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Will the Nabucco pipeline ever go ahead?

15 April 2009

The European Union has signalled its willingness to finance Nabucco; an alternative route to transport gas from Turkey to Austria, following gas supply disruptions in a January row between Russia and Ukraine which cut-off gas to many European consumers for nearly three weeks.

Will the Nabucco pipeline ever go ahead?
Will the Nabucco pipeline ever go ahead?

A pipeline to ease the EU’s dependency in Russian natural resources through energy infrastructure is seen as imperative.

The Nabucco pipeline would carry gas from mainly Azerbaijan as well as Turkmenistan, Kazakhstan and Iran. The pipeline’s maximum capacity will be 31 billion cubic meters per year.

At a summit in Brussels, leaders gave final approval to a €200 million finance package intended to kick-start the controversial project. However, the pipeline is still by no means guaranteed as the project is plagued by a number of finance and gas supply concerns.

The money that the EU has pledged to provide comes from a larger pot of €5 billion earmarked for investment in energy and telecoms infrastructure as part of the wider European stimulus package. This is an important step forward for the Nabucco project and brings an intergovernmental accord closer to reality. However, the agreement was not reached easily, and comes after weeks of tortured wrangling and negotiations between heads of state.

In the wake of the Russia-Ukraine gas crisis in early 2009, eastern European governments reiterated their support for the pipeline at a meeting in Budapest in late January. In response to Eastern Europe's pledged support, German Chancellor Angela Merkel, backed by Italian Prime Minister Silvio Berlusconi, moved against the project. Both leaders attacked the proposals on the grounds that the construction of Nabucco is unlikely to begin for many years, undermining the stated objective of providing jobs and stimulating economic growth. This position belies a wider truth; neither Germany or Italy is keen to invest in energy diversification projects, having secured bilateral energy treaties with Russia. Gazprom, is currently in talks with Italian company ENI, regarding the Russian-backed South Stream pipeline being extended into Italy. The South Stream gas pipeline plans to pump 31 billion cubic meters of gas per year directly from Russia across the Black Sea through Bulgaria and Greece. An Italian extension of the route could make Nabucco redundant.

Chancellor Merkel's insistence on the money being spent on projects with immediate economic impact may actually speed up the construction of the pipeline. If the Nabucco consortium is to receive the funds, they will need to bring the project's start date forward to early 2010, rather than the scheduled start of 2011.
The €200 million will be made available to the Nabucco consortium via the European Investment Bank. The consortium consists of OMV (Austria), MOL (Hungary), Transgaz (Romania), Bulgargaz (Bulgaria), BOTAS (Turkey) and RWE (Germany), each with a 16.67% share. In early 2008 GDF-Suez's attempt to gain a stake in the pipeline was vetoed by Turkey on political grounds.

The EU has at last banded together to provide monetary incentives for investment in the project which will provide an alternative to Russian-controlled imports. However, this union could be too late. The Nabucco project depends on its first phase on new gas coming online from Azerbaijan’s Shah-Deniz II and Azeri-Chirag-Guneshli fields in the Caspian Sea. Azerbaijan’s gas is key. Yet, Rovnag Abdullayev, the head of Azerbaijan's state-owned energy company has signed a memorandum of understanding that pledges gas from Azerbaijan's two new fields for Russian consumption -- and possibly for further export to the EU. While still nonbinding, the agreement could undercut the viability of the Nabucco project entirely. It is likely that Azerbaijan made this decision as a result of Russia’s invasion of neighbouring Georgia which challenged the region’s Western Trajectory. Additionally, Turkey’s decision to tie energy projects across its soil to Ankara’s gaining EU membership left Azerbaijan and the other oil- and gas-producing states around the Caspian without a reliable bridge to Europe. There was little choice left but to turn north, to Russia.

Azerbaijan is the only route through which Turkmen gas can reach Europe without going through Russia. European energy diversification could therefore depend on a potentially hostile Iran, as gas flowing from Iraq and the Gulf alone is not sufficient to justify Nabucco's construction.

The money being given to the Nabucco consortium is essentially a loan, intended to be used to generate further cash. Somewhat optimistically, it is estimated that this could eventually yield some €2 billion. Even if the final figure is only half that, it is symbolically important.

It will be seen as a victory for the eastern European states that view Nabucco as a means of escaping dependency on Russian gas. Poland, Slovakia and Romania in particular see reliance on Gazprom as the central threat (as opposed to transit through politically unstable Ukraine). This distinction was made explicit when a draft document presented at the EU heads of state summit replaced references to Nabucco with a more generic proposal for pipelines through the "Southern Energy Corridor". This implied tacit support and indeed potential funding for the Russian-backed South Stream pipeline, the latent rival to Nabucco; feeding Russian gas to Europe through Bulgaria. This proved unacceptable to the former Soviet satellite states, which insisted on explicit reference to Nabucco.

Their success in excluding South Stream is a set-back for Gazprom, which has until now proved adept at promoting its alternative (and for that matter Nord Stream) though divide and rule tactics. Deputy chief Alexander Medvedev was quick to point to Nabucco's continuing lack of secured upstream reserves. He is in fact correct to highlight this as a major obstacle. Furthermore, the finance agreed, is a drop in the ocean compared to the estimated €10.2 billion required overall. However, the bigger problem may reside closer to Europe. As the critical transit state, Turkey is demanding a pre-emptive right to buy 15% of the Azeri gas that will pass through the Nabucco pipeline en route to Europe. Furthermore, Ankara insists on paying less than European netback prices for that off-take portion, and on taxation rates higher than those proposed by other states through which the pipe would flow. These demands may cause turbulence in the future.

In recent months, Turkey has started to voice these demands more confidently. Buoyed by the damage done to Russia's reputation in Ukraine and Georgia, and by the expectation of supplies from Iran, including LNG terminals. Supplies from Iraq and Egypt are also a possibility. For their realisation though, political stability is necessary.

Prime Minister Recep Tayyip Erdogan envisages Turkey as Eurasia's energy hub. Concurrently, he sees Europe as increasingly amenable to Ankara's objectives. Erdogan's confidence in the future of Nabucco was manifest when he essentially threatened to withdraw from the project if EU leaders were not more forthcoming over Turkey's accession to the club. The result of Turkish resentment is not only a lost energy-transit partner but, more important, lost energy producers. This could mean the collapse of Nabucco, a project the European Commission has labelled an EU strategic priority. Such a prospect would leave European consumers in the same position as Azerbaijan: with little choice but to turn to Russia.

On a brighter note, Turkish Energy Minister Hilmi Guler expressed hope that Turkey will sign Nabucco pipeline deal with Austria, Bulgaria, Hungary, and Romania, by June 2009. The signing of the agreement will clear the processes for specifying the track on the territory of the participating countries, as well as the preparation of the evaluation of the environmental impact.

The Nabucco pipeline will provide an alternative fuel source rather than relying on Russia- if it is ever built. Finance for the pipeline has at last been granted and following the January gas crisis between Russia and Ukraine, which saw a number of European countries suffer from supply disruptions, the attitude towards the pipeline is now positive. However, many questions still remain unanswered. Will Turkey follow Ukraine's example and become more bullish in exacting transit fees. If so, this could prove an even bigger obstacle to Nabucco's eventual realisation than securing upstream reserves. Furthermore, perhaps more importantly, does shifting dependence from Russia and Ukraine to Turkmenistan and Turkey necessarily improve security of supply?”

For more information on the Nabucco pipeline Click here

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