Publication: Eurasia Daily Monitor Volume: 5 Issue: 138

The European Union’s Nabucco pipeline project for transporting Caspian gas to Europe continues to experience false starts and outright setbacks. The impasse seems to justify the Hungarian proposal to hold a summit of the Nabucco consortium countries and the relevant gas producer countries, with the participation of the EU and the United States as main political supporters of this project.

Hungarian Prime Minister Ferenc Gyurcsany has suggested holding a summit for resuscitating Nabucco and offers to host the event in Budapest before the end of this year (MTI, July 7). Gyurcsany launched this initiative during his visit in early July to Azerbaijan and Turkmenistan, which are the main prospective suppliers of gas for the Nabucco project. Top executives of Hungary’s privately owned MOL company went to Baku and Ashgabat at the same time as the prime minister. MOL is a shareholder in the Nabucco consortium, along with Austria’s OMV; the state-owned gas companies of Turkey, Bulgaria, and Romania; and Germany’s privately owned RWE.

OMV, the initiator of Nabucco and informal leader of the consortium, has recently inflicted three severe blows on the project. It has agreed to share ownership of Nabucco’s designated terminal, Baumgarten near Vienna, with Russia’s Gazprom and to build gas storage sites for Gazprom in the area. It has also agreed with Gazprom to extend the latter’s South Stream pipeline project, Nabucco’s rival, into Austria. And it suggests sharing the Nabucco pipeline’s capacity (if and when it is built) with Gazprom for “Russian” gas–most likely Central Asian gas monopolized by Gazprom. OMV’s moves could bring Gazprom closer to its goal of killing the Nabucco project or controlling it (see EDM, June 10).

Azerbaijan is the designated source of gas for the first phase of the Nabucco pipeline. The country’s government supports the project unwaveringly, at the risk of irritating Moscow and despite defections of other countries from Nabucco to Gazprom’s South Stream project. Azerbaijan’s loyalty to Nabucco should not be taken for granted indefinitely by Washington and Brussels, if they fail to prove that Nabucco is viable for both of its phases. Failure to line up Turkmen or Middle Eastern gas volumes for Nabucco’s second phase would continue to discourage Western private-sector investment for Nabucco’s first phase.

With Azerbaijan’s giant Shah-Deniz field ramping up gas production for its second expansion phase, Azerbaijan and its partners in that consortium (led by BP and Norway’s StatoilHydro) require with increasing urgency an outlet for their production. Moscow is now offering that outlet because the West is not. Visiting Azerbaijan in early July, Russian President Dmitry Medvedev and Gazprom CEO Alexei Miller offered to buy up Azerbaijan’s entire surplus of gas at European netback prices, starting in 2009, and re-sell that gas in Europe (www.az.taj, Trend, July 4-7). Azerbaijani gas could in that case reach Europe through Russia. Ironically, Gazprom could pump Azerbaijani gas either through the promised South Stream pipeline (which lacks sufficient Russian gas) or through a reconfigured Nabucco under Russian control (which is Gazprom’s alternative option, if unable to kick-start South Stream).

On July 18 Azerbaijan’s state oil company chairman, Rovnag Abdullayev, announced that a decision is impending about the direction of Azerbaijan’s gas exports from 2009 onward: “We are receiving and assessing proposals from all sides until the end of this year. We shall see. We will vote at a meeting [of the consortium] to launch the second phase of Shah-Deniz after determining the market” (ANS, July 18).

Turkey creates a number of difficulties both for the transport consortium Nabucco and for the gas producing consortium in Azerbaijan. Perhaps the main irritant is the Turkish government’s insistence that it should buy gas from Azerbaijan and re-sell that gas westward, at a profit to Turkey, instead of simply providing transit service for the Azerbaijani gas. Turkey seems to be imitating Gazprom’s methods on this issue. Such a demand contradicts both Nabucco’s concept and the EU policy on energy transit. This issue seems to remain static since February, when the EU’s project coordinator Jozias van Aartsen failed to overcome the deadlock.

On July 15 the government of Turkmenistan announced the start of construction operations on the Caspian Coastal Pipeline project, designed to increase Turkmen gas exports to Russia by 10 to 20 billion cubic meters per year from 2010 onward (Turkmen government press service, Altyn Asyr TV, July 15, 16). On July 16 and 17, President Gurbanguly Berdimukhamedov on a visit to Romania responded evasively to President Traian Basescu’s rather urgent questions about Turkmen gas for the Nabucco project. The Turkmen side apparently did not to mention this issue in its own statements on the visit (Turkmen government press service, Altyn Asyr TV, July 17, 18).

High-ranking Western visitors to Ashgabat in search of gas supplies for Nabucco, most recently Hungary’s Gyurcsany, invariably hear from Berdimukhamedov that Turkmenistan is ready to sell its gas at the Turkmen border to whichever party has a means of transport available. The answer from the West and Azerbaijan is a Trans-Caspian pipeline from Turkmenistan to Baku and onward to Turkey, where it should link up with Nabucco. A political summit, such as that proposed by Hungary, could help demonstrate Western support, as a prerequisite for putting together a consortium for the Trans-Caspian project and financing the Nabucco pipeline.