Hungary to Host Nabucco Summit in a Reshaped Strategic Context

Hungary is hosting a high-level meeting of active and potential participants in the Nabucco gas transport project on January 26 and 27. Top officials of supplier, transit, and consumer countries; international financial institutions; the European Union; and the United States are expected to participate (MTI, January 21).

The goal is to demonstrate support for the project from all players in terms of political backing, capital investment, and supply commitments for Caspian gas to Europe. The planned pipeline, Turkey-Bulgaria-Romania-<wbr></wbr>Hungary-Austria, is to be supplied mainly from Azerbaijan (first phase) and Turkmenistan (follow-up phase) via Georgia and would connect at the western end with Germany.

The Hungarian government and the privately-owned MOL energy company have taken the lead in promoting the Nabucco project since mid-2008, when EU support for the project had not noticeably advanced from the verbal to the practical and the EU-appointed coordinator had even disappeared from sight. The Hungarians stepped in to fill the vacuum of European leadership at that time.

Meanwhile, Russia’s invasion of Georgia and the crisis on financial markets galvanized the EU into some real action on Nabucco. The invasion demonstrated the indispensability of the South Caucasus corridor for energy transit to Europe and the urgency of developing it, instead of allowing Russia to bottle it up. Contrary to Moscow’s assumptions, investor confidence in that transit corridor actually rebounded after the invasion. Shortly thereafter, the crisis on financial markets exposed the fallacy of leaving strategic energy security projects at the full discretion of “market forces.” It ushered in a change of mentality, underscoring the need for public-private sector partnerships to implement such projects.

At the same time, Russian gas output has entered a stagnant and potentially declining phase, casting strong doubt on Russia’s capacity to meet external supply commitments while meeting its own internal demand in the years ahead. Equally worrisome, Moscow took the lead in assembling a gas-exporting states’ cartel, potentially to impose terms on Western consumer countries. This threat highlighted the urgency of opening direct Western access to gas reserves in Central Asia, so long as those reserves remain outside the scope of the proposed cartel.

Russia’s move to suspend gas supplies to Europe via Ukraine in January 2009 spotlighted (again contrary to Moscow’s assumptions) the imperative of establishing direct links through Nabucco between European consumer countries and Caspian supplier countries. Both groups of countries now understand better than ever that they share vital interests in avoiding dependence on Russian supplies and/or Russian transit.

Thus, all those negative developments came with a positive reverse side. Meanwhile, a potential breakthrough occurred in Turkmenistan for Nabucco and the Southern Corridor. The recent Gaffney Cline audit of Turkmen gas deposits reported immense reserves of 4 trillion cubic meters of gas at the low estimate, 6 trillion at the best estimate, and 14 trillion cubic meters at the high estimate at the South Yoloten-Osman gas fields alone. Other Turkmen onshore and offshore fields have yet to be audited.

Such an accumulation of challenges and opportunities within just six months (August 2008-January 2009) has boosted the case for urgently making the Nabucco project operational. The new strategic context that has taken shape is both unprecedented and entrenched for the foreseeable future. It should focus all players on the task of bringing the Nabucco project to a jump-start point. For a timely start-up the European Union must provide financial guarantees to investors and encourage lending by export credit agencies and international financial institutions, primarily the European Bank for Reconstruction and Development and the European Investment Bank.

Some of the interested parties have announced significant steps in this regard in the lead-up to the Budapest meeting. The European Commission, for example, is proposing to establish the Caspian Development Corporation (CDC), a private-public sector initiative to combine political, legal, and commercial resources for procuring Caspian gas and promoting investment in transport links westward. The CDC’s goals focus on Turkmen gas and its delivery to Europe through a dedicated infrastructure in the Southern Corridor (European Commission Communication, Second Strategic Energy Review, November 13, 14; Platts International Gas Report, December 15, 2008).

The commission has integrated the planned Nabucco pipeline into a broader, Southern Corridor concept that includes several pipelines, with Nabucco (design capacity 31 billion cubic meters [bcm] per year) as its centerpiece. The Corridor’s other components are: the partially completed Turkey-Greece-Italy Interconnector (8 bcm annually), the planned Trans-Caspian pipeline, and the proposed White Stream (Azerbaijan-Georgia-Black Sea-Romania and further into EU territory). These would boost the Southern Corridor’s overall capacity and thus the commercial market in Europe for Caspian gas.

Prospects of a larger market share in Europe would make the entire project more profitable to Turkmenistan and other Caspian/Central Asian suppliers. It would provide them with a convincing alternative to Gazprom’s monopoly and stimulate them to choose the European option despite Russian pressures. It would also encourage Western investment in upstream development in Turkmenistan and neighboring countries.

Opening access to Central Asian gas would obviate any perceived need for Russian gas to fill Nabucco to capacity. The idea of soliciting Gazprom to “rescue” the Nabucco project with Russian gas, which has until now persisted in some quarters, contradicts the whole rationale of the Nabucco project. Ironically again, those presumed Russian gas inputs into Nabucco would have originated in or been swapped with Central Asia. Any such arrangement would use European hands and funds to reinforce Gazprom’s Central Asian monopoly. Meanwhile Gazprom’s supply shortfalls and Russia’s sinking reliability, following its suspension of supplies to Europe, should rule out the idea of opening a part of Nabucco’s capacity to Gazprom.