The large-scale international conference in the Hungarian capital marked some progress but failed to assure the world that the Nabucco gas pipeline will indeed be built.
The two-day (January 27-28) event brought together high-level government officials from the Nabucco consortium (Austria, Bulgaria, Germany, Hungary, Romania, and Turkey), potential suppliers (Azerbaijan, Egypt, Iraq, Kazakhstan, and Turkmenistan), transit country Georgia, the EU, and other interested parties, including Russia (delegation led by Gazprom Chairman Viktor Zubkov) and the United States (represented by Deputy Assistant Secretary of State for European and Eurasian Affairs Matthew J. Bryza).
Many Nabucco supporters hoped that recent signals from the EU and the new U.S. administration that pointed to a softening position toward Tehran would become explicit through a last minute appearance of an Iranian delegation. Nothing of the sort has transpired, yet Iran’s participation in Nabucco is widely considered a sine qua non for the project. The Islamic Republic disposes over the world’s second largest reservoir of natural gas after Russia and the future destination of its vast export potential is still up in the air.
Now in its seventh year of agonizing birth, Nabucco was conceived with the idea of reducing European dependence on Russian gas. Its 2,050-mile long route would run from Erzurum (Turkey) to Baumgarten (Austria) through Bulgaria, Romania, and Hungary. Under the tentative schedule, the project should become operational by 2013 and would reach its full throughput capacity of 31 billion cubic meters per annum (bcm/y) by 2020. At current prices, construction costs would be approximately 8 billion euros (well over $10 billion).
The project’s most obvious problem is the “Catch 22” relationship between supply and funding. Suppliers want to see capital committed before they sign long-term contracts (10 years is the standard length in this business) and investors want to be assured that the pipeline will be filled to capacity before they sink their own or borrowed funds into it.
Hungarian Prime Minister Ferenc Gyurcsany, the organizer of the conference, made a huge effort to extricate Nabucco from this vicious circle.
To distinguish Nabucco’s claim on much-coveted Mideastern and Caspian gas, Gyurcsany, with full EU backing, offered to broaden the seller-buyer relationship to include comprehensive development assistance in education and scientific research. Suppliers present at the conference welcomed the idea.
With regard to capital, the EU delegation, which included the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), a 200-300 million euro commitment to kick off construction appeared to have a strong chance of approval by the European Commission and the European Parliament. EIB and EBRD expressed their support, although with qualifications that do not seem to improve much on the project’s sluggish condition.
Analysts doubt that these actions will be sufficient to attract the private capital needed to finance the bulk of construction. Preliminary commitments are below expectations and few seem to believe that the two-billion euro backing that Gyurcsany requests from Brussels — which would, no doubt, cause a sea change in investment sentiment — will come on line.
The conference promised more than it delivered
Shortly before the illustrious palaver, the EU was clarifying tax, subsidy, and competitiveness issues surrounding Nabucco. It negotiated with partners and parties to the project and sponsored intergovernmental negotiations.
Even more spectacularly, the latest scene from the troubled marriage between Russian and Ukrainian gas concerns, which showed to what extent millions of households and entire industries across Europe can be victimized by the cat and dog life of Moscow and Kiev, underscored Nabucco’s security-enhancing aspect in addition to its economic significance.
But there are limits to the EU’s enthusiasm for Nabucco. The stoppage of Russian gas deliveries via Ukraine did not affect Western Europe, making the whole issue less of a general security problem than the hardship-enduring population in EU-East may think. Moreover, Brussels believes that even with the realization of Nabucco, the Union’s reliance on Russian gas is on the ascent. It is projected to increase from the current 42 percent of total EU imports to over 60 percent by 2030.
After big words extolling the importance of energy security, the blue fuel, in general; and a series of photo ops, the conference produced just enough positive results to keep the suspense alive about the future of the project and allow fellow conferees to part with “until we meet again in Bulgaria in April.”
Big Brother Gazprom is watching!
The Nabucco consortium is managed by Austria’s oil/gas conglomerate, OMV. It includes the leading gas firms of Turkey (Botas), Bulgaria (Bulgargaz), Romania (Tranzgas), Hungary (MOL), and the powerful German utility company, RWE.
For a while it looked like that Azerbaijan’s state-owned oil and gas corporation, Socar, and Gaz de France would also participate. But Baku backed off under Russian pressure (Magyar Hirlap, Jan. 26) and France’s participation, which could have been a critical boost for the project, was prevented by Turkey, where the public is outraged at the French Parliament’s decision regarding the 1915 genocide of Armenians.
Some allege that quasi-monopolist Gazprom, haunted by the specter of potential competition, may be trying to quash Nabucco by inveigling consortium partners and potential customers into special deals and relationships. When many buyers face a dominant seller, they are prone to engage in intensive bidding against one another, particularly when rewards in trade are extended into investment, multiplying inducements through an endless variety of joint ventures, cross-ownership, and personal favors.
Despite deeply insightful public relations policies that make its profit-maximizing strategies as elusive as quick silver, Gazprom bears the burden of probability of ruthless market conduct associated with bigness. It apparently charges all that the traffic can bear and differentiates among buyers according to their ability to pay – both phenomena are hallmarks of excessive market power.
Gazprom’s negative, critical stance toward Nabucco, which has so far been hidden by diplomatic language, came to the surface in Budapest (Magyar Hirlap, Jan. 26). This may well be part of a “good cop-bad cop routine.” Rough treatment by the bad cop makes the suspect listen to the good cop – another Gazprom dignitary – who recruits support for Nabucco’s rival, the South Stream project.
Originating from Russia’s Black Sea coast, the South Stream is planned to transit Greece, Bulgaria, Serbia, and Hungary, i.e., two Nabucco shareholders. The possibility of Austrian and Slovenian participation has also been raised. Since all the listed countries could be supplied, South Stream competes head on with Nabucco.
It has an expected capacity of 30 bcm/y and may be completed as early as 2015. A meeting to finalize commitments for this project is scheduled in early May in the Czech Republic (which holds the rotating EU presidency), shortly after the next Nabucco conference in Bulgaria.
Russians can play chess but do they have that much gas?
Gazprom has made many and is in the process of making new commitments to serve export markets, not only in Europe but also in Asia. Natural gas plays a central role in the development of Russia’s long-term economic relations with China and India. At the same time, Russian gas output is expected to peak during the next decade.
According to the St. Petersburg State Mining Institute (Putin’s alma mater), the current rapid rate of depletion of Russia’s gas reserves may eventually force the country to choose between honoring export commitments and experiencing domestic energy shortfalls (based on Der Spiegel, Jan. 27)
Gazprom must, therefore, be counting on its European customers to support, or at least not to oppose, the extension of its control over Mideastern and Caspian gas resources to the detriment of projects aimed at reducing its market power and influence. Striving to be at once a monopsony (the only buyer) and a monopoly (the only seller) in as many places as possible is indeed a brilliant strategy but also an antagonism-breeding one. It could lead to a messy coupling of defaults in gas infrastructure investments, fuel shortages, and nonmarket-type confrontations, not excluding shooting wars.
Turkish March meddles into Nabucco’s theme
As serendipitously as Ali Baba learned the magic words “Open Sesame,” sheer location may have given Turkey the means whereby to parley its Muslim civilization into long-aspired EU membership.
Turkey has been knocking on Europe’s door for a long time. Negotiations began in 2005 but have gained little ground. The EU is said to be suffering of “expansion fatigue” but in reality Brussels is profoundly dissatisfied with Ankara’s domestic reforms to ensure constitutional rights and fairer treatment of minorities. The unhealthy status quo in Cyprus is also troubling.
Turkey’s willingness to cooperate in projects that enhance EU’s energy security and membership in the Union appeared as a quid pro quo. Brussels finds this unacceptable and is trying to convince Turkish government officials that the two issues should not be linked, but there is no assurance that this advice has been taken to heart.
“If Turkey ties the two together that means the death of Nabucco,” said Gyurcsany in an interview during the conference (Nepszabadsag, Jan. 27).
Nabucco’s Turkish partner (Botas) has made unacceptable lift-off claims on transshipped gas as a price for its participation. According to sources close to the project, the Turkish partner simply wants to dramatize the need for Iran to enter the picture as a key supplier, probably to the great pleasure and approval of Tehran. It is worth noting that Gazprom is heavily involved in the development of Persian gas fields.
Warning: Peak oil today, peak gas tomorrow!
Based on known reserve and current production data (coming from reputable official and independent private sources), natural gas will run out in 55 – 65 years.
Uncertain as these figures may be, they deserve the status of reference scenario. While some estimates put yet-to-be-discovered reserves as high as two-thirds of currently confirmed ones, it seems unlikely that tapping these hypothetical sources would exceed the projected ca. 50-percent increase in global gas consumption (piped and liquefied modes of delivery combined) between now and 2030.
On the express train that leads to the depletion of irreplaceable natural resources, the barren scenery of “peak gas” follows “peak oil” closely. Once both peaks are passed, prices of these twin hydrocarbons would keep rising (at global full employment levels) along an interwoven chaotic path.
Natural gas is hyped consistently as a “clean,” “abundant,” and “responsible” source of energy. Projections of its future use are consumption-based and they assume away or ignore the economic consequences of the peak.
The optimal strategy would be to use the few decades that natural gas may accord to the global economy to build up renewable sources of energy. But no such integrated approach is in sight when support for the construction of new pipelines is discussed at international fora such as the one that has just ended on the banks of the Danube.
