareholders are Total, SOCAR and GDF-Suez convinces me that around 8 bcm could be brought on stream shortly after Shah Deniz II. I think with all the other projects in the Caspian, the total gas production by 2030 could be around 50 bcm from Azerbaijan alone, a considerable amount.

What are the possibilities for reverse flow of TAP in terms of gas deliveries to the Balkans from the West?

- In line with the EU Third Energy Package, we have designed TAP to have a physical reverse flow capacity of 80% of the initial 10 bcm. So if there is a repeat of the January 2009 crisis, there will be more than enough gas to supply Albania, Greece, FYROM, Bulgaria and even Romania.

In his current role, Michael Hoffmann leads the External Affairs and Communications department of the TAP AG project, based in Baar, Switzerland. His team is responsible for political negotiations and communications activities in order to raise the TAP project’s profile and create favourable environment for its implementation.

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