EU looks for more than hot air out of Nabucco gas pipeline summit

By bne IntelliNews January 26, 2009

Nicholas Watson in Prague -

As officials from the EU, Caucasus and Central Asia sit down in Budapest on Tuesday, January 27 to discuss the Nabucco project, prospects for the ambitious gas pipeline have never looked better. But while yet another gas crisis between Russia and Ukraine has certainly given the pipeline a new impetus, it still faces daunting problems that won't be solved during a conference.

At the very least, the summit's organisers are looking for some kind of joint declaration confirming the various parties' commitment to the Nabucco project. EU officials present will include Czech Prime Minister Mirek Topolanek, representing the EU presidency, as well as EU Energy Commissioner Andris Piebalgs. From potential supplier countries, Azerbaijan's president, Ilham Aliyev, will be the most high profile. "There isn't a PR campaign in the world that could have given the Nabucco as much attention as the Russian-Ukrainian dispute did," Hungarian government spokeswoman Bernadett Budai was quoted by newswires as saying. "This is the best opportunity in years to make progress."

Many analysts agree. "This may be the summit for the signing of the long-awaited intergovernmental agreement," says Zoe Grainge of Global Insight. "There are two agreements awaiting signatures: a host-government agreement and an inter-governmental agreement. These will dictate how respective countries go about acquiring land for the pipeline and will also help to work out some tax and customs-related technicalities."

Nabucco, one of the EU's few proposed counterweights to Russia's domination over gas exports to the EU (Russia has two new pipelines in the works - Nord Stream and South Stream - which resemble a military pincer movement on a map), plans to aggregate gas supplies from some combination of various gas producers in the Caspian region, Middle East and North Africa. The gas would then be piped 3,300 kilometres from the Georgia-Turkey border, or the Iran-Turkey border - possibly both - to the gas hub at Baumgarten in Austria, passing through Turkey, Bulgaria, Romania and Hungary on the way.

The Nabucco consortium - made up of OMV, Mol, Transgaz, Bulgargaz, Botas and RWE - initially plans to take gas from Azerbaijan and pipe it through the 692-km South Caucasus Pipeline, possibly as soon as 2013. But these volumes would account for only about 8bn cubic metres per year (cm/y) of Nabucco's total planned capacity of 31bn cm/y. The consortium hopes further volumes can be sourced from a later stage of the giant BP-led Shah Deniz project in Azerbaijan, which is nearing the end of its first phase. The consortium is also hoping some gas could come from gas-rich Central Asian republics such as Turkmenistan and Kazakhstan through an as-yet-unbuilt pipeline under the Caspian Sea. Other mentioned supplies include Iran, Iraq, Egypt and, somewhat ironically, Russia.

Source of the problems

The sourcing of the gas is the first and biggest obstacle the pipeline's backers, which as well as the EU include the US, have to overcome. Without guarantees of enough gas, the pipeline simply won't get built or at the very best would be an expensive white elephant.

Iran's suitability as a potential supplier is doubtful, given its pariah status in the international community. Iraq's gas industry is sclerotic and Russia's involvement in the project contradicts the whole rationale of it. Even if one ignores that inconsistency, there are doubts about Russia's ability to meet its export commitments in any case, as Russian gas output has entered a stagnant and potentially declining phase. After the latest gas dispute, nobody in Europe has any faith in Russian commitments or contracts.

Even so, there has been some recent positive news on gas supplies for the pipeline. In October, some light was finally shed on Turkmenistan's gas reserves, which until recently were considered a state secret. According to a reserves audit by Gaffney Cline & Associates commissioned by the Turkmen government, the UK-based consultancy concluded the country has "more than sufficient" natural gas to fulfil its export contracts. It claims the South Iolotan and Osman fields in the east of the country could hold between 4 trillion and 14 trillion cm of gas and are most likely to contain 6 trillion cm. Any figure in this range would make it by far the country's largest gasfield. At the top end of the range, it would be one of the five largest gasfields in the world. By comparison, Russia's Shtokman field is thought to contain only around 4 trillion cm. But unlike Shtokman, the Turkmenistani fields are onshore in a relatively benign operating environment. Gaffney Cline says South Iolotan and Osman could be developed through successive production increments of 10bn cm/y, rising to 70bn cm/y - which would roughly double the country's gas output. Gaffney Cline also estimates reserves at the Yashlar field, next to the South Iolotan and Osman fields, amount to 250bn-1.5 trillion cm.

The problem with getting Turkmen gas (as well as Kazakh gas) into Nabucco is that a pipeline under the Caspian Sea to Azerbaijan would have to be built. This Trans-Caspian pipeline won't be an easy sell, though, because it would need Russia's agreement, as it's one of the sea's five littoral states. Russia, unsurprisingly given it doesn't want to dilute its dominance of the European gas market nor offer Central Asian suppliers any alternative routes for their gas other than those that cross Russia, is likely to oppose any such pipe, possibly on environmental grounds - ironically, the same grounds being used by several Scandinavian and Baltic nations to stymie Russia's Nord Stream gas pipeline.

Finagling the funding

Without any guarantees over supplies, the consortium building the pipeline will struggle to raise the huge sums of money needed to build it. The projected cost is now put at €7.9bn, considerably more than the original €5bn. Some reports now put the cost at a round €10bn; analysts reckon that could still be an underestimate.

Attending the Budapest summit will also be representatives of the European Investment Bank (EIB) and the European Bank of Reconstruction and Development (EBRD). Analysts say the EU needs to provide financial guarantees to investors and encourage lending by such multilateral lenders in order to get the project off the drawing board quickly. "The crisis on financial markets exposed the fallacy of leaving strategic energy security projects to the full discretion of market forces," says one analyst, who points out there have already been steps in this direction. The European Commission, for example, is proposing to establish the Caspian Development Corporation (CDC), a private-public sector body that will combine political and commercial resources to procure Caspian gas.

If the supplies and finance can be guaranteed, the next biggest hurdle will be one that appears to be inherent in many EU projects and certainly one of this scale - squabbling between the various parties.

Encompassing so many members, Nabucco is one of the largest and most complex energy projects the EU is trying to get off the ground. Disagreements are never far from the surface as each interested party tries to push its own agenda. The latest malcontent is Turkey, whose prime minister, Recep Tayyip Erdogan, told reporters during a visit to Brussels in January that his government might pull its support for Nabucco if the EU blocks discussions on the energy chapter of the country's stalled membership bid for the bloc. "If we are faced with a situation where the energy chapter is blocked, we would of course review our position [on Nabucco]," Erdogan said, referring to reports that Cyprus is blocking the opening of Turkey's EU energy chapter negotiations over a dispute with Turkey over oil and gas exploration in the Mediterranean Sea.

Turkey, which relies on Russia for about 76% of its total gas imports and was thus badly affected by January's gas dispute, is also now asking to take some of the supply flowing through Nabucco rather than just receiving fees for its transit. Analysts at Business Monitor International say Turkey wants to keep 15% of the pipeline's gas, equal to 4.5bn cm at full capacity; this request has gone down badly with the other parties, who want Turkey to serve merely as a transit country. "Despite Erdogan's subsequent assurances, his initial comments about Turkey potentially exerting this added leverage over Europe's alternative gas supplies will do little to build Europe's confidence in Turkey as a reliable transit state if Nabucco goes forward," says Andrew Neff of Global Insight.

Another weak link has been Hungary itself. In 2007, Hungary's government caused consternation in EU capitals when it announced it was throwing in its lot with Russia and joining the consortium building Moscow's competing South Stream gas pipeline. Though Hungarian PM Ferenc Gyurcsany has since insisted he is committed to seeing both Nabucco and South Stream built, his words at the time, that "Nabucco has been a long dream and an old plan... but we don't need dreams, we need projects," showed where his true sympathies lay.

Hungary's decision to host the summit is surely proof that in some quarters at least - the country's main oil and gas firm Mol is one of its key proponents - Nabucco maintains a level of importance. The EU too is looking to the summit to ensure that the pipeline does not suffer the same fate as the huge project of its namesake. Nabucco is the Italian name for the Babylonian king who was the architect of the mythical Hanging Gardens of Babylon. No trace has ever been found of these gardens.

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EU looks for more than hot air out of Nabucco gas pipeline summit

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