Publication: Eurasia Daily Monitor Volume: 5 Issue: 187

With Brussels lacking a policy and Washington in the grip of two mutually contradictory policies on European gas supplies, Hungary has taken the lead in efforts to resuscitate the Nabucco project for Caspian gas to Europe. The Hungarian government, parliamentary opposition, and privately owned MOL energy company are all involved in this effort.

Heavily reliant on natural gas for its energy consumption, dependent on Russia for 80 percent of that gas, and (unlike the other Nabucco consortium members) poorly connected to international arteries for energy transport, Hungary is vitally interested in diversifying its supplies away from dependence on Russia. Even the oft-wavering Socialist government now seems to share the consensus on this issue.

Hungary has proposed hosting a Nabucco summit in Budapest for state and industry leaders from the six Nabucco consortium countries, possible supplier and transit countries, and relevant international institutions, with the participation of the EU and the United States as political supporters of this project. Hungarian Prime Minister Ferenc Gyurcsany first aired the summit initiative during his July visit to Azerbaijan and Turkmenistan, which are prospective suppliers of gas for the Nabucco project. MOL executives took part in that visit.

Hungary has appointed one of its most senior diplomats, Mihaly Bayer, as full-time special envoy for promoting the Nabucco project with countries along the producer-transit-consumer chain and international organizations. Bayer is filling a role that seems to have been all but vacated by the EU’s Nabucco project coordinator, although Nabucco is still officially a top priority of the EU.

MOL is a shareholder in the Nabucco consortium, along with Austria’s OMV (initiator of the project); the state-owned gas companies of Turkey, Bulgaria, and Romania; and the Rheinisch-Westfaelische Elektrizitaetswerk (RWE, Germany’s largest power-generating company), each with one sixth of the consortium’s shares. MOL’s president and CEO, Zsolt Hernadi, tackled the thorny issue of Iranian gas supplies for Nabucco forthrightly during his September 22 press conference in Vienna.

“Nabucco will become reality if we can get Iranian gas. The companies involved in the project must bear in mind possible profits and losses; and when they do not have any guaranteed gas sources, then [the project] gets difficult. An empty pipeline is too expensive.” Nabucco could be financed and built quickly if the gas supply source were clearly identified, Hernadi noted. But “perhaps we need another shock, like that of January 2006 [Russia-Ukraine gas crisis], to tackle the risks involved” (Die Presse, Vilaggazdasag, Reuters, September 23). While carefully noting that Iran could be one of several sources, the statement is probably the first time that MOL has publicly linked Nabucco’s prospects with Iranian gas.

Given the decade-long failure of the EU and the United States to access Central Asian gas (which Russia is winning by default) and considering Iran’s potential as a balancer to Gazprom in the European and Eurasian gas trade, Hernadi’s cautious argument breaks new ground in a European debate that has long been inhibited by U.S. dilemmas. U.S. policy for European energy security through diversification (in which NATO’s and the EU’s coherence are ultimately at stake) conflicts with the U.S. policy to penalize Iran (currently for its nuclear development program, earlier for other transgressions).

U.S. sanctions are designed to reduce Iran’s oil output and prevent altogether the development of Iran’s gas reserves, which are second-largest in the world. That U.S. policy dates back to an era (mid-1990s) of record-low oil and gas prices, depressed demand for them, generally assured physical access, Western ownership of a large share of global reserves, and no anticipation of Russian pressure on Europe’s economic and political security through the instrument of energy policy. All those circumstances, however, have changed beyond recognition in the intervening decade.

Nabucco was originally designed a decade ago, specifically for Iranian gas. At present, U.S. sanctions are forcing major European companies (Shell, Total, StatoilHydro, and OMV, among others) to shelve their agreements of intent with Iran for gas development and turn to Gazprom. Most likely, the change of administrations in Washington will recast the terms of debate on energy security, including the issue of Iranian oil and gas development in a wider context.

With European demand rising steadily, Hernadi anticipated in his press conference that both Nabucco and its rival, Gazprom’s South Stream, would be built. A growing number of observers share that view. Whether the two projects can coexist downstream depends, however, on the sources upstream. Nabucco clearly could not be financed without the Central Asian gas, which Washington and Brussels had hoped to access in lieu of Iranian gas. Thus, attempts to resuscitate Nabucco are likely to refocus attention on that unused potential.

Nabucco’s first construction phase is planned in correlation with the second production phase at Azerbaijan’s Shah-Deniz giant offshore gas field. The planned timeline has already been delayed to 2013 for each. It now faces further delays due to financing problems for Nabucco (not very bankable thus far, plus the global credit crunch) and difficulties posed by Turkey to the transit of Azerbaijani gas.

According to Hungary’s special envoy Bayer, the consortium is now striving to have the necessary intergovernmental agreements signed by year’s end, to be followed in early 2009 by an Open Season, that is, bids from gas suppliers to reserve portions of the pipeline’s capacity for their future use (MTI, September 23, 24). Gazprom is expected to bid in order to use part of Nabucco’s capacity for Russian gas. That would defeat Nabucco’s initial raison d’etre and would mark a double defeat for Western policy if the gas marketed as Russian were actually Central Asian.