EU-backed Nabucco gas pipeline is one step closer to reality

By bne IntelliNews July 14, 2009

bne -

Another important milestone in the rather torturous path of getting the Nabucco gas pipeline built has been passed as the leaders of the five transit states through which the 3,300-kilometre pipeline will run – Turkey, Bulgaria, Romania, Hungary and Austria – signed an intergovernmental agreement to support the project.

The signing of the deal in Ankara on July 13 capped months of sometimes acrimonious talks that threatened to derail the EU-backed project, which is designed to break Russia's stranglehold on gas exports to Europe from the Caspian Sea region. "The Nabucco agreement sets out the terms and conditions under which gas can be exported from the Caspian Sea and the Middle East to the European Union and Turkey," the European Commission said in a statement. "Potentially Nabucco can supply up to 5-10% of European gas demand, but in countries that are currently 100% reliant on one external supply route, it will provide immediate tangible security of supply benefits."

The most contentious issue had been a long-running demand by Turkey that it could buy for its own needs 15% of the 31bn cubic metres per year (cm/y) of gas that would be transported down the Nabucco pipe. This was fought by the other Nabucco consortium members - which include Austria's OMV, Germany's RWE, Hungary's Mol, Romania's Transgaz, and Bulgaria's Bulgargaz, as well as Turkey's Botas - and a compromise was reached whereby Turkey would instead be allotted a share of the 50% of the annual capacity, or roughly 15bn cm/y, that the consortium members can take (the other 50% of annual capacity is given over to third-party access). In return for agreeing to this, Turkey will receive up to 60% of the tax revenues from Nabucco, which Turkish officials have estimated are worth up to €450m a year.

Analysts note that with the intergovernmental agreement signed, the pipeline's chances of being completed have improved immeasurably. But there's still no guarantee a final investment decision will be made and the project can actually get built.

Next stage

What the agreement does mean is that the Nabucco consortium can now get on with signing project support agreements with each of the five host countries, commissioning detailed engineering work and launching the "open season" for capacity allocation on the pipeline. "The next stage is to conclude capacity contracts. These are commitments to put gas into the pipeline for a fixed period. Either buyers of gas or sellers of gas can make these commitments. These commitments are what underpin the financing of the pipeline. This stage will begin in the second half of 2009," the Commission said.

This "open season" will give a crucial indication of how likely the consortium can overcome what critics argue is the project's greatest weakness: the lack of gas to fill the €7.9bn pipeline.

Also in attendance at the signing ceremony were representatives from a variety of countries that could conceivably supply Nabucco, including Azerbaijan, Turkmenistan, Iraq, Egypt, Kazakhstan and Uzbekistan. Notably absent were any from Iran, which Turkey is keen to get on board but the US is dead against until there is an agreement over Tehran's nuclear programme. Azerbaijan will be first and foremost supplier to the pipeline - without its participation, say analysts, the project won't get very far. Iraq too has made positive, though often contradictory, noises. However, neither has put pen to paper - and until they do, no private financing can be raised (the project has so far only received pledges from multilateral lenders like the European Investment Bank).

Andrew Neff of IHS Global Insight says there are hopeful signs the open season will go well. He cites a market survey showing that potential demand among bidders is well above the 31bn cm/y capacity of the pipeline in the high case. Furthermore, positive comments were made at the signing ceremoney from Azerbaijan's industry and oil minister Natik Aliyev, Egypt's oil minister Sameh Fahmy, Turkmen President Gurbanguly Berdymukhammedov and Iraqi Prime Minister Nuri al-Maliki. "There is strong interest from companies in Azerbaijan and Iraq to make commitments immediately. Further gas can come from Central Asia and the Caspian region," says the Commission. "There is no shortage of potential gas sources available to the pipeline as the Caspian/Middle East region contains the largest gas reserves in the world."

That may be so, but the EU is up against Russia, which calls the thinking behind the pipeline "Russophobic" and is already pressing ahead with its own South Stream gas pipeline, which will run from Russia's Black Sea coast via Bulgaria, Greece and Serbia to Italy and Austria. Given Russia's own huge gas reserves and existing access to Caspian gas, it has few concerns about supplying its pipeline.

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EU-backed Nabucco gas pipeline is one step closer to reality

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