Major Pipeline Projects Reshaping Gas Transit in Europe

Introduction

Europe's natural gas infrastructure is undergoing significant transformation, with several major pipeline projects reshaping transit routes, supply dynamics, and geopolitical relationships across the continent. These developments come at a critical juncture as Europe navigates the complex interplay between energy security imperatives, decarbonization goals, and shifting supplier relationships. This article examines the key pipeline projects that are reconfiguring Europe's gas landscape and analyzes their implications for market dynamics, energy security, and regional politics.

The Evolving European Gas Market Context

Before examining specific pipeline projects, it's essential to understand the broader market context in which these infrastructure developments are occurring:

Shifting Supply Patterns: European domestic gas production continues to decline, with output from the North Sea and Groningen field diminishing. This increases import dependency, making pipeline infrastructure increasingly critical for energy security.

Diversification Priorities: Following supply disruptions and geopolitical tensions, European nations are prioritizing supply diversification, both in terms of sources and routes. This has accelerated interest in new pipeline connections and expanded LNG import capacity.

Energy Transition Considerations: As Europe pursues decarbonization goals, questions persist about the long-term role of natural gas infrastructure. Pipeline investments must be evaluated against potential future scenarios where gas demand could decline substantially in the 2030s and beyond.

Regulatory Environment: The EU's energy market regulations, including the Third Energy Package and its provisions on unbundling, third-party access, and certification requirements, significantly impact pipeline development and operations.

Southern Gas Corridor: Opening the Caspian Route

The Southern Gas Corridor (SGC) represents one of Europe's most significant diversification initiatives, establishing a direct connection to Caspian gas resources and bypassing traditional transit routes through Russia.

Key Components

The SGC consists of three interconnected pipeline systems:

South Caucasus Pipeline (SCP): Transports gas from Azerbaijan's Shah Deniz field across Azerbaijan and Georgia to the Turkish border (capacity: 25 bcm/year).

Trans-Anatolian Pipeline (TANAP): Carries gas across Turkey from the Georgian border to the Greek border (initial capacity: 16 bcm/year, expandable to 31 bcm/year).

Trans-Adriatic Pipeline (TAP): Connects TANAP at the Turkish-Greek border and extends through Greece, Albania, and the Adriatic Sea to southern Italy (initial capacity: 10 bcm/year, expandable to 20 bcm/year).

Current Status and Expansion Plans

The entire Southern Gas Corridor system became operational in late 2020, with commercial gas deliveries to European customers beginning in 2021. The system has been delivering approximately 10 bcm annually to European markets, with Italy receiving the majority of volumes.

Expansion plans are under consideration, potentially involving:

• Increased capacity utilization of existing infrastructure
• Physical capacity expansions through additional compressor stations
• Connection to additional gas fields in Azerbaijan beyond Shah Deniz
• Potential integration with gas resources from other Caspian countries, particularly Turkmenistan

Market and Strategic Implications

The Southern Gas Corridor has significant implications for European gas markets:

Diversification: Provides Europe with direct access to Caspian gas, reducing dependence on Russian supplies and traditional transit routes.

Market Integration: Enhances gas market integration in Southeastern Europe, a region historically dependent on single-source supplies.

Geopolitical Relationships: Strengthens Europe's energy relationship with Azerbaijan and potentially other Caspian producers, while establishing Turkey as a key transit country for European gas supplies.

Baltic Pipe: New Nordic-Central European Connection

The Baltic Pipe project creates a new gas transmission corridor linking Norway, Denmark, and Poland, enabling Polish and potentially other Central European countries to access Norwegian gas supplies directly.

Project Overview

Baltic Pipe consists of five key components:

• An offshore pipeline in the North Sea connecting the Norwegian gas system to Denmark
• Expansion of the Danish transmission system
• A compressor station in Denmark
• An offshore pipeline between Denmark and Poland across the Baltic Sea
• Expansion of the Polish gas transmission system

The pipeline has a capacity of 10 bcm per year and represents a critical diversification project for Poland, which has historically been heavily dependent on Russian gas imports.

Current Status

The Baltic Pipe project achieved full operational capacity in late 2022 following some delays related to environmental permitting in Denmark. The project was partially commissioned in October 2022, with gas flowing from Norway to Poland via Denmark.

Strategic Significance

Baltic Pipe has significant strategic implications:

Polish Energy Security: Enables Poland to substantially reduce its dependence on Russian gas imports, in line with the country's long-term strategy to diversify energy supplies.

Regional Hub Potential: Positions Poland as a potential gas hub for Central and Eastern Europe, with the ability to re-export Norwegian gas to neighboring countries.

North-South Integration: Complements other infrastructure projects that enhance north-south gas connectivity in Central Europe, including interconnectors between Poland, Lithuania, Slovakia, and Ukraine.

EastMed Pipeline: Mediterranean Ambitions

The Eastern Mediterranean (EastMed) pipeline project represents one of the most ambitious and technically challenging pipeline initiatives in Europe, aiming to connect significant gas discoveries in the Eastern Mediterranean basin to European markets.

Project Concept

The EastMed pipeline is designed to transport natural gas from offshore gas fields in the Levantine Basin (primarily Israel's Leviathan field and Cyprus's Aphrodite field) to Greece and Italy, with potential connections to the Western Balkans.

The project includes:

• An offshore pipeline from Israeli and Cypriot gas fields to Cyprus
• An offshore pipeline from Cyprus to Crete
• An offshore pipeline from Crete to mainland Greece
• The Poseidon Pipeline connecting Greece to Italy

With a planned capacity of 10 bcm per year and an estimated cost of €6-7 billion, the EastMed pipeline represents a significant infrastructure investment.

Current Status and Challenges

The EastMed pipeline project faces substantial challenges despite receiving political support from the involved countries:

Technical Complexity: The project involves ultra-deep-water sections (reaching depths of over 3,000 meters), making it technically challenging and expensive.

Economic Viability: Questions persist about the project's commercial viability given the high capital costs, competing supply options, and Europe's uncertain long-term gas demand outlook.

Geopolitical Tensions: Maritime boundary disputes and broader geopolitical tensions in the Eastern Mediterranean complicate project development.

Financing Challenges: Securing sufficient financing for such a capital-intensive project remains a significant hurdle.

While an Intergovernmental Agreement was signed by Cyprus, Greece, and Israel in January 2020, the project remains in the development phase with final investment decision pending. In early 2022, the United States expressed reservations about the project's economic viability and environmental impact, adding uncertainty to its prospects.

Alternative Options

Given the challenges facing the EastMed pipeline, alternative options for monetizing Eastern Mediterranean gas are being considered:

LNG Export: Expansion of Egypt's existing LNG facilities to export Eastern Mediterranean gas as LNG.

Regional Pipeline Networks: Smaller-scale pipeline connections to supply regional markets (e.g., Jordan, Egypt).

Floating LNG (FLNG): Deployment of FLNG vessels for offshore liquefaction and export.

Hydrogen Pipeline Initiatives: Future-Proofing Infrastructure

As Europe pursues decarbonization goals, significant attention is turning to the potential repurposing of existing natural gas infrastructure and development of new pipelines specifically designed for hydrogen transport.

European Hydrogen Backbone

The European Hydrogen Backbone (EHB) initiative, developed by a group of European gas transmission system operators (TSOs), envisions a dedicated hydrogen transport infrastructure spanning Europe. The latest vision (2022) includes:

• Approximately 53,000 km of hydrogen pipelines by 2040
• About 60% consisting of repurposed natural gas pipelines
• The remaining 40% as new hydrogen pipeline constructions
• Total estimated investment of €80-143 billion

H2Med: Mediterranean Hydrogen Corridor

In 2022, France, Spain, and Portugal announced the H2Med project (formerly known as BarMar), a submarine hydrogen pipeline connecting Barcelona to Marseille. This project replaces the previously proposed MidCat natural gas pipeline and is explicitly designed as a hydrogen-dedicated infrastructure.

Key elements include:

• Capacity to transport up to 2 million tonnes of hydrogen annually
• Estimated cost of approximately €2.5 billion
• Target operational date of 2030
• Designation as a Project of Common Interest (PCI) by the European Commission

The project aims to transport green hydrogen produced in the Iberian Peninsula, which has substantial renewable energy potential, to markets in Central Europe.

Implications for Gas Infrastructure Planning

The emergence of hydrogen pipeline initiatives has significant implications for gas infrastructure planning in Europe:

Future-Proofing Investments: New natural gas pipeline projects are increasingly designed to be "hydrogen-ready" to ensure long-term relevance in a decarbonizing energy system.

Asset Repurposing: Existing gas TSOs are developing strategies to repurpose portions of their networks for hydrogen transport as natural gas demand potentially declines.

Regulatory Frameworks: Evolving EU regulations, including the proposed Hydrogen and Decarbonised Gas Market Package, are addressing the specific challenges of hydrogen infrastructure development and operation.

Geopolitical and Market Implications

The evolving pipeline landscape in Europe has far-reaching implications for gas market dynamics and geopolitical relationships:

Shifting Transit Patterns

New pipeline routes are fundamentally altering traditional gas transit patterns in Europe:

Declining Role of Traditional Transit Countries: Countries that have historically served as major transit routes for Russian gas, including Ukraine, Belarus, and to some extent Poland, are seeing their transit role diminish as new direct routes develop.

Emerging Transit Hubs: New countries are emerging as important transit nodes, including Turkey (via the Southern Gas Corridor), Greece, and potentially Egypt for Eastern Mediterranean gas.

Market Integration and Competition

Pipeline developments are influencing market integration and competitive dynamics:

Enhanced Market Connectivity: New interconnections are increasing physical gas flow capabilities between previously isolated or poorly connected markets, particularly in Southeastern and Central Eastern Europe.

Price Convergence: Improved interconnectivity is contributing to greater price convergence across European gas hubs, though significant differentials persist in some regions.

Supplier Competition: Diversification of routes and sources is enhancing competition among gas suppliers, potentially strengthening Europe's negotiating position.

Strategic Relationships

Pipeline developments both reflect and influence strategic relationships:

Evolving EU-Russia Energy Relationship: The reduction in Russian gas imports and development of alternative supply routes reflects a fundamental shift in the historically interdependent EU-Russia energy relationship.

Enhanced Ties with New Suppliers: Pipeline projects are cementing Europe's energy relationships with alternative suppliers, including Azerbaijan, Norway, and potentially Eastern Mediterranean producers.

Intra-European Dynamics: Differing priorities regarding pipeline projects sometimes reveal divergent energy security perspectives among EU member states, creating occasional tensions in European energy policy coordination.

Financing and Economic Challenges

Major pipeline projects face significant financing and economic challenges in the current environment:

Investment Uncertainty

The uncertain long-term role of natural gas in Europe's energy mix creates challenges for securing financing for new pipeline projects. Investors must weigh the risk that new infrastructure could become stranded assets if gas demand declines significantly in the 2030s and beyond due to decarbonization policies.

Public Financing Support

Many recent pipeline projects have relied on public financing support through mechanisms such as:

• EU Connecting Europe Facility (CEF) grants for Projects of Common Interest
• European Investment Bank (EIB) loans
• National government guarantees and direct investments
• International financial institutions' support

However, evolving EU sustainable finance policies, particularly the EU Taxonomy, are limiting public financing support for natural gas infrastructure that does not incorporate clear decarbonization elements.

Project Finance Structures

Pipeline developers are adopting various financing structures to manage risks and attract investment:

• Long-term capacity bookings to secure revenue streams
• Joint venture structures distributing risk among multiple stakeholders
• Hybrid public-private partnerships
• "Hydrogen-ready" designs to enhance long-term investment cases

Regulatory Considerations

The development and operation of gas pipelines in Europe are subject to complex regulatory frameworks:

EU Gas Market Regulation

The EU's Third Energy Package and subsequent regulatory developments establish key principles for gas infrastructure, including:

• Unbundling of transmission system operation from supply and production activities
• Third-party access requirements ensuring non-discriminatory access to infrastructure
• Tariff methodologies based on transparent, cost-reflective principles
• Certification requirements for transmission system operators

Exemption Regimes

Some major pipeline projects have sought and received exemptions from certain regulatory requirements under specific conditions, particularly for new infrastructure where the investment would not occur without exemptions. These may include exemptions from:

• Third-party access requirements
• Regulated tariff methodologies
• Unbundling provisions

Evolving Hydrogen Regulations

The regulatory framework for hydrogen infrastructure is still developing, with the proposed Hydrogen and Decarbonised Gas Market Package expected to establish specific rules for:

• Hydrogen network operation
• Third-party access to hydrogen infrastructure
• Repurposing of natural gas assets for hydrogen transport
• Cross-border hydrogen trading

Conclusion: The Future of Europe's Pipeline Landscape

Europe's gas pipeline landscape is undergoing a profound transformation driven by the intersection of energy security imperatives, decarbonization goals, and shifting geopolitical relationships. The projects discussed in this article represent different facets of this transformation—from diversification of traditional natural gas supplies to preparations for a hydrogen-based future.

Several key trends will shape the evolution of Europe's pipeline infrastructure in the coming decades:

Dual-Purpose Infrastructure: New pipeline investments will increasingly need to serve both immediate energy security needs and long-term decarbonization objectives, with hydrogen compatibility becoming a standard design feature.

Selective Development: Given financing constraints and uncertain long-term gas demand, pipeline development will become more selective, focusing on projects that serve multiple strategic objectives and offer flexibility.

System Integration: Greater integration between gas infrastructure planning and electricity system development will emerge as sector coupling becomes more prominent in Europe's energy strategy.

Repurposing Over New Build: The focus will increasingly shift toward repurposing existing infrastructure rather than constructing entirely new pipeline systems, particularly as hydrogen networks develop.

As Europe navigates the complex energy transition, pipeline infrastructure will remain a critical element of energy security. However, the nature and purpose of this infrastructure will evolve substantially, reflecting broader transformations in Europe's energy landscape and geopolitical positioning. The strategic decisions made today regarding pipeline investments will shape the continent's energy system for decades to come.