Two Solutions to Same Gas Problem

Both the Planned TAP and ITGI Pipelines Face Real Obstacles in Getting Around Ukraine

By ALESSANDRO TORELLO

BRUSSELS -- Two smaller rivals to the proposed Nabucco pipeline project look set to open up a key new supply line meant to ease Europe's dependence on Russia for natural gas. But with both of them competing for the same gas, only one is likely to succeed.

Disputes between Russia and Ukraine have been a continuing problem for gas supplies to the European Union, and European Commission President José Manuel Barroso said Friday the issue could cause a major crisis in a matter of weeks.

In the search for an alternative, the European Commission has long favored Nabucco, a 3,300-kilometer, €7.9 billion ($11 billion) pipeline that would bring the gas straight to Central Europe, where it is most needed.

But analysts say it may take 10 years before enough gas becomes available to fill a pipeline as big as Nabucco, which would have a capacity of 31 billion cubic meters, or bcm, per year. The 27 EU countries consume about 500 bcm of gas per year, according to data from gas industry association Eurogas.

While talk about Nabucco continues, two much smaller projects are poised to step in first in the next five years.

Norway's oil-and-gas giant StatoilHydro ASA and Swiss energy-trading company Elektrizitats-Gesellschaft Laufenburg AG, or EGL, have formed a consortium to develop the 520-kilometer Trans Adriatic Pipeline, known as TAP.

The 10-bcm TAP -- expandable to 20 bcm per year -- would transport Azerbaijani and some Iranian gas to Italy. Starting in Greece, the pipeline would make its way through Albania before crossing the Adriatic -- the shortest physical route and the one with the smallest portion offshore.

The other project is ITGI, or Interconnector Turkey Greece Italy, which is being developed by Italian utility Edison SpA and Greek monopoly gas company DEPA. ITGI would carry up to 10 bcm of gas to southern Italy through a slightly longer route bypassing Albania.

TAP has had a lower profile, but many experts have identified the lesser-known project as a possible front-runner.

But both projects are counting on gas from the new Azerbaijani field of Shah Deniz II, due to start production of as much as 16 bcm of gas a year as soon as 2014. Only about half of that gas will get to Europe, though -- after Azerbaijan, Georgia and Turkey get their share. So, it appears that only one of the planned pipelines to Europe will get its gas.

Off the Azerbaijani coast in the Caspian Sea, the Shah Deniz II field is being developed by a consortium of energy companies, with BP PLC and StatoilHydro each holding 25.5%.

As partners in the consortium, these companies will have a say in the final gas sale. Given StatoilHydro's 50% stake in TAP, the project has an asset others lack. But TAP does lack something else crucial for a big project that involves energy security, international relations and big investments: political support.

Neither of the two consortium companies is based in an EU member country, giving them no national sponsors at the EU level to challenge the backing of Italy and Greece for the rival ITGI. ITGI's developers, Edison and DEPA, are based in the countries the pipeline would cross and supply, greatly easing the national approval process. It also looks bad for TAP that the EU saw fit to give ITGI €100 million in financing with Nabucco getting €200 million, while TAP was left empty-handed.

The next few months will show who has it right. Both have said they will make a final decision on whether to go ahead with construction by the end of the year. Nabucco plans to do the same in the first quarter of 2010.

Write to Alessandro Torello at alessandro.torello@dowjones.com