Nabucco Conference in Budapest, Part Two: Gas Supply and Transport—Diversification’s Twin Sides

The high-level conference in Budapest on the Nabucco gas project (see EDM, January 20, 22, 23, 27, 29) underscored a reality that seems to slip from the conceptual grasp of some influential West European circles. This reality is that diversification of supply sources and transport routes are twin aspects of energy security. The planned Southern Corridor, including Nabucco, is the sole large-scale European project that would meet both criteria. As a counterexample, the Russo-German Nord Stream meets only one of those criteria and even this only half-way.

With regard to supplies for the Southern Corridor to Europe, a senior RWE company executive in Germany noted the decisive factor during the Budapest conference: Caspian and Middle Eastern gas reserves, untapped, are almost twice the size of Russia’s proven reserves. Thus, Nabucco and related gas projects are amply justified in terms of resource backup. To open access to those reserves, Europe must build close partnerships with Azerbaijan, Turkmenistan, Kazakhstan, and Iraq; and ultimately it can not afford to exclude Iran from energy partnerships, RWE executive Stefan Juedisch wrote in an article timed to the Budapest event (Financial Times Deutschland, January 27). RWE, a member of the six-party Nabucco consortium, seeks to open a trans-Caspian outlet for Turkmen gas and supports diversification of German supplies away from overdependence on Russia. It regards the Russia-Ukraine gas crisis as an “opportunity to open a new chapter in the history of supplying Germany and Europe with energy” in both aspects of energy security—diversifying sources and routes.

Prime Minister Mirek Topolanek of the Czech Republic, the current holder of the EU presidency, delivered key remarks to the Budapest conference. Noting that the Nabucco project was a test of the EU’s capacity for integration, Topolanek warned that the EU would risk its freedom unless it drew its energy supplies from a variety of sources. Independence would become illusory without diversification of sources, Topolanek noted in his address to the conference and to the media on the sidelines. Nabucco would only succeed if treated as an absolute priority by the EU and as part of a common energy policy. Projects such as Gazprom’s South Stream or Nord Stream threatened Nabucco while reinforcing the EU’s dependency on Russia, Topolanek observed (Lidove Noviny, Pravo, January 27, 28).

At the moment, Azerbaijan, with its Shah-Deniz oil field, is the only guaranteed source of supply for the planned Nabucco pipeline’s first stage (and, concurrently, for the existing Turkey-Greece Interconnector to be extended to Italy). President Ilham Aliyev projected the image of a successful, energy-producing, Western-oriented state at the Budapest conference. Noting that Azerbaijan had become a significant contributor to the EU’s energy security, Aliyev confirmed Azerbaijan’s interest in connecting the Caspian basin with Europe through Nabucco and other projects, through which Azerbaijan would export its own resources as well as transport eastern Caspian gas to Europe. Azerbaijan would export its gas on competitive terms, Aliyev stated, alluding to other standing offers and urging the EU to intensify its involvement if the Nabucco project were to be implemented (APA, January 26, 27).

Aliyev was alluding to Gazprom’s offer to buy all of Azerbaijan’s available export volumes of gas at European netback prices, a move that would stop the Nabucco project. Norway’s StatoilHydro company, in charge of marketing gas from Azerbaijan’s Shah Deniz, was absent from the Budapest conference. StatoilHydro is said to have entered into tentative discussions with Gazprom about a possible export outlet to Russia for Shah Deniz gas, in case Nabucco fails to provide a westbound outlet in time for the second phase of Shah Deniz development. Under such circumstances, and after its long neglect of the Nabucco project, the EU must not take Azerbaijan for granted indefinitely.

Turkmenistan made a rare, high-level appearance at the Budapest conference. The head of the Turkmen State Agency for Management and Use of Hydrocarbon Resources (“attached to the President of Turkmenistan”), Yagshygeldy Kakayev, reaffirmed Ashgabat’s policy on gas exports. Turkmenistan sells its gas at its borders, to buyers who come up with commercial offers and transport solutions. It favors diversification of export routes in multiple directions, and it seeks commercially attractive purchase prices (that is, not the Russian monopsony’s below-market purchase prices through 2008). Citing the recent Gaffney Cline audit of Turkmenistan’s South Yolotan-Osman gas field, estimated at 6 trillion cubic meters of likely reserves (in a range from 4 trillion at the low estimate to 14 trillion at the high end, not including other unexplored Turkmen fields), Kakayev stated that Turkmenistan could supply several pipeline projects including Nabucco at the same time (MTI, January 27, 28). The implicit challenge to Brussels and Washington is to support rapid development of Turkmen resources by Western companies, a task that Washington dropped in 2001 and Brussels never undertook.

Egyptian Petroleum Minister Sameh Fahmy and Iraqi Oil Ministry’s State Secretary Motasam Keek told the Budapest conference that their countries could supply gas for the Nabucco pipeline—Egypt, as soon as the pipeline via Syria reached Turkey; and Iraq, within five years, pending field development and a transport solution from western Iraq to Turkey. The Egyptian and Iraqi volumes remain unspecified but are likely to be small and the transport solutions therefore hardly attractive in terms of cost. Turkmenistan and Iran, however, are indispensable to Nabucco, the Southern Corridor, and Western energy security in general.