Nabucco Conference in Budapest, Part One: Moderate Expectations, Moderate Promise

On January 26 and 27 Hungary hosted a high-level policy conference on the Nabucco gas transport project, with participants encompassing the entire producer-transit-consumer chain from the Caspian basin to Europe, and with active involvement by the European Union for the first time. The event did not mark a breakthrough or jump-start; such notions are alien to the EU’s modus operandi. The Budapest conference did, however, for the first time set the Nabucco project in motion toward practical implementation.

Threats and challenges to European energy security, rapidly accumulating in Eurasia and globally in recent months, reshaped the strategic context of the debate on energy supply, turning the case for Nabucco into a compelling one (see EDM, January 20, 22, 23). Russia’s shocking suspension of gas supplies via Ukraine to Europe this month was only the latest in that series of threats and challenges. By the time it occurred, the date and agenda of the Budapest meeting had already been set. Nevertheless, as Zsolt Hernadi, the president and CEO of the Hungarian company MOL noted during the meeting, the Russia-Ukraine gas crisis helped to “transform the debate” within the EU over Nabucco, imparting to the EU for the first time a sense of urgency about this project (Financial Times, January 28).

The meeting’s concluding document welcomes the development of Azerbaijan’s Shah Deniz and other gas fields, the main source for Nabucco’s first phase. It strongly supports two recent initiatives, the Caspian Development Corporation (CDC, created by the European Commission) and the Caspian Energy Company (CEC, launched by Austria’s OMV and Germany’s RWE companies, members of the Nabucco consortium). As the declaration notes, these two initiatives aim to transport natural gas from the eastern Caspian shore westward, linking up with the planned Nabucco pipeline. The Budapest meeting participants strongly encouraged foreign direct investment in the gas producing countries and transit countries (“Declaration of the Nabucco Summit,” January 27).

Hungarian Prime Minister Ferenc Gyurcsany said during the conference that EU decisions on financing should treat Nabucco as a matter of strategic security, not simply as a commercial project. While the EU on the whole is not quick to accept that strategic view, some aspects of it were in evidence at the Budapest meeting. European Energy Commissioner Andris Piebalgs, for example, expressed concern over the Russian-led move to create a cartel of gas exporting countries. Without naming Russia, Piebalgs said that such a cartel, based on dividing European markets, would endanger the energy security of the EU as a whole.

Commissioner Piebalgs, European Investment Bank (EIB) President Philippe Maystadt, and European Bank for Reconstruction and Development (EBRD) President Thomas Mirow outlined the funding prospects at the Budapest meeting for the first time. The European Commission is prepared to disburse some €300 million ($392 million) immediately as pre-financing toward construction of the Nabucco pipeline from Turkey to Austria. The EIB would contribute some €2 billion ($2.6 billion) and the EBRD an as-yet-unspecified amount. Both banks would disburse the funds after vetting the intergovernmental and project support agreements, soon to be signed among the six parties to the Nabucco consortium.

Total project costs are estimated at €8 billion ($10.4 billion) (revised upward from earlier estimates). The EU is expected to provide some guarantees for private and public-sector lending to the project. Clarifications should follow the signing of agreements in the coming months.

The Budapest conference outlined a road map toward completion of the negotiations. Two sets of agreements are to be signed during the first half of 2009 by the six members of the Nabucco pipeline consortium (Germany’s RWE, Austria’s OMV, Hungary’s MOL, Romania’s Transgaz, Bulgaria’s Bulgargaz, and Turkey’s BOTAS). They are currently negotiating the intergovernmental agreement that will establish the legal and regulatory framework for the project. This will be followed by the project support agreement for the commercial framework. The final signing event is tentatively envisaged for June 2009 in Turkey. Budget issues should be clarified at that juncture to launch the construction.

An updated time-table envisages laying the first pipes in 2011, finishing the first-phase construction and pumping the first gas in 2014, and completing the second phase of pipeline construction by 2019 for the full capacity of 31 million cubic meters per year. The first phase is planned to start from Ankara westward. A follow-up step will involve laying pipelines from Turkey’s borders with Georgia and with Iran to Ankara.

Demand for gas in the relevant markets, however, far exceeds Nabucco’s planned capacity. According to the project’s general manager, Reinhard Mitschek, an informal market sounding in the summer of 2008 elicited requests totaling 60 billion cubic meters of gas per year, double the pipeline’s planned capacity. Subsequent to that market sounding, and prompted by strategic considerations on top of business ones, the European Commission redefined the Nabucco project as a part of a far more ambitious Southern Corridor for gas supply to Europe from the Caspian basin and the Middle East.