Confidence in the Nabucco Project Fading

Confidence in the viability of the Nabucco project – at least in its version envisaged from 2004 to 2011 – seems to be fading all around. On January 25, the Nabucco consortium’s management disclosed that it has submitted “amended” proposals to the Shah Deniz gas producers’ consortium in Azerbaijan at the end of December 2011 (Nabucco Gas Pipeline International press release, January 30).

The producers’ consortium will select one of the five competing pipeline projects for transporting 10 billion cubic meters (bcm) of Shah Deniz Phase Two gas to Europe annually, starting in 2017. Shah Deniz producers are now expected to announce a final investment decision in Phase Two of gas extraction by March 2012, along with the final choice of a transportation solution. Nabucco’s “amended” proposals are not known publicly, but the project’s Austrian management has dropped a few hints. It seeks at this late stage to remedy one of Nabucco’s built-in weaknesses, namely, the absence of a major gas-producing company among the consortium’s partners. The consortium would also accept the entry of new shareholders that would contribute gas supplies or financing. And it would negotiate about some combination or even merger with one of the rival pipeline projects (rather than pressing for exclusivity as heretofore) (Platts Commodity News, January 26; Nabucco press release, January 30).

German RWE, a partner in the Nabucco consortium, would prefer a less costly, lower-capacity option for transporting Azerbaijani gas to Europe.  This preference is unrelated to RWE’s negotiations with Russian Gazprom over joint projects in Germany and elsewhere. Those negotiations have already failed. According to RWE CEO, Juergen Grossmann, the company simply needs to limit its financial exposure and reduce capital expenditures. The Azerbaijan-Turkey project for a Trans-Anatolia Gas Pipeline, announced at Christmas 2011, looks attractive to RWE (Wall Street Journal Deutschland, January 18),

Almost certainly, the unpublished amended proposals go further than that. At a minimum, they acknowledge, if only implicitly, that Nabucco has not lined up the gas volumes and investment funding that would justify the pipeline’s design capacity of 31 bcm annually and the construction costs involved (unless and until Turkmen gas becomes available).  In the absence of financial commitments to a 31 bcm pipeline, Nabucco has fallen out of synchronism with the Shah Deniz field development schedule. That schedule necessitates an investment decision and the choice of a bankable transportation solution in early 2012, so as to launch Phase Two of production in this same year and the first commercial gas flow by 2017. Nabucco’s own development trails behind the producers’ planned time-frame. Conversely, Nabucco at 31 bcm looks premature, as long as Turkmen gas has not yet crossed the Caspian Sea to the South Caucasus. If and when that happens, Turkmen gas could make possible or indeed necessary a Nabucco Two (see accompanying article).

Last year, Nabucco’s Austrian management admitted that the pipeline’s costs would exceed the initial 8 billion euro estimate, which dated back to 2005. The management announced in 2011 that it would revise that estimate, but the result is not known. Others are estimating the construction costs in the range of 10 billion to 14 billion euros. These are educated guesses; meanwhile, the absence of publicly available cost updates from the consortium itself tends inevitably to erode confidence. Vague, unsubstantiated references to future gas supplies to Nabucco from northern Iraq cannot encourage investors either, nor reassure potential gas consumers downstream. References to Iraqi gas fail to cite any dedicated volumes or clear time-frames; imply a feeder pipeline, Iraq-Turkey, at substantial additional cost to the Nabucco project; and seem to overlook daunting political uncertainties and risks in Iraq.

Nabucco representatives’ briefings are, however, correct to insist on the project’s unique advantages and promises. These include: the Nabucco Intergovernmental Agreement (legally binding treaty among Turkey, Bulgaria, Romania, Hungary, and Austria), the project support agreements (national commitments to the project), right-of-way, licensing and permitting issues, European Union legal and regulatory framework covering the project, are all signed and wrapped up. The FEED (front end engineering design) process seems fairly advanced after some changes last year (Nabucco project presentation, European Gas Conference, Vienna, January 25).

The European Commission’s political backing was also a unique asset to Nabucco, reflecting the latter’s strategic value to European energy security. That backing came close to facilitating credits to Nabucco from European lending institutions, had the other conditions fallen into place. The Commission’s hard work to promote a trans-Caspian pipeline for Turkmen gas could also have enhanced investor and consumer confidence in the Nabucco project.

Those unique advantages notwithstanding, the gas volumes and the funding are not yet lined up for a project on Nabucco’s ambitious scale. Those hard-won advantages can be conserved for a reconfigured Nabucco (Nabucco Two) as a follow-on project, in the event that Shah Deniz producers select one of Nabucco’s rival pipelines for transporting Azerbaijani gas to Europe. Those rivals are smaller, better attuned to the guaranteed gas volume from Shah Deniz, and thus more bankable, compared with Nabbucco.

Among those five rival pipeline projects, two are backed by the most influential partners in the producers’ consortium. These are: Azerbaijan’s State Oil Company with the project for a Trans-Anatolia Gas Pipeline (TANAP, from the Georgia-Turkey border to the Turkey-Bulgaria border); and British Petroleum with its concept of a South East Europe Pipeline (SEEP, from Turkey to Hungary, with interconnectors farther afield). Thanks to the participation of these influential producers, TANAP and SEEP seem better placed than Nabucco or the other rival pipeline projects to be selected for the transportation of Shah Deniz Gas to Europe.