Since the signing in July of the “Nabucco Inter-Governmental Agreement,” supporters of the planned gas pipeline smile a lot and the upbeat rhetoric about reducing European exposure to Russian gas flows in large volumes once again. But the project’s future is as murky as ever. Its goal of limiting the Kremlin’s mighty energy czardom, which stretches from the Balkans to the British Isles, conflicts with the fundamental fact that Russia sits on the world’s largest wealth of blue fuel and that worldwide demand for this hydrocarbon is expected to increase during the next two decades.
If Nabucco begins operations in 2014, as currently foreseen, it would be thoroughly vulnerable to falling under Moscow’s influence. The delivery of Russian gas through the contemplated system has never been excluded and the energy companies of Nabucco partner states are entangled in joint ventures and cross ownership with Gazprom and other Russian state-dominated firms.
Naming the pipeline after Verdi’s opera suggests a craving for independence. The parallel between exiled Israelites longing to free their homeland from Babylonian dominion and the struggle of Italians to shake off Austrian rule in the 19th century is extended to Europe’s wish to reduce Gazprom’s near monopoly in the continent’s gas market. More independence from Moscow while counting on a long-run increase of Russian gas amidst signs of intensifying competition for Eurasian energy reserves with Asia’s new economic superpowers?
The agreement is not to be disparaged.
It is remarkable indeed that Turkey, Bulgaria, Romania, Hungary, and Austria have been able to sing Nabucco’s theme for seven years, given that the project plays a different role in the long-term energy strategy of each. Economic, national, and international political cost/benefit analysis of the pipeline differs by partner country.
As the summer winds down, the five countries plus Germany, the only non-transit member of the consortium (with its own baggage of conflicting interests regarding the project) are getting down to the financial, technical, legal, environmental, and marketing nitty-gritty of implementation.
Nabucco would transport Caspian and Middle Eastern gas along its 2,050-mile-long route from Erzurum, Turkey, through Bulgaria, Romania, and Hungary, to the Baumgarten Hub in Austria. The full discharge capacity of 31 billion cubic meters per annum (bcm/y) is expected to be reached in 2020 at the earliest. Half of the gas would be used by shareholding nations; the rest would be offered for sale.
Price tag: €7.9 billion ($11.2 billion).
The consortium is managed by Austria’s OMV, Central Europe’s leading hydrocarbon group, and includes the top energy companies of the rest of the four countries along its route, plus the German utility giant RWE.
The question that many ask: How is it possible that Nabucco, plagued with problems in securing supplies, capital, customers, and facing Gazprom’s on again, off again disapproval, is gathering momentum?
Politics weigh heavily in the mix that fuels Nabucco.
Although the gas transported at full capacity would account for less than five percent of EU’s forecasted demand by 2030, the project resonates well with a continent-wide agreement to increase the number of pipelines that connect Europe with non-European fields. Expansion and diversification of the transmission network is taken as a precondition to reducing over-dependence on any given supplier and any specific route, above all the one that crosses Ukraine.
Last winter’s fallout in gas supplies was a brutal reminder that normal life in Eastern and Southeastern Europe depends to a large extent on whether the gospodins from Moscow and Kiev can let go of each other’s hair in their intermittent quarrel over whose business conduct is unseemly.
Mutual accusations about which party initiated the cutoff and engaged in other forms of double dealing have been so perfectly balanced and so skillfully presented that the rest of the world could not decide who was right. Neither side had been able to mobilize public opinion in its favor. Outsiders could see only the indecorous eruption of a chronically troubled partnership, while millions shivered in frozen cities for weeks on end.
Can those who had been beggared by the Moscow-Kiev acrimony believe that all is fine from here on, that the 10-year agreement over Russian shipments through Ukrainian territory signed by Gazprom and Naftogaz in January will indeed last ten years?
If Brussels remained passive under these circumstances, the EU would look more like a customs union than the world’s most successful scheme of cross-national integration. The Union had to weigh in and it did.
EU to the rescue
With independence from Russian supplies (particularly via Ukraine) writ large on its circled-gold star banner, and encouraged by Washington, the European Commission has initiated the Southern Corridor (dubbed “Energy Silk Route”). This broad program includes Nabucco along with the Turkey-Greece-Italy Interconnector (ITGI) (372 miles, 11.5-bcm/y capacity) and the Trans-Adriatic Pipeline (TAP), (323 miles, 10 bcm/y initial and 20 bcm/y final capacity). ITGI is already under construction; TAP is in advanced planning stages. Start-up date is 2012 for both.
The EU intends to tap into Central Asian, Caspian, and Middle Eastern reserves. Brussels has established permanent contact with Baghdad concerning the development of northern Iraqi (Kurdish) fields and supports the construction of the 30 bcm/y capacity Trans-Caspian Pipeline (TCP). If built, TCP would increase chances for the realization of the Kiev-initiated, 32 bcm/y capacity White Stream (Georgia-Ukraine-EU Gas Pipeline).
The EU also wants to increase the role of LNG in satisfying Europe’s gas needs. The maritime transportation of liquefied gas would tend to reduce the fragmentation of currently mostly regional, pipeline-dependent markets.
As far as Nabucco is concerned, the European Commission has earmarked €200 million for the project and the European Investment Bank (EIB) came through with an offer to help finance construction up to one-fourth of its cost (roughly €2 billion). Disbursement would take the form of risk-sharing, guarantees, and loan subsidies — mechanisms that have become typical of multilateral development financing over the past decades. Similar support of €1 billion came from the European Bank for Reconstruction and Development (EBRD).
Unfortunately, the language accompanying EU financial pledges awakens the old Catch 22 circuitry that has haunted the project since its 2002 inception: EU financial backing is contingent on advanced commitments by supplier countries and private investors, while suppliers and investors balk at signing contracts without seeing decisive and firm EU support.
Unanswered questions of critical importance dog Nabucco.
Who will pump?
There is no shortage of possibilities. Gas earmarked for Nabucco could enter Turkey from Iraq and Iran directly; or from Caspian and Central Asian fields through Georgia, and from North Africa via Syria.
The Iraqi government floated the possibility of selling 15 bcm/y to Nabucco. Iraq and Iran together may in fact offer more than what the system will ever need but those supplies are not hand.
Iraqi gas production, struggling with a combination of war-inflicted damages to its infrastructure and unsolved technical problems, cannot be counted on to feed Nabucco at the level indicated before the second half of the next decade.
Prospects of using Iranian reserves are even worse. The recent election scandal has set back an already halting process of normalizing Western trade relations with “God’s State.”
Among eligible Caspian suppliers, Azerbaijan has indicated explicit support for Nabucco. It is also the only one among these countries with an operative delivery route to Turkey (i.e., the South Caucasus Pipeline via Georgia). But even Azeri willingness to sign a long-term agreement remains questionable and for much the same reason Turkmenistan, Kazakhstan, and Uzbekistan seem hesitant: Russia and Asian economic powers are trying to lock in as much of Caspian and Central Asian gas as they possibly can.
Syria would connect Nabucco with North African fields through the extension of the Arab Gas Pipeline’s Syria-Turkey connection, which should be ready in two years. It could deliver Egyptian gas but that would represent only one-tenth of Nabucco’s full capacity. Qatar’s recently indicated willingness to ship through a yet-to-be-built pipeline to Turkey certainly improves the prospects of bringing Middle Eastern gas to Europe.
Even under the most favorable scenario, in which Nabucco holds its ground in the bidding war with EU support for Caspian and Central Asian gas, only Iraqi and Iranian participation can secure a viable supply regime for the project. But will this lingering potentiality be sufficient to make private investors want to include Nabucco Gas Pipeline International, Inc. in their portfolios? Doubts are justified when investors doing due diligence read that, as of now, the consortium appears to be assured of only one-fifth of the gas it intends to transport.
Who will pay?
Of the estimated €7.9 billion construction cost, €2 billion will be covered by the energy firms that form Nabucco. After combining this with the quoted EU support of €3.2 billion, the remainder is €2.7 billion. This much will have to be raised competitively in international capital markets and the task is proving to be difficult.
Beside the lack of signed supply agreements, the current environment of deleveraging and cloudy outlook for economic recovery also discourages investors. In the development of natural gas reserves, similar to what was observed in the oil industry since the summer of 2008, the disincentive of momentarily prevalent low exchange value tends to override the lure inherent in the projected growth of underlying demand.
It is a disturbing symptom of our out of joint time that what seems to be a formidable obstacle barring the realization of an infrastructure project deemed to be vital for entire nations is a fraction of “bankers’ bonuses” paid in excess of $30 billion for nine big financial institutions during a single year.
Who will buy?
Half of the gas flowing through Nabucco would be offered for sale to nonconsortium members. Potential buyers keep scratching their heads.
The economic downturn reduced demand for energy in Europe and uncertainty surrounds the pace and extent of the much heralded rebound. And why rush into a 10-year contract now when sluggish business may force pipelines that are either planned or under construction to engage in competitive price-cutting?
And what will the czar of all gas companies say?
Gazprom has its own plans for expanding supply routes.
South Stream would have a whopping 63 bcm/y capacity. But this Black Sea-crossing Russo-Italian project comes with sticker shock. Its construction costs are estimated in the range of €20-€24 billion. The line’s offshore section alone would cost more than its direct rival Nabucco.
South Stream also wants to bypass Ukraine and could also deliver non-Russian gas. And it is also up in the air. Except for a fixed starting point on Russia’s Black Sea coast, its geography is a kaleidoscope of fuzzy alternatives.
The pipe may see daylight on the shores of Bulgaria from where it would bifurcate, one avenue leading to southern Italy via Greece — moving partially offshore to traverse the Ionian Sea; the other going to Austria’s Baumgarten (the same distribution facility Nabucco plans to use) through Serbia and Hungary. An alternative layout calls for connecting northern Italy via Slovenia and enlarging the artery of lanes to serve other former Yugoslav republics.
The persistently rumored possibility of replacing Bulgaria with Romania as the receiving end of South Stream’s offshore segment is a game changer in terms of main corridors and network design.
It is confusing to outside observers that the project does not have a feasibility study and no one seems to know when it will have one. The evaluation of major technical problems and a comprehensive cost-benefit analysis ought to be near completion by now if operations should commence in 2015 as advertised.
Turkey, Bulgaria, and Hungary are openly on board for South Stream. Given that Austria’s largest energy company, OMV (Nabucco’s principal manager) is interwoven with Gazprom through cross ownership and cooperation agreements, one may venture to say that Vienna could also be persuaded. Even if Baumgarten is replaced by a new gasholder facility in Hungary to distribute Nabucco gas — an option that had been publicly aired — it would be built as an OMV-Gazprom-MOL joint venture. There is significant Austrian and Russian capital in MOL, the energy firm that represents Hungary in Nabucco.
Another Moscow-initiated project, the Blue Stream, would link Turkey and Russia under the Black Sea. It may be extended to serve Southeast European and even Middle Eastern markets. How each of its alternative routes and capacities would relate to South Stream is a mystery, but the overall idea may be regarded as a Nabucco contender.
Connecting Russia and Germany, the 758-mile long, Baltic Sea-crossing North Stream is now under construction and is scheduled to be open for business in 2011. At full capacity, it will transmit 55 bcm/y gas to customers across the continent. North Stream is not considered a Nabucco competitor.
The combined capacity of European market-serving pipelines (i.e., North Stream, South Stream, Nabucco, ITGI, TAP, White Stream, and Blue Stream (excluding the intermediary Trans-Caspian line) amounts to 228.5 bcm/y. This number was within the range of pre-recession forecasts for the continent’s increased import needs by 2030. However, planned capacity expansion by 2020 appears to be excessive given the risk of slow recovery and Brussels’s efforts to increase the role of LNG.
Invisible hands finger the deck.
Senior Russian Government officials and Gazprom brass alternate in dispraising Nabucco and calling it a legitimate parallel to South Stream in the vein of “both will be needed, considering Europe’s growing gas hunger.” But the tone is sometimes overtly hostile. The double talk and choreographed self-contradiction is perceived as a sotto voce question: “Are you with us or against us?”
Yes, no one wants to get on the wrong side of the gas hyper power. It could retaliate in implicit, subtle, indirect ways. Gazprom is fully embedded in Europe’s energy business through mutual shareholding and combinations — a trend that shows no sign of letup.
While EU’s annual demand for natural gas is forecasted to increase, “domestic” production, which includes non-EU member Norway, will undergo a drastic decline. Brussels’s overall expectation is that the EU’s current 40 percent gas import dependence will balloon to 75 percent by 2030. If Europe’s economy recuperates within the next two years, EU’s demand for Gazprom deliveries could expand by more than 38 percent, from 159 bcm in 2008 to 220 bcm in 2020.
Most likely, there will be enough Russian-controlled gas and enough direct Russian influence over the East and Southeast European distribution artery to allow Gazprom (or its successor) to charge as much as the market can bear.
Recognizing the puppeteer unites Europe.
The sheer fact that Moscow has been able to plunge two Nabucco partners, Bulgaria and Romania, into competition over the privilege of accommodating the rival South Stream is a vivid testimony of the power Russia wields over Europe’s energy sector.
But even as, one-by-one, capitals across the continent come around and pledge support for South Stream, looking to reap advantages from compliance, they channel their fear and dissatisfaction with their puppet status through Brussels. Using the EU’s supranational identity to hide their own, they struggle to diminish the monopoly power that holds sway over their respective economies.
The behemoth also has problems.
When Gazprom executives visit Central Asian and Caspian capitals, offering better and better prices and conditions under which they would like to take title of enormous amounts of gas to be produced during the next two decades, they have Nabucco in mind. Essentially, they attempt to siphon away its sources. If they succeed, it will either not be built or it will become dependent on “Russian” supplies; e.g., Gazprom-owned shipments that may originate in Azeri, Kazakh, Turkmen or Uzbek fields.
The realization of this goal is not at hand. Former Soviet Republics are proving to be quite capable of looking after their interests. They temporize as much as they can in order to generate competition among Moscow, Brussels, Beijing, New Delhi, and Islamabad — the biggest bidders. In addition to negotiating the highest possible price, they also try to maximize development assistance and other advantages obtainable through bilateral bargaining in exchange for long-term supply agreements.
The heated wrangle over supplies and routes of delivery obscures a deep problem, known as “the paradox of abundance.” It haunts all primary-resource-rich ex-Soviet Republics — Russia, most of all.
The Dutch Disease (the name acquired currency in connection with the discovery of natural gas reserves in Holland during the 1960s) is the well documented damage to economic growth caused by being over-endowed in a raw material of major significance, a condition that leads to “deindustrialization” and to the shrinkage of manufactured exports.
Preparing for the times when the flood of revenues from winning the geographic lottery dries up is a core concern in Moscow and in other capitals of hydrocarbon-plenty former Soviet states.
Oil and gas account for roughly 60 percent of Russia’s export revenues and the black gold is disappearing much too fast. The country is ranked only eighth in proven oil reserves, but it is the second largest producer after Saudi Arabia. The situation is incomparably better in natural gas.
Vast earnings and the hegemonic potency derived from being the world’s leading gas supplier provide Russia with the wherewithal to finance the development of alternative energy sources (e.g., atomic energy) and key industries; as well as with the leverage needed to secure export markets for a variety of products and services (e.g., local energy distribution) while the bonanza lasts.
Gas is Moscow’s trump card in the overall plan to restructure Russia’s economy and to ensure a decent place for the country in the international division of labor once nature’s one-time bounty runs out. Consequently, no one should be surprised that Gazprom plays hardball and that its actions are part of a comprehensive business, diplomatic, intelligence, and military strategy of global scope.
Moscow’s edge in assessing the “when” of “peak gas”
Gazprom and other state-ruled Russian firms are heavily involved in the development of Iranian fields, which represent the world’s second largest gas reserves. Russia may also have direct stakes in the €5.7-billion, EU-sponsored Austro-Hungarian (OMV and MOL) commitment to develop Kurdish fields in northern Iraq.
Being better informed than any other capital at least about 41 percent of the planet’s highly concentrated gas resources (Russian and Iranian reserves combined), Moscow’s guess about when “peak gas” will rear its head may well be the most accurate. This is a genuine advantage in the vexingly complex international energy game, even amidst debilitating uncertainties about economic prospects and the impending restructuration of the global carrier base.
Knowing, but not telling the rest of the world, when gas production will peak (in 2030, for example), could be part of a strategy of inflating resource estimates to encourage pipeline construction beyond a correspondingly reasonable capacity — and as fast as possible, before a persistent gap between expanding demand and the discovery of new sources signals to the world at large that “peak gas” cannot be far away.
Statements coming from Russian officialdom claiming that the country has enough gas to satisfy domestic and foreign demand for a hundred years, if not longer, are in dire need of qualification. According to U.S. Government data, at current levels of production, worldwide proven reserves would last for roughly 60 years. Given that reliance on this resource will increase with stricter environmental regulations — and as the brute empirical fact of “peak oil” escapes the holding cell of forgetfulness — the rate of exploitation will surely accelerate, at least for a while.
According to analysts at the U.S. Department of Energy, worldwide gas consumption is set to grow at an average annual rate of 1.6 percent, expanding from 104 trillion cubic feet (tcf) in 2006 to 153 tcf in 2030. Under these circumstances, market forces would tend to push gas prices upwards.
That would be good for pipelines; that is, until motivation to substitute away from both oil and gas gains strength.
Most independent experts say that we are at or very close to “peak oil” (85 million barrels per day [mb/d] but certainly not exceeding 95 mb/d) and several credible sources place “peak gas” way below the quoted 153 tcf/y — a figure that reflects projected demand.
The scene is set for a drastic intensification of efforts to substitute away from all carbon-based energy, beginning from 2030, at the latest. The recognition that hydrocarbon extraction has reached economically unsustainable rates will be complemented by the growing specter of human self-destruction through coal power’s unsustainable rates of pollutant insertion into the environment.
The world’s leading gas company must surely reckon with the possibility that the current sluggard transition to a postcarbon civilization will accelerate within decades.
That would be bad for pipelines scheduled to be commissioned around 2020 (the year when the bulk of currently proposed capacity buildup would come online) and having an anticipated lifetime of 50 years. Pipeline companies may have to buy high and sell low (starting from 2040, for example) in order to minimize losses, especially if the use of LNG expands.
Under the implied conditions, gas demand would settle on a secular downward trend, but the dominant firm upstream could still charge a relatively high price to pipelines as long as it does not boost their average variable costs above the price the final buyer is willing to pay.
Thus, there exists a long-term strategy under which the most powerful supplier could maintain profitability at the expense of pipelines against the background of receding demand for gas. Encouraging the excessive build up of transmission capacity may be a strategy of buffering the profitability of extraction three decades from now.
The quasi-monopolist gas company’s optimal strategy is to maximize supply and minimize pipeline ownership.
Let the owners of an overbuilt delivery capacity subsidize production once the price begins to move downward in the wake of a post-carbon revolution. For example, Russian ownership is limited in the North Stream. Gazprom is only one of four corporate shareholder entities that together account for 30 percent of the construction costs through equity contributions.
The complementary strategy regarding the Southern Corridor (including Nabucco) may be to encourage its realization through tactical opposition and then establish control over it.
All these speculations about speculations could, of course, fly out the window along with the speculations themselves. We are living in chaotic times. Anything that can happen on the energy front can happen next and the world could stumble upon a path that no one ever imagined, let alone predicted. Nevertheless, gazing at the blue horizon from where things stand today, the entire Eurasian pipeline complex destined to bring gas from East to West could easily come under Russian control and be nicknamed Nabukov. There is, after all, a legitimate desire to be free from the dangers of chronic Dutch Disease, the “curse of plenty.”
