AIIB approves US$600 million loan to support Azerbaijan pipeline project through Turkey

The Asian Infrastructure Investment Bank (AIIB) has approved a US$600 million loan for the construction of a natural gas pipeline from Azerbaijan through Turkey, the largest loan made by the China-backed multilateral development bank to date. 

The bank is co-financing this project with a number of other multilateral development banks, including the World Bank Group, and other commercial entities.

Once completed, the Trans Anatolian Natural Gas Pipeline Project (TANAP) will transport natural gas from fields in Azerbaijan into Turkey, and then onto markets in Southern Europe. Investment in this energy infrastructure project is crucial for integrating Azerbaijan with new markets, and enhancing energy security for Turkey, while also benefitting the EU.

The loan is provided to Southern Gas Corridor (SGC) company, a state-owned enterprise of Azerbaijan, and is fully guaranteed by the Government of Azerbaijan.

The approved US$600 million loan from the AIIB will be used to finance the TANAP section, a 1,850 km pipeline representing 53% of the total 3,500 km of pipeline to be constructed under the Southern Gas Corridor Program.

The Southern Gas Corridor Program consists of the development of Shah Deniz 2 gas field in Azerbaijan, and construction of the pipeline needed to export the gas. There are three main parts of the pipeline. The South Caucasus Pipeline runs through Azerbaijan and Georgia. It then connects to the TANAP which crosses Turkey. This then connects to the Trans Adriatic Pipeline which crosses Greece and Albania, and then runs into Italy.   

First gas supplies are scheduled for 2018, with supplies to Georgia and Turkey. Gas deliveries into the European Union will follow.  

Shah Deniz Stage 2 is a giant project which will add 16 billion cubic metres per year to the 9 billion produced by the existing Shah Deniz Stage 1.  Shah Deniz is operated by BP, on behalf of its partners in the Shah Deniz Production Sharing Agreement. 

The pipeline has a political dimension, in that it is viewed as a way to reduce the over reliance on Russian gas by countries such as Georgia, but also eventually by EU counties. Energy trader E.ON Global Commodities had already signed a long term gas supply contract, with deliveries starting in 2019.

In spite of the project reducing dependence on Russian gas, Russian oil company Lukoil is one of the partners of BP on the Shah Deniz gas field. Another partner is Petronas, the Malaysian National Oil company.

This latest loan approval brings the total amount lent by the bank in its first year to US$1,730 million, in nine infrastructure projects across seven countries. Collectively, the bank’s portfolio of lending so far will: boost connectivity in Tajikistan and Uzbekistan with investments in new state-of-the-art roads; support urban infrastructure development in Indonesia; upgrade electricity infrastructures across South Asia, bringing power for the first time to 2.5 million rural households in Bangladesh, and significantly raising production capacity in Pakistan and Myanmar; and help Oman diversify its economy through a dual investment in port and railway infrastructure, which are interrelated and will together improve trade links from its hinterland of Gulf countries to the rest of the world.