Hungary's appetite for gas to be filled by Gazprom, not Nabucco

By bne IntelliNews March 16, 2007

Derek Brower in London -

In a huge blow to the EU's hopes of diversifying its gas supplies from Russia, the long-delayed Nabucco natural gas pipeline looks even less likely to proceed after Hungary's prime minister, Ferenc Gyurcsany, admitted this week that his country would back Gazprom's rival export project. All this in a week when Russian President Vladimir Putin was in Greece signing a new oil pipeline deal.

"Nabucco has been a long dream and an old plan," Gyurcsany told reporters. "But we don't need dreams. We need projects."

The European Commission considers the €5bn Nabucco project to be crucial to its efforts to diversify gas imports away from Gazprom. A consortium led by Austria's OMV plans to bring 30bn cubic metres (cm) a year of gas from Central Asia, the Middle East and North Africa, through Nabucco into its Central European gas hub at Baumgarten. Andris Piebalgs, the EU's energy commissioner, has described it as a "strategic priority" and the Commission instructed its development banks to fund up to 70% of the project.

OMV's gas hub for Nabucco

Hungary's energy company Mol is one of five companies in the Nabucco consortium. But without Budapest's backing, the project now seems destined to fail. That is because Hungary now favours a rival pipeline project that would bring Gazprom's gas through the Blue Stream pipeline, which links Russia and Turkey under the Black Sea, through the Balkans into Hungary. This line would target the same markets as Nabucco. Analysts believe that only one of the two will go ahead.

The likeliest outcome is that the Nabucco project will be subsumed by Gazprom's. In Brussels' opinion, that would destroy the strategic rationale of Nabucco. The grounds for such cooperation appear already to have been laid. In October, OMV's chief executive, Wolfgang Ruttenstorfer, told bne that there could be "synergies" between the two projects. In the meantime, the partners have already sought to include a sixth partner, likely France's GdF or Germany's RWE, in the project.

Not enough to go around

Nabucco's biggest problem has been finding the gas to fill it. Although exports of some 9bn cm a year have started from the Shah Deniz field, in the Caspian Sea, the stated ambition to take Iranian and Egyptian gas has always been unrealistic – not to say naive. Iran's export plans remain hindered by political problems and Egypt now sees liquefied natural gas (LNG) as its preferred means of export – if enough gas is left after it meets its own growing domestic demand.

Hungary's Gyurcsany appears to have realised that. "The single problem with Nabucco is that we cannot see when we will have gas from it," he said this week. "If someone could say to me definitively, you would have gas by a certain time, fine, but you can only heat the apartments with gas and not with dreams."

Gazprom's project has no such worries. "Blue Stream is backed by a very strong will and a very strong organisational power – and there is capacity behind it," says Gyurcsany,

Furthermore, building Gazprom's line will secure Hungary's own security of supply – even if it undermines the EU's wider strategic ambitions of diversifying away from Russia. Gazprom has talked openly about making Hungary one of its "hub states" for gas sales in Europe. Germany, the destination of Gazprom's flagship Nord Stream pipeline, has already emerged as another.

Hungary's decision to back the Gazprom project, which the Russian company is already branding "South Stream" – the southern counterpart to Nord Stream – will infuriate Brussels. But it will reward Gazprom's policy of appealing to the national interests of the EU's member states.

It also caps a good week for Russia's oil and gas export policy. On a whistle-stop tour of energy-hungry European countries, President Putin confirmed supply deals with Italy and Greece. The first affirms an accord signed by Gazprom and Eni last year, and will see Gazprom increase exports to Italy. It could also involve some downstream presence in the country for the Russian company.

The second deal, signed on Thursday, will see development of a 260-kilometre crude pipeline from Burgas, on Bulgaria's Black Sea coast, to Alexandroupolis, on the Aegean Sea, which will help alleviate congestion on the Bosphorus. The $1.2bn line will have capacity for some 20m tonnes a year of crude. Construction will begin next year.

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