EC claims Hungary deal over Russia gas pipeline no threat to Nabucco

By bne IntelliNews February 27, 2008

Derek Brower in London -

The European Commission told bne on Wednesday, February 27 that Hungary's decision to participate in Gazprom's proposed South Stream gas pipeline would not threaten the rival Brussels-backed Nabucco project. But it warned consumers in the EU that the Russian project would "not bring competition or energy security" to their energy markets.

Gazprom and its partner, Italy's Eni, plan to build a pipeline under the Black Sea to deliver 31bn cubic metres a year (cm/y) to customers in Central and Eastern Europe. Hungary's decision to sign up to the project follows a contract in January struck between Gazprom and Sofia, establishing Bulgaria as the landing point for the pipeline. A deal with Belgrade will also see the pipeline pass through Serbian territory.

But Hungary's participation, announced on February 26, came as a surprise. In September, Prime Minister Ferenc Gyurscany declared that Budapest would endorse Nabucco, which also aims to deliver 31bn cm/y to the same markets as South Stream, ahead of Gazprom's project. Hungarian energy company Mol is one of the six members of the Nabucco consortium.

"We don't consider it a threat to Nabucco," a spokesman for Energy Commissioner Andris Piebalgs told bne . "Hungary is completely committed to Nabucco." He added that the government in Budapest had reiterated that to the Commission recently.

No gas in the pipe

Nabucco has struggled to find sources of gas to fill its pipeline. Azerbaijan's Shah Deniz gasfield, which came on stream at the end of 2007, could provide 9bn cm/y - enough to fill the first phase of Nabucco, due on stream in 2012. But the Commission says the remaining gas will have to come from a range of other countries, including Turkmenistan, Kazakhstan, Iraq, Iran and Egypt. For the first time, it also claimed to bne that Libya could be a potential supplier.

As a Caspian littoral state, Russia is able to prevent Turkmenistan and Kazakhstan from building sub-sea infrastructure to export gas across the sea to Azerbaijan, where it could enter export pipelines connected to the proposed Nabucco route in Turkey. However, the energy commissioner's spokesman said also revealed foe the first time that gas from Central Asia could be compressed - or liquefied - and shipped across the Caspian Sea to Azerbaijan. Feasibility studies had shown that option to be "very attractive", he claimed.

Iran, said the spokesman, "is desperate" to sign deals to export more gas. And Turkmenistan has invited foreign companies to explore its gasfields. Its president recently claimed that his country wanted to sell its gas to the highest bidder. At present the country exports almost all of its gas to Gazprom, for a fraction of the price at which the Russian company sells it on to Ukraine.

Yet the inclusion of Egypt, Libya and Iraq as potential suppliers to Nabucco will also raise eyebrows. Analysts say Egypt is unlikely to fulfil already existing plans to pipe gas to Jordan and, if additional reserves are found, liquefied natural gas remains the preferred option. Libya already has infrastructure in place to export gas to Europe.

Iraq looks an even less likely prospect in the short term, given the political instability in the country. When bne raised the point about Iraq's instability with the Commission, the spokesman retorted, without a hint of irony: "You could say the same about Russia."

With those problems in the upstream, Nabucco consortium operator OMV says that Russian gas could help fill Nabucco. Responding to that, the Commission's spokesman said, "this is not the objective of the Commission. We want the gas to come from other parts of the world."

Meanwhile, the commission has granted an article 22 derogation to the Nabucco pipeline, said the spokesman, meaning it will be exempt from EU competition rules that guarantee third-party access to its capacity. But there is "no way" South Stream will get the same derogation, he added. "If the Russians want to build a new pipeline, we wish them luck. But it is not a priority for the EU."

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