Cross-border natural gas deal likely to suffer from Greek EU exit

Author: Kirsty Ayakwah

2015/02/19

Uncertainty over Greece’s role in the EU is likely to affect cross-border natural gas transactions and could signal a major set-back in the development of on-going infrastructure projects.

European markets fell following news on Thursday of Greece submitting a formal request for a loan extension.

The embattled country imports most of its oil and natural gas and an exit from the EU is likely to put increasing pressure on the price of its energy.

Oil has been the dominant energy source in Greece and accounted for around 45% of the country’s total primary energy supply in 2012, according to data published by the International Energy Agency in 2014. Gas demand, which is primarily used for electricity generation, is also expected to rise in coming years, buoyed by the Greek’s government’s efforts switch household heating from oil to gas generation.

State company DEPA, which sells gas to large consumers and to gas supply companies, would still have to honour its long-term gas agreements with Russian producer Gazprom and Algerian producer and LNG exporter Sonotrach – even if the country made the choice to exit.

DEPA has three long-term contracts for natural gas supply, which total around 4billion cubic metres (bcm)/year. The deals include a 2.8bcm/year deal with Gazprom’s export arm Gazexport which runs until 2016, a 0.5bcm/year deal with Sonatrach until 2019, and a 0.7bcm/year deal until 2021 with Turkish gas incumbent Botas.

As these deals were agreed before a possible exit from the euro, it is unlikely that there would be any change paying off the dollar-priced deals irrespective of its position within Europe.

But with an exit from the EU and the possible return to using the drachma or some other currency, Greece would have to deal with the additional exchange costs that would accompany paying for its contracts.

According to one source in the country, Greece paid €7.5 – 8bn on energy imports in 2014, which roughly represented 5-5.5% of its gross domestic product (GDP) for the same period. A sharp devaluation of the new currency could double that, without even taking account of a sinking GDP, the source added.

Key elements of Greece’s overall policy on natural gas security is promoting the diversification of supply sources, which is why the country is embarking on a series of projects aimed at improving Greece’s interconnectivity between countries. But the fear is that projects could be adversely affected by a drop in confidence from private investors.

The European Commission’s investigation into the sale of grid operator DESFA to Azeri state oil and gas company SOCAR has been suspended because the notifying parties have not provided an important piece of information. In addition, the Greek government has made it clear that it plans to halt the sale of DEPA. A previous attempt to sell the state-owned company under the previous administration had also failed to attract any buyers.

And earlier in the week, SOCAR insisted that calls by Greece to renegotiate the price for Caspian gas were off the table.

A total of 16bcm/year will be shipped along the Trans-Anatolian Pipeline (TANAP) across Turkey and will connect with the Trans-Adriatic Pipeline (TAP) on the Greek border. Of the total, 6bcm/year is earmarked for Turkey with the remaining 10bcm/year to be sold to European customers.

The pipeline will transport gas from Azerbaijan’s Shah Deniz II field to Europe, with the first deliveries expected in 2020. It will be linked to the Turkish TANAP pipeline.

In June DESFA secured a loan from the European Investment Bank worth €80m, which will be used to finance the expansion of the Revithoussa LNG terminal. Two months later the country obtained a €107m grant from the European Regional Development Fund to support five projects, including the work at Revithoussa.

And DEPA is also pushing for the construction of a new LNG terminal in the northeast of the country, to be developed in concert with an interconnector link to Bulgaria known as the IGB. A final investment decision (FID) on the creation of the 3bcm/year interconnector is anticipated by the end of May and could be operational by 2018, a Bulgarian spokesman told ICIS (see ESGM 16 February 2015). Kirsty Ayakwah