Comparative Advantages of Nabucco-West Offset By Lack of Financing

The Nabucco Committee’s meeting (see accompanying article) on May 21 in Bucharest has provided perhaps the final opportunity for comprehensively assessing the Nabucco-West project’s comparative advantages as a route for Azerbaijani gas to Europe. Prior even to the Committee meeting, the Nabucco participant governments had appealed in a joint letter to the European Union to show more visible signs of support for this project (see EDM, April 26). The May 21 Committee meeting entered the end game of the final pipeline selection decision in Baku.

Although still unfunded by international financial institutions, the Nabucco-West pipeline project holds significant comparative advantages from the perspective of the European Commission and of Caspian gas producing states. This project:

•    Offers the shortest route to lucrative European gas markets for Caspian gas. Nabucco participant countries should enable Caspian gas producers to earn higher netback prices, thanks to the shorter distance from the production site to market, compared with rival Trans-Adriatic Pipeline’s (TAP) more remotely located markets in Italy and Switzerland.

•    Targets those markets where supply diversification is a pressing requirement, yet liquefied natural gas (LNG) will not be available to compete against pipeline-delivered gas. Such is the case with the Nabucco participant countries. Meanwhile, Italy’s plans to increase LNG imports are likely to depress the price of pipeline gas in that already saturated market.

•    Interconnects Central and Southeast European countries’ gas networks and integrates their gas markets. In effect, Nabucco-West is designed to function as a backbone-interconnector of the countries along that route. The Nabucco countries, moreover, are linked with their neighbors through bilateral connections: Austria-Slovenia, Hungary-Croatia (recently completed), Hungary-Slovakia (soon to be built), Romania-Ukraine, Bulgaria-Serbia and Bulgaria-Macedonia, thus multiplying the market options for Caspian gas (www.nabucco-pipeline.com, accessed May 29).

•    Capitalizes on gas storage sites available along the Nabucco-West route, with capacities  ranging from 0.5 billion cubic meter (bcm) in Bulgaria and 2.7 bcm in Romania, to 6.1 bcm in Hungary and 7.1 bcm in Austria (www.gie.eu.com/maps/gse_stor, accessed May 29). For its part, rival TAP intermittently proposes to build a “strategic” storage site in the peripherally located Albania.

The TAP project holds a different set of comparative advantages. Its shareholders’ (led by Norway’s Statoil) superior financial resources, compared with those of Nabucco, can prove decisive. Within the Shah Deniz consortium, certain West European shareholders claim that the Nabucco consortium has proposed a far lower purchase price for gas, compared with that proposed by the TAP consortium in the initial bidding at the end of March. Further bidding rounds are possible, and the Shah Deniz producers have until late June to announce their decision.

Shah Deniz producers such as BP prefer TAP mainly because of this pipeline’s limited capacity at 10 bcm per year, correspondingly limiting the investment into the pipeline. BP is narrowly interested in exporting its share from the 10 bcm per year of Shah Deniz Phase Two of production, with a commensurate pipeline solution. BP is aligned with TAP’s lead company, Statoil, in this respect. A pipeline capacity with strategic impact would, however, involve a larger diameter and/or additional parallel strings, necessitating higher investments.

Nabucco-West’s capacity is designed to be scaled up from 10 bcm to as much as 30 bcm per year, in step with anticipated gas production growth from Azerbaijan and Turkmenistan. For its part, Azerbaijan plans to build the Trans-Anatolia Pipeline (TANAP) in Turkey with an ultimate capacity of at least 30 bcm, potentially up to 50 bcm per year. Baku also proposes expanding the capacity of the transit pipeline in Georgia (connecting Azerbaijan with Turkey) at least to equal TANAP’s capacity. These pipeline plans are vital to Azerbaijan’s future as a gas-exporting country from projects beyond Shah Deniz, as well as a transit country for gas from Turkmenistan. In this perspective, Azerbaijan’s interests would seem to be aligned with the Nabucco-West project.

TAP’s proposed capacity of 10 bcm per year and its market destinations are non-strategic. They also seem barely relevant to supply security through diversification in the destination countries. TAP’s main market, Italy, is highly diversified already, with Gazprom’s market share currently at 27 percent (www.nabucco-pipeline.com) and set to diminish thanks to Italy’s LNG imports. Switzerland, another TAP market (to be reached presumably via Italian pipelines), uses little natural gas in its overall energy mix, and it purchases that gas already via Germany from E.On Ruhrgas (a TAP minority shareholder).

TAP would drop off a small portion of the gas in Greece, en route to Italy; and it proposes to create natural gas markets from scratch in Albania, Kosovo, and Montenegro. These three states, meanwhile, do not use natural gas and are not connected to any pipeline grid. It has yet to be explained how could any of those destinations be more lucrative than the Nabucco countries for Caspian gas.

Nabucco’s design capacity, scalable ultimately to 30 bcm per year, could accommodate Azerbaijani gas from projects other than Shah Deniz after 2020, combined with gas from Turkmenistan, which can come on stream earlier, and which the European Commission regards as pivotal to the Southern Corridor to Europe.

Nevertheless, EU political support for Nabucco-West seems to be diminishing, and the European Commission has not been able to mobilize financing for this project in these times of austerity. As Elshad Nassirov, vice-president of Azerbaijan’s State Oil Company, ruefully noted to the Southern Corridor forum just held in Baku, Europeans and Americans could easily have financed the Nabucco project a few years ago, at a cost equivalent to that of a few weeks of military operations in Iraq for example (Trend, May 29).

Lacking EU-backed public financing, the Nabucco consortium now suggests “working with” the EU and the TAP participant countries Italy and Greece toward a “win-win,” “comprehensive” or “inclusive” outcome of this rivalry (Nabucco Committee Declaration, www.nabucco-pipeline.com, accessed May 29). What this would entail is not publicly specified yet. It might perhaps envisage some commitment to sharing gas volumes from the Caspian basin between these two pipeline projects at some point in time.

The Obama administration endorses “both options” in principle, as does the EU with its “project-neutrality” between Nabucco-West and TAP. But Brussels and Washington know that the Shah Deniz producers’ consortium will select only one of the two routes in the coming weeks. The final selection decision might be presented as sequencing the two pipeline projects in a certain order. In that case, the project passed over in June would not officially be eliminated outright, but postponed for some years, awaiting the further growth of gas production in the Caspian basin. In that case, Nabucco-West could only remain on the drawing boards in expectation of gas from Turkmenistan and the EU-backed trans-Caspian pipeline materializing.