The hardship imposed on Central and Southeastern Europe by the delivery hiatus of Russian gas via Ukraine has unleashed a free flow of speculations about the future of the Nabucco pipeline project. Nabucco could bring Europe a modicum of badly needed independence from Russia’s state-dominated Gazprom, the world’s largest gas company. It could also provide some protection against being held hostage by the endless wrangling between Moscow and Kiev over prices, pilfering, and unpaid bills.
To seal the deal and make final commitments, a summit is scheduled in Budapest on January 26-27, with the participation of consortium members (Austria, Bulgaria, Germany, Hungary, Romania, and Turkey) and potential suppliers (Azerbaijan, Egypt, Iraq, Kazakhstan, and Turkmenistan), the European Union (as represented by the Czech Republic, which is currently filling the role of the Union’s rotating presidency, and the EU energy commissioner); the Council of Europe and the European Bank for Reconstruction and Development. Invitations have also been extended to the United States, Russia, and Georgia — a temporary transit country for Caspian gas shipped to Turkey.
While the most recent bout between Russia and Ukraine appears to raise Nabucco’s prospects, other news and the entire constellation of circumstances leading up to the summit are discouraging.
Nabucco’s stage, cast, and maddening difficulties of orchestration
With an estimated construction cost of $10 billion, the pipeline would transport Caspian and Mideastern gas along its 2,050-mile long route from Erzurum, Turkey, through Bulgaria, Romania, and Hungary, to the Baumgarten Hub in Austria, from where further customers in Central and Western European would be served. If construction begins next year, as currently envisaged, the system could become operational by 2013, and could reach its full throughput capacity of 31 billion cubic meters per annum (bcm/y) by 2020. The Nabucco consortium is managed by Austria’s OMV, Central Europe’s top oil and gas group, and includes the leading energy companies of the rest of the four countries along its route, plus the German utility giant, RWE.
Nabucco enjoys EU support and U.S. approval, yet it has been struggling from the start. It has to compete for Caspian and Mideastern gas resources not only with formidable Gazprom, which is building up its capacity to serve European markets, but also with China, to some extent India, and with other projects designed to reduce Russia’s grip on Europe’s energy sector.
Gazprom’s ability to deliver gas to Europe will increase through the construction of the North Stream (completion date 2012), the South Stream — Nabucco’s direct rival — with 2015 as the completion date; and the expansion of the Blue Stream, supposedly ready by next year. The main Gazprom-competing projects, in addition to Nabucco, are the Turkish-Greek-Italian Gas Connector (completion date 2012), the Trans-Adriatic Pipeline (completion date 2012), and the White Stream or Georgia-Ukraine-EU line (proposed).
Nailing down long-term purchase commitments has proven to be not as easy as one might think, based on the huge projected increase in dependence on imported natural gas across the EU, from the current 54 percent of total demand to 84 percent by 2030. In addition to the recession, uncertain economic outlook, and confusing signals about the likely future evolution of gas prices, another reason may be that customers have adopted a “wait and see” attitude, knowing full well that Gazprom could underbid Nabucco at any time.
It is not beyond the gas superpower to divide the consortium against itself by approaching its members with special offers and joint interest-creating, interlocking investments, turning the privileged energy company into its covert agent that would willfully slow Nabucco’s realization.
Those who know this trade from the inside would tell you that the raw friction between Russia and Ukraine is only the visible surface of contemporary Byzantine pipeline politics, replete with mutative and malleable posturing, deception, and backstabbing.
Upon encountering Gazprom executives or Russian government officials, for example, Nabucco office holders or representatives of consortium member national governments never fail to emphasize that their project does not intend to curb Gazprom’s quasi- monopoly power. Rather, its sole purpose is to help build up the pipeline system Europe will need in the coming decades. The real purpose, of course, is to loosen Gazprom’s double Nelson over EU’s energy economy. And this strategic goal is not even hidden behind diplomatic language in EU declarations and communications. On the other hand, when Gazprom officials come face-to-face with Nabucco personnel they insist that this project represents no danger whatsoever for Gazprom’s business. They even welcome it as a source of healthy competition, a common sense dictum of market-based freedoms, and a necessary means to augment and refine the continent’s energy grid in light of growing worldwide reliance on natural gas. In the meantime, of course, they try subtly to disable the project; or, if that does not succeed, at least acquire control over its pricing and supply policies.
There is indeed a distinct possibility that Gazprom will become a Nabucco supplier through its Blue Stream (trans-Black Sea) line. In that case, the project — as someone close to it suggested — might as well be called “Nabukov.”
A further danger is that the consortium’s Turkish partner (Botas), well aware of Turkey’s indispensable role in the entire undertaking, has made demands far in excess of what the rest of the group finds reasonable. This problem is supposed to be resolved before the Budapest summit.
Add to all this that environmental groups across the transit route will have to be assured or assuaged through some unforeseeable, costly compromise; that investors will have to be convinced about the security of gas shipments from the Caucasus. And that’s not all.
Fresh bad news in the pipes
Gazprom recently reiterated its offer to buy up the entire volume of gas that Azerbaijan can export. (Nepszabadsag, Dec. 27, 2008). If such a deal came to pass, Nabucco will be remembered as a grand opera and nothing more. At present, Azerbaijani gas shipped from Shah Deniz fields in the South Caspian Sea to Erzurum has been presumed to be the main source to fill Nabucco’s line, somewhere around the half-way mark of its planned capacity.
But there is more, or perhaps more accurately, “less” for Nabucco. Construction of the Western segment of the world’s longest gas pipeline from Turkmenistan to South China has begun, proving skeptics about the realization of this project wrong. The Turkmen gas that Nabucco counted on to be delivered through an East-West transcaspian pipeline might also be subject to bidding by China. Early estimates put Turkmenistan’s contribution to Nabucco at 10 bcm/y.
While the EU, Nabucco’s most credible sponsor, struggles with recession, the financial crisis, and severe fiscal problems in many of its member states, China has launched a half-trillion dollar stimulus package in which energy security figures prominently.
Those who argue that steel prices are relatively low and this somehow compensates for all the bad news for Nabucco should take a second look. The price of steel is low because world markets have found so many investment projects unprofitable. Recent falls in raw and intermediary material input prices underscore the general difficulties that beset infrastructure development, including Nabucco.
One factor that could indeed turn the table on unfavorable initial conditions and bad omens is the vast, untapped reservoir on the southern shore of the Caspian Sea – Iran! It possesses an estimated 15 percent of the world’s natural gas wealth, second only to Russia’s estimated 27 percent, according to official U.S. data.
The Persian wildcat is ready to jump in.
Iran offered to participate in Nabucco but Brussels, in perfect alignment with Washington, objects because of the Islamic Republic’s militarily motivated nuclear program. But this is not the end of the story. Highly-placed officials in the Nabucco partnership and noted EU politicians opposing Iran’s economic and financial isolation (e.g., Luxembourgian EU Parliament Representative Robert Goebbels) keep bringing up the critical importance of the country’s hydrocarbon reserves. As statements made by Vladimir Chizkov, Russia’s Ambassador to the EU demonstrate, Moscow also pushes for accepting Iranian gas for the Nabucco. Why?
The Russians and the Chinese took advantage of Western absence in God’s State. According to Tehran Times (Jan. 5), Gazprom invested $4 billion in Iran. Asia Times (June 4, 2005) claims that Chinese investments in the country’s energy sector might amount to $100 billion by 2030.
If Iranian gas were to be accepted by Nabucco, directly or indirectly through Gazprom, the latter would see return on the capital it has sunk into Persian gas field development. Mother Russia would increase her clout across the Middle East while filling her handbag with gold.
As if closely following Nabucco’s ups and downs, Iran offered to fill the gap created by the heavy Turkish demand for gas arriving at its territory for further transit.
“Viva Nabucco!” — Perhaps
Among plans and proposals to reduce European dependence on Gazprom, this project is certainly the most drastic; both in terms of envisaged capacity and closeness to the moment when earth-moving machines may be fired up. Nabucco is often called the flagship project of EU’s broad strategic goal to ensure the Union’s energy security at economically viable costs.
If the EU were to guarantee Nabucco-related investments the same way as national governments stand behind stumbling banks and financial institutions, the project could get out of its coffin with a smile.
Publicly-vented ire over forced factory shutdowns and millions of households being left without heat across Europe (all considered collateral damage of the pugilistic relationship between Gazprom and its Ukrainian counterpart, Neftogas) has created an atmosphere that just might push the EU further in its support of Nabucco than originally intended.
The other key question is whether there will be a last minute relenting on Iran’s exclusion. The country has no embassy in Hungary, thus, a quickly delivered formal invitation to accredited representatives is out of the question. But present or not, Russia may well argue for accepting Iranian gas, probably through Gazprom. Given this strong possibility, it will be interesting to see who will represent the United States a few days after the new administration assumes office.
