Publication: Eurasia Daily Monitor Volume: 4 Issue: 92

Austria’s OMV company, leader of the Nabucco pipeline project, initially conceived it almost a decade ago to bring Iranian gas via Turkey and the Balkans to central Europe. With subsequent political developments shelving this and other gas projects in Iran, OMV has considered options in the Caspian basin, Egypt, and most recently the Iraqi Kurdistan to deliver gas to Europe through the planned Nabucco pipeline. The European Commission and European Investment Bank also looked at these options when the EU endorsed Nabucco as a high-priority project in June 2006 and March 2007. In April, OMV signed a gas partnership agreement with Iran after all, despite the threat of U.S. sanctions against energy companies including non-U.S. ones that invest in Iran.

These uncertainties played for some time into the hands of Gazprom, whose Blue Stream pipeline extension project to central Europe enjoys the preference of Hungary’s Socialist-led government and MOL national energy company. Prime Minister Ferenc Gyurcsany and MOL president Hernadi make a valid point in saying that Nabucco’s implementation has been delayed for a number of years and is not yet in sight, whereas Gazprom’s offer seems closer at hand. However, their continual disparagement of Nabucco in major European media (International Herald Tribune, March 12, 29; Frankfurter Allgemeine Zeitung, May 7; see EDM, January 16, March 13, 26) seems baffling, when the EU is finally getting its act together on this project, Washington is strongly encouraging it after a few years of benign neglect, and Azerbaijan has plentiful gas supplies available.

The Hungarian government claims that it is not yet committed to either the EU-backed Nabucco or Gazprom’s Blue Stream; that it will take its time to choose; and that it may ultimately combine the two pipeline “versions” into one. Minister of Foreign Affairs Kinga Goencz restated these arguments in parliamentary hearings on May 7, in line with Gyurcsany and Hernadi’s position (MTI, May 7).

Such arguments for public consumption fail on several counts. First, the noncommittal position replaces Hungary’s earlier commitment as a member of the Nabucco consortium. Thus, the purported even-handedness is a step backward. Second, it contradicts the EU’s evolving policy of supply diversification, which assigns high priority to the Nabucco project, the sole remaining avenue for Caspian gas directly to Europe. Third, combining the Nabucco and Blue Stream pipelines into a single project would force the Nabucco consortium to share its pre-designated regional markets with Gazprom. This would drastically reduce Nabucco’s profitability and investor appeal, nipping the project in the bud — unless it becomes (as Hernadi admits) a conduit mainly for Gazprom’s gas.

At present, Hungary depends on Gazprom for 80% of the country’s annual gas consumption of nearly 11 billion cubic meters. While the Nabucco project can substantially reduce that dependence, Blue Stream would increase and perpetuate it through Gazprom’s long-term contracts. This would cement monopolistic arrangements for the long term in Hungary, with prices dictated at consumers’ expense.

The Hungarian government and MOL seem seduced by Gazprom’s offer to build underground gas storage sites in Hungary with a holding capacity of 10 billion cubic meters, mainly for re-export and almost equal to the country’s annual consumption. Such sites would cost an estimated $5 billion to build — a sum roughly equal to the estimated cost of building the pipeline. This could make Hungary the “hub country” for Gazprom in Central Europe, meaning simply that MOL would receive a part of the regional distribution business from Gazprom. In practice this would be contingent on ownership arrangements for the storage sites and the stored gas, which Gazprom would annually pump there.

Austria is the designated hub country in the OMV-led Nabucco project. The Hungarian government and MOL have hinted that they would look more favorably at Nabucco if Hungary received some of the “hub country’s” business. This seems to imply building underground storage capacity not only in Austria, but also in Hungary for regional distribution.

Gazprom is skillfully manipulating the interested parties in this regard. Its “hub” offer is a factor in splitting Hungary from Austria on the Nabucco project and using Hungarian officials to casting doubt on the project’s viability. Meanwhile, the Hungarian government is worried that Gazprom could lay the Blue Stream extension pipeline through Serbia, instead of Hungary, if the latter displeases Gazprom somehow.

The Hungarian government takes the position that it is too early for a commitment to either Nabucco or Gazprom’s Blue Stream. This formulation obscures the government’s actual de-commitment from Nabucco and tilt toward Gazprom’s project. The longer the government postpones a re-commitment to the EU-backed Nabucco, the greater the likelihood that its disparagement of this project could become a self-fulfilling prophecy on this government’s responsibility.