SOURCING THE NABUCCO PIPELINE TO PREVAIL AGAINST SOUTH STREAM

Gas reserves at Azerbaijan’s Shah-Deniz field would amply suffice for the Nabucco pipeline’s first commercial phase, from 2013 onward. However, investors would expect second-phase supplies to be reliably identified by the time construction work starts on the pipeline’s first phase. The start of construction is now rescheduled for 2009 (Wirtschaftsblatt, MTI, Rompres, Bloomberg, February 5-7).

Second-phase supplies can come from Central Asia via Azerbaijan, if Brussels and Washington can coordinate a commercial and transport offer to Central Asian producer countries.

Austria’s OMV company had initiated the Nabucco project in the late 1990s for Iranian gas. U.S. sanctions soon forced an indefinite postponement of that plan (along with gas projects in Iran by other European companies). OMV nevertheless signed in April 2007 a memorandum of understanding with Iran to develop sections of the South Pars gas fields. However, it desisted again under the threat of U.S. sanctions.

Hopes to access Central Asian gas for Nabucco via a trans-Caspian pipeline suffered a further setback in December 2007. Absent a specific offer to Turkmenistan and Kazakhstan, those countries signed Russian-proposed pipeline agreements that would increase Russia’s intake of Central Asian gas even further by 2010 and thereafter.

OMV is currently exploring for oil and gas in Iraqi Kurdistan by agreement with the provincial authorities, without consent from Iraq’s government. On January 1 that government retaliated by suspending discussions with OMV on future projects in Iraq (Der Standard, February 5). Washington and Brussels encourage the consideration of the Iraq option for Nabucco’s second phase. On January 31 in Brussels, Iraqi Oil Minister Hussein Shahristani told EU officials that Iraq could supply gas through the Nabucco pipeline “in a none-too-distant future” (NewsIn, February 1). However, Iraq’s legal and security vacuum discourages any significant investment and makes the Iraqi option seem distant indeed.

Egyptian gas is also being suggested as a possible source for Nabucco’s second phase. This would necessitate a pipeline from Egypt to Turkey, either across the Mediterranean seabed or overland across Syria. However, these routes look prohibitive in terms of costs and risks. Public discussions of the Iraqi and Egyptian options by Brussels and Washington do more harm than good to the Nabucco project. Unwittingly they make Nabucco look implausible to investors and consumers alike; make Russian gas deliveries seem more reliable by comparison; and underscore the EU and U.S. failures to tap into Central Asian and Iranian gas for almost two decades.

The lack of access to Central Asian or Iranian gas for Nabucco’s second phase has caused potential investors to hold back from the project thus far. It has also helped Russia to tempt Nabucco countries into bilateral deals that could abort the Nabucco project in favor of its rival, Gazprom’s South Stream, planned to run across the seabed of the Black Sea. Russian President Vladimir Putin and his government are involved full-time in this campaign. The United States and European Union are a long way from that level of political involvement.

The second half of January 2008 and early February seemed to herald Nabucco’s unraveling. OMV signed an agreement to turn Nabucco’s planned terminal and main storage and distribution center near Vienna into a joint venture with Gazprom. The Austrian government and OMV — including the general manager of Nabucco — proposed allocating part of the Nabucco pipeline’s capacity to Gazprom for its gas, which would negate the EU and U.S. strategic rationales for supporting the Nabucco project. Bulgaria signed an agreement with Russia to build the South Stream pipeline through Bulgaria en route to Central Europe. On February 5, Hungarian President Laszlo Solyom expressed hopes for Gazprom’s South Stream line to reach Hungary (MTI, February 5). Such a link has become a possibility following the January 25 Russian-Serbian agreement to build a section of South Stream through Serbia en route to Central Europe (see EDM, January 24, 28, 29, February 5).

Political leaders tempted by South Stream usually claim to be interested in “both” projects, Nabucco and South Stream, at the same time. However, the two projects compete against each other in the Caspian upstream and in the Central European downstream. To preempt the Nabucco project, Russia is offering supply agreements and extensions of Gazprom’s South Stream to countries along Nabucco’s planned route and their immediate neighbors.

Those offers are misleading, however. Gazprom cannot in fact provide the declared gas volumes for all of its existing and planned pipelines to Europe: Nord Stream, Yamal, the Ukrainian system, Blue Stream, and now South Stream with its variously offered extensions. In the short-to-medium term, Russia is likely — and seems itself to expect — to fall short of meeting its rising internal gas requirements and multiple gas export commitments at the same time.

Thus, Russia’s recent cascade of pipeline and supply proposals to a host of countries, including those in Nabucco, entails elements of commercial bluff and political hype to impress governments and publics. Romanian President Traian Basescu derides such offers: “We are witnessing the development, with unprecedented enthusiasm, of certain pipelines that are meant to compete with the European project Nabucco,” Basescu commented for a GMF event in Brussels during his visit to NATO headquarters (press release, January 31).

Moscow’s all-out campaign reflects its concern at the Nabucco project’s revitalization since the September 2006 Budapest conference, the consortium’s ongoing enlargement, and the EU’s move to coordinate Nabucco and related Southern Corridor projects.

As Nabucco approaches the first-phase start, Moscow is organizing a final effort to stop it. Russia hopes to disrupt the consortium by encouraging OMV’s hostile takeover bid against Hungary’s MOL. It tries to play off the consortium’s countries and their neighbors against each other by offering pipeline extensions and storages, gas supply quotas, and illusory eminence as “regional hubs” to multiple countries at the same time. And it seeks to increase Russian control of gas transport even if Gazprom’s own gas deliveries to Europe stagnate or decrease. South Stream could position Russia to control the entry of pipeline-delivered gas to Europe from Central Asia and other producer countries. On top of its role as unwanted middleman, Russia would also become the gatekeeper of Europe’s southern corridor for energy supplies.

Nabucco’s prospects as well as Russia’s counter-strategy hinge on the issue of direct access to Central Asian or Iranian gas for the Nabucco pipeline’s second phase. Prerequisites for such access need to be laid early on during the first phase.