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Azerbaijan, Caspian, Energy Diplomacy, Europe, Liquefied Natural Gas, Mediterranean, Pipeline, Russia, South Stream, SouthernGasCorridor, Trans-Adriatic Pipeline, Turkey

Greece appeared a “Gordian Knot” for Azerbaijan’s SOCAR


Background

On 21 June 2013, the Azerbaijan’s state oil company SOCAR has won the tender to acquire the 66% share of the Greece’s Hellenic Gas Transmission System Operator (DESFA), which operates country’s gas transmission pipelines and distribution networks. The purchase accelerated the Shah Deniz Consortium’s decision on the final leg of the Southern Gas Corridor, by choosing the Trans-Adriatic Pipeline against the Nabucco-West, while SOCAR acquired 20% in TAP. However, the ongoing antitrust investigation of the European Commission to assess whether the proposed acquisition of the Greek DESFA by the SOCAR, is in line with the EU Merger Regulation, blocked the final transaction of 66% of DESFA to SOCAR. Because, the Commission concerned that, the involvement of Azerbaijan’s SOCAR in both production and sale of natural gas in Greece may hinder the competition in a discriminatory manner within the EU. Moreover, when the leftist Syriza party took the government in Greece, official Athens declared the Party’s new energy agenda, which articulated the nationalization of ex-public companies and the new requests for TAP project. It had blurry effects over Azerbaijan’s energy policy toward Southeast Europe and had negatively hit the ‘DESFA deal’ of SOCAR as well. This article will examine the possibility of transaction of the DESFA’s 66% to Azerbaijan’s SOCAR and the potential shareholders in TAP project.

Analysis

Before the European Commission’s in-depth investigation for acquisition of DESFA’s 66% stake, the EU’s adamant stance on energy acquis had appeared during the meeting between SOCAR and Greek officials in Brussels, in December 2013. Thus, Directorate-General for Energy had required that the EU-Azerbaijan intergovernmental agreement needs to be signed to reaffirm official Baku’s adherence to EU’s Third Energy Package, which separates the gas production from transmission and trading. However, official Baku’s counter-reaction is that from Azerbaijan’s perspective, there was no conflict of interest in acquiring the majority stake in DESFA, because the owner of the gas to be pumped through Southern Gas Corridor was not Azerbaijan, but the Shah Deniz Consortium. Azerbaijan is not the shippers of gas either, since the SGC and Shah Deniz field is operated by BP, which has a 28.8% share in the Consortium, but Azerbaijan has only 16.6%. Therefore, Azerbaijan should not be considered as the owner, the transporter and the distributor of gas.

The key issue here is that the Commission does not want the control package of such a big Transmission System transferred to the hands of non-EU country, but remain under the Greek control for strategic decisions on country’s natural gas transmission system. Secondly, the EU is not eager to create a legal precedent for Russia’s Gazprom, which eyed Greek DEPA and had been rejected for the Third Party Access exemption for South Stream pipeline. This is also a clear message to Moscow that the EU’s energy legislation is in force for all third countries and in all Member States. Moreover, the previous Greek Energy Minister, Panagiotis Lafazanis said that after the decision of the Commission, the Greek government would take efforts to keep the control package of DESFA under the state control. Because, “splitting up state firms has not helped our economy recover and has not offered a way out of the crisis, but it exacerbated the energy poverty and the economic crisis”, Lafazanis said.

Recently, after meeting of new Greek Energy Minister Panos Skourletis with the director of SOCAR Energy Greece Anar Mammadov, which was the first meeting after the suspension of talks on DESFA since January 2015 elections in Greece, Greek energy portal energypress.eu reported that, SOCAR is expected to acquire the 49% of DESFA, but not 66%. The remaining 17% will be transferred to the third party (though the third party was not mentioned). SOCAR initially had negatively reacted to the idea of acquiring only 49% of DESFA instead of initially agreed 66%. Because, State Oil Company would like to acquire more than 50% (at least 51%) – the control package – in order to be a main decision maker. However, apparently former does not want to lose this opportunity at the final stage of privatization. Because, an initial two-year period of agreement was supposed to expire in June, but it was extended because of delays due to elections. Thus, until the deadline, SOCAR should either apply for the further extension of indemnity letter on termination of the DESFA agreement or opt out it and withdraw from privatization. If the Commission’s authorization is not released, SOCAR can receive back its 10% down payment for DESFA’s 66%.

There are two scenarios for DESFA deal of SOCAR. First supposed the direct sale of 49% share of DESFA to SOCAR after the authorization of the European Commission; Second option is two-step scenario: first, SOCAR acquires the 66% of DESFA, and then the 17% will be sold to either Greece or another third party. Thus, Belgian Fluxys, Dutch Gasunie, Italian Snam Rete Gas and Infrastrutture Trasporto Gas, as well as Spain (Enagas), Romania (Transgas), Germany and Bulgaria are believed to have interested in remaining 17% stake of DESFA. The most probable company that might acquire the 17% stake (or small part of it) is Belgian Fluxys, since the company already owns 16% stake in TAP and was planning to join the DESFA tender in 2012. Italian Snam Rete Gas might be also a probable candidate for DESFA’s  entire 17%. Because, after Norwegian Statoil’s decision to sell its 20% stake in TAP, Snam’s CEO Carlo Malacarne confirmed that it could take a stake of up to 20 % in TAP. Moreover, recently, the Bulgarian government proposed a ‘package of energy cooperation projects’ to Azerbaijani government. However, it remains unclear whether this package of cooperation is a part of property swap for DESFA’s remaining 17% stake, which could solve the problem of official Baku vis-à-vis Brussels, writes euroactive.com. The final result is to be clear by the end of September.

The incentives of SOCAR to acquire the major stake in DESFA is stemming from numerous factors, as it will give a strong voice to Azerbaijan’s state-owned company in Greece’s gas transmission/distribution system and upstream market for production and sale of natural gas. The DESFA, as a subsidiary of DEPA, will operate the Greek section of Interconnector Greece-Bulgaria in the Greek territories as a part of National Gas Transmission System and owns the Revythousa LNG terminal. Furthermore, DEPA and Gastrade S.A. plan to construct LNG plant in Kavala and Alexandroupoli respectively, both of which to be located near the DESFA’s pipeline network. The LNG brought to Revythousa, Kavala and Alexandroupoli could be injected into TAP (in the expansion capacity) via the DESFA’s transmission system. Thus, SOCAR could control the import of LNG and delivery of gas from Mediterranean countries to Europe. Furthermore, SOCAR is financially capable to develop the planned Kavala underground gas storage, the plan that was shelved by DESFA due to lack of investment and the storage can be connected with TAP and IGB. All those would enable SOCAR to position itself in the Southeastern European gas market accessing the various chains of the gas transport and transmission system. Moreover, SOCAR can also control Russian gas delivery if Gazprom decides to transport its gas from Turkey-Greece border via Interconnector Turkey-Greece (as an extension of Turkish Stream, if it succeed) since Greek portion of the pipeline is operated by DESFA.

‘TAP’ card for DESFA deal

Initially, the selection of TAP was interpreted as a mutually scored game, like ‘SOCAR opted for the TAP in exchange of winning the DESFA tender’. After the coalition of leftists came to power in Greece, official Athens declared that it would revise the TAP agreement to boost its economic dividends and requested a stake in TAP with the involvement of DEPA; revision of the transit fees for TAP; price discounts for Azeri gas; and sale of only 49% of DESFA to SOCAR. Azerbaijan welcomed Greece’s participation in TAP by selling part of its share to Greece, but did not make a compromise on the price of Azeri gas to Greece and transit fee. Perhaps, Greek government wanted to acquire a stake in TAP in exchange of solving the issue of DESFA’s 66% share in favor of SOCAR. Thus, since falling oil prices and devaluation of Azeri Manat are supposed to endanger the commerciality of SGC, SOCAR can sell part of its shares in TAP to Greece in order to secure financing of pipeline from its side.

Actually, after selling its shares in Shah Deniz field and South Caucasus Pipeline in late July 2015, Norway’s Statoil declared it is selling its 20% in TAP as well. The market share of 20% stake is estimated 400 million euro, the same amount that was considered for 66% of DESFA. SOCAR could buy the 20% from Statoil and then exchange with DESFA’s 66% with Greece. However, on the other hand, SOCAR would prefer to sell this 20% to different shareholders in order to secure the financial viability of the project, given the debt problems of Greece. Actually, the previous Greek government has managed to secure 5% stake in TAP, however, the new government failed to move with this plan. Involvement of Greece in TAP via DEPA raises doubts on whether pro-Russian Greek government would favor involvement of Russian gas into TAP in the second stage of gas delivery.

Russian factor

If privatization of DESFA is not approved by EC, then Greece may open a new tender. Given the warming relations between Greece and Russia, the question is whether Gazprom can involve in a new tender. Because, Russia’s eagerness to secure the Greece’s participation in the Turkish Stream is something beyond the ordinary commercial interests. Thus, by financing the Greek part of Turkish Stream from Greek-Turkish border up to Northern Greece and offering gas discount, thus, having a leverage over Athens, Russia could push Greece to reconsider the DEPA privatization, for which Gazprom dropped its bid in 2013. Although Greek government had earlier ruled out the DEPA’s privatization, however, reconsideration of this stance and Gazprom’s re-involvement into DEPA’s privatization would open the way for Russia into DESFA, including DESFA-operated pipeline system that was eyed by SOCAR. Furthermore, in the light of standoff between SOCAR and Greece, as well as official Baku and Brussels, the recent Russo-Greek Memorandum of Understanding in June 2015 on the construction of the Greek section (also referred as ‘Greek Stream’) of the Turkish Stream pipeline is something that official Baku concerned about. Making the Turkish Stream a priority put the credibility of Greek government under question on their commitments concerning TAP project. Given the fact that Gazprom needs the Greece’s DESFA-operated gas transmission system to deliver its gas to Europe, official Baku’s concern is that Russian Gazprom may consider its intention for DESFA deal. However, following the recent delay of “Turkish Stream” because of prices issues between Russian Gazprom and Turkish BOTAS, Russia’s new pipeline will probably experience the “South Stream Syndrome” for a while.

Conclusion

Although, Greece was holding the Presidency of the Council of the EU in the first half of 2014, Athens could not lobby for the finalization of the DESFA deal. Apparently, Greece was planning to use Turkish Stream and its new agenda on TAP as a ‘bargaining cheap’ vis-à-vis Azerbaijan to impose its political will over Baku to obtain beneficial dividends from the SGC. However, Greece should leave its leftist rhetoric aside and make strategic moves to develop competitive and integrated energy market by engaging in TAP and IGB projects for their smooth and timely realization. This yields strong economic and political benefits for Greece, as it is dependent on single supplier for 70% of its gas demand. From Azerbaijan’s side the problem is that, SOCAR is a sole owner of the entire energy infrastructure of the country and there is no other national energy company within country. Whereas, if there were additional national/private energy companies in Azerbaijan dealing with gas fields and construction, they could substitute SOCAR in DESFA deal and it would not contradict with the EU’s competition rules. This precedent already exists in Russia, as there are Rosneft and Novatek other than Gazprom. If Russian Gazprom involved in DESFA deal and faced same problems that Azerbaijan does, Gazprom could give its entire (66%) or half of stakes in DESFA to either Rosneft or Novatek, the chiefs of both are close people of Vladimir Putin. Thus, they could jointly rule the control package of DESFA. Moreover, despite the strong political support for the realization of the Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines in early 1990s by the U.S., the Southern Gas Corridor experienced less political support from both the US and EU. Notably, in the light of EU’s current DESFA investigation, official Baku found itself abandoned vis-à-vis individual member states and Russia-led project. Presumably, the West is also testing the patience of official Baku in the light of their criticism for the ‘human right crackdowns’. However, after the Greek PM Alexis Tsipras announced his resignation on 20 August 2015, and following the upcoming parliamentary elections in late September, the balances might slightly change for the energy agenda.

Ilgar Gurbanov, is an Independent Analyst on Energy Affairs

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