* TAP plans to bring Azeri Shah Deniz II gas to Italy and Turkey
* Italian gas demand has fallen 15 pct since 2005
* Total has already withdrawn from Shah Deniz II project
* Gazprom ditched Italy as destination for its South Stream pipeline (Adds detail throughout)
By Nailia Bagirova and Margarita Antidze
BAKU, June 3 France's Total and Germany's E.ON plan to withdraw from a pipeline scheme to bring Azerbaijan's gas to Italy, an Azeri official said, as falling Italian demand puts energy projects there into doubt.
The move comes less than a month after Russia's Gazprom said that it would re-route its massive South Stream pipeline, which plans to bring Russian gas to Europe later this decade, to Austria instead of Italy.
Total and E.ON plan to to withdraw from the Trans Adriatic Gas Pipeline (TAP), Vagif Aliyev, SOCAR's investment department head at Azeri SOCAR told reporters at an industry conference.
Total is already selling its stake in Azerbaijan's major gas field, while sources say E.ON is pulling out of the ailing Italian market.
Both are lesser partners in TAP, in which BP, SOCAR and Norwegian Statoil all hold 20 percent stakes.
Europe sees Azeri gas as an alternative to its reliance on Russia, but analysts say commercial issues cloud the picture.
"At the end of the day its all about the commercial viability," said Peter Kiernan, lead energy analyst at the Economist Intelligence Unit (EIU). "Gas in Europe seems pretty sluggish at the moment in terms of demand, so these factors combined would have an impact on the economics of it."
Azerbaijan aims to transport 16 billion cubic metres (bcm) of gas a year from its Shah Deniz II field in the Caspian Sea by the end of the decade to Turkey and on to Italy.
While Turkey is keen to find new supplies after its gas demand doubled in the last decade, Italian use of the fuel has dropped by over 15 percent since peaking around 80 bcm in 2005, casting into doubt projects that aim to bring more gas to an oversupplied market.
"We continuously review the strategic options with regards to our portfolio, including our pipeline business. Such review may or may not result in us deciding from time to time to evaluate a disposal of certain assets in the portfolio," E.ON spokesman Adrian Schaffranietz said.
"E.ON was expected as it is pulling out of Italy in general," a source with knowledge of the matter said.
TAP and Total said they would not comment on the matter, but Total said less than a week ago that it would sell its stake in the Azeri Shah Deniz II gas project to Turkey's state oil company TPAO.
"It would not be logical if Total stayed in TAP after selling its stake in Shah Deniz II project," said a senior official at SOCAR who did not want to be named.
Of its supplies, 10 bcm of Shah Deniz II's gas has been committed to come to the EU while 6 bcm a year have been earmarked for Turkey.
"Shah Deniz II has signed buyer commitments which were announced last year, and the changes in TAP won't change those commitments," said Toby Odone, spokesman at BP, which leads Shah Deniz II's development.
"There are still a host of companies in partnership for TAP (Socar/Statoil/BP/Fluxys/Axpo), but it would be interesting if the 6 bcm for Turkey, 10 bcm for Italy/Europe break down changes," the EIU's Kiernan said.
TAP's other shareholders are currently Fluxys (16 percent), Total (10 percent), E.ON (9 percent) and Axpo (5 percent).
Total's pullout from Shah Deniz II and its retreat from TAP together with E.ON comes a month after Statoil said it had sold a 10 percent stake in Shah Deniz II to the project's other main partners BP and SOCAR.
"This makes sense given the lower margins in this project compared to others because of the low gas prices in Europe," said Trond Omdal, analyst at Arctic Securities about Statoil's move.
European forward gas prices, which are used to make investment decisions for big pipeline and gas field projects, have dropped over 15 percent since the beginning of the year.
They are now close to 3-year lows, and most analysts say they will drop further as new producers flood markets with gas.
Analysts have said that many new gas projects will struggle to make a return on investment necessary to receive the required financing.
The pullout of two TAP partners could also be a blow for Italy's aim of finding new gas over fears that instability in North Africa could disrupt imports and after Gazprom's South Stream project was re-routed to end in Austria instead of Italy.
Italy's role as the destination for TAP has run into local protests against the pipeline and sources said Croatia had been applying pressure to redirect the project there. (Writing by Henning Gloystein, additional reporting by Stephen Jewkes in Milan, Barbara Lewis in Brussels and Matthias Inverardi in Frankfurt, editing by William Hardy.)