EBRD to lend $500m for Azerbaijan gas pipeline

The European Bank for Reconstruction and Development has approved crucial $500m financing for a pipeline to bring Azeri gas from the Caspian Sea to the EU, despite questions about Azerbaijan’s record on corruption and democracy.

The bank’s board approved the loan on Wednesday to a mostly Azeri-owned consortium building the Trans-Anatolian Pipeline, or Tanap. The project is the central link in the so-called Southern Gas Corridor aimed at reducing Europe’s reliance on Russian gas. The $40bn, 3,500km corridor is one of the biggest infrastructure projects in the global oil and gas industry. It will bring Caspian gas through three linked pipelines across Azerbaijan, Georgia, Turkey, Greece and the Adriatic Sea to southern Italy, and has been designated one of the EU’s “priority projects”. Financing for the project was thrown into question in March when Azerbaijan quit the Extractive Industries Transparency Initiative, an international anti-corruption watchdog made up of governments, companies and non-governmental organisations. The EITI had suspended Azerbaijan’s membership after criticism from human rights groups over a crackdown on civil society.

Officials at the EBRD, the only international financial institution with a specific mandate to promote democracy, insisted they had ensured Tanap met the usual standards. The financing is one of the largest single loans the bank has granted. Francis Malige, the bank’s managing director for eastern Europe and the Caucasus, said that EITI principles had been applied to the project despite Azerbaijan’s withdrawal from the initiative. He added that the Southern Corridor was important for EU efforts to diversify supply routes and develop an open, competitive gas market. While not involving zero-emission or renewable energy it would also help replace coal and lignite, still widely used in the Balkans, with cleaner gas. Nandita Parshad, EBRD managing director for energy and natural resources, said: “This is not a project that is just about Azerbaijan, this is a project of much, much wider strategic impact for Europe. It is clearly of benefit to many of our countries of operation.”
But Anna Roggenbuck, lead campaigner on the Southern Gas Corridor at Bankwatch, an NGO network, said Tanap would “contribute to the violation of human rights in Azerbaijan.”“This project will enable Azerbaijan to quadruple its income from fossil fuel exports, from gas exports,” she said. “It will definitely strengthen the family of [Azerbaijan’s authoritarian leader Ilham] Aliyev.” The $8.6bn Tanap pipeline will link to the Southern Corridor Pipeline already operating across Azerbaijan and Georgia, carrying gas from the giant Shah Deniz field in the Caspian across Turkey to the border with Greece. From there the Trans-Adriatic Pipeline, or Tap, will take gas through Greece, Albania and across the Adriatic to Italy. With first gas expected in 2020, about 6bn cubic metres of Tanap’s capacity will go to Turkey, with 10 bcm for Europe, enough to supply about 10m households, the EBRD said.

Azerbaijan holds a 58% stake in the project, while Turkish national pipeline group Botas owns 30% and BP holds 12%.The EBRD, which has already loaned $450m to gas projects in the Caspian, is considering a further $1.5bn financing package for Tap, including $500m of its own funds, but does not expect a decision until next year. The EU’s European Investment Bank is also considering financing for both Tanap and Tap. Azerbaijan’s majority stake and role as main gas supplier to Tanap has caused concern in light of a European Parliament investigation into allegations that the country used state funds to attempt to illegally influence EU officials, in addition to longstanding human rights concerns in the country. Human rights activists say the deal will strenthen the hand of Azerbaijan president Ilham Aliyev Mr Aliyev has been in charge since 2003 after succeeding his father, who ruled for a decade.

The pipeline is critical to ensure European buyers for gas from the Shah Deniz field, owned by a consortium including BP, Azerbaijan’s Socar, Russia’s Lukoil and Malaysia’s Petronas. Brussels has also touted the gasfield and pipeline projects as part of its strategy to reduce EU reliance on Russia, with some estimates suggesting that as much as 20% of Europe’s long-term needs could eventually be served by Azeri supplies.

Source: Neil Buckley and Henry Fox for the Financial Times