The sluggish progress of the NABUCCO project

The European Union’s Nabucco pipeline project for transporting Caspian gas to Europe continues to experience false starts and outright setbacks. The impasse seems to justify the Hungarian proposal to hold a summit of the Nabucco consortium countries and the relevant gas producer countries, with the participation of the EU and the United States as main political supporters of this project.

Hungarian Prime Minister Ferenc Gyurcsany has suggested holding a summit for resuscitating Nabucco and offers to host the event in Budapest before the end of this year (MTI, July 7). Gyurcsany launched this initiative during his visit in early July to Azerbaijan and Turkmenistan, which are the main prospective suppliers of gas for the Nabucco project. Top executives of Hungary’s privately owned MOL company went to Baku and Ashgabat at the same time as the prime minister. MOL is a shareholder in the Nabucco consortium, along with Austria’s OMV; the state-owned gas companies of Turkey, Bulgaria, and Romania; and Germany’s privately owned RWE.

OMV, the initiator of Nabucco and informal leader of the consortium, has recently inflicted three severe blows on the project. It has agreed to share ownership of Nabucco’s designated terminal, Baumgarten near Vienna, with Russia’s Gazprom and to build gas storage sites for Gazprom in the area. It has also agreed with Gazprom to extend the latter’s South Stream pipeline project, Nabucco’s rival, into Austria. And it suggests sharing the Nabucco pipeline’s capacity (if and when it is built) with Gazprom for “Russian” gas--most likely Central Asian gas monopolized by Gazprom. OMV’s moves could bring Gazprom closer to its goal of killing the Nabucco project or controlling it (see EDM, June 10), writes Vladimir Socor for Eurasia Daily Monitor

Azerbaijan is the designated source of gas for the first phase of the Nabucco pipeline. The country’s government supports the project unwaveringly, at the risk of irritating Moscow and despite defections of other countries from Nabucco to Gazprom’s South Stream project. Azerbaijan’s loyalty to Nabucco should not be taken for granted indefinitely by Washington and Brussels, if they fail to prove that Nabucco is viable for both of its phases. Failure to line up Turkmen or Middle Eastern gas volumes for Nabucco’s second phase would continue to discourage Western private-sector investment for Nabucco’s first phase.

With Azerbaijan’s giant Shah-Deniz field ramping up gas production for its second expansion phase, Azerbaijan and its partners in that consortium (led by BP and Norway’s StatoilHydro) require with increasing urgency an outlet for their production. Moscow is now offering that outlet because the West is not. Visiting Azerbaijan in early July, Russian President Dmitry Medvedev and Gazprom CEO Alexei Miller offered to buy up Azerbaijan’s entire surplus of gas at European netback prices, starting in 2009, and re-sell that gas in Europe (www.az.taj, Trend, July 4-7). Azerbaijani gas could in that case reach Europe through Russia. Ironically, Gazprom could pump Azerbaijani gas either through the promised South Stream pipeline (which lacks sufficient Russian gas) or through a reconfigured Nabucco under Russian control (which is Gazprom’s alternative option, if unable to kick-start South Stream).

On July 18 Azerbaijan’s state oil company chairman, Rovnag Abdullayev, announced that a decision is impending about the direction of Azerbaijan’s gas exports from 2009 onward: “We are receiving and assessing proposals from all sides until the end of this year. We shall see. We will vote at a meeting [of the consortium] to launch the second phase of Shah-Deniz after determining the market” (ANS, July 18).

Turkey creates a number of difficulties both for the transport consortium Nabucco and for the gas producing consortium in Azerbaijan. Perhaps the main irritant is the Turkish government’s insistence that it should buy gas from Azerbaijan and re-sell that gas westward, at a profit to Turkey, instead of simply providing transit service for the Azerbaijani gas. Turkey seems to be imitating Gazprom’s methods on this issue. Such a demand contradicts both Nabucco’s concept and the EU policy on energy transit. This issue seems to remain static since February, when the EU’s project coordinator Jozias van Aartsen failed to overcome the deadlock.

On July 15 the government of Turkmenistan announced the start of construction operations on the Caspian Coastal Pipeline project, designed to increase Turkmen gas exports to Russia by 10 to 20 billion cubic meters per year from 2010 onward (Turkmen government press service, Altyn Asyr TV, July 15, 16). On July 16 and 17, President Gurbanguly Berdimukhamedov on a visit to Romania responded evasively to President Traian Basescu’s rather urgent questions about Turkmen gas for the Nabucco project. The Turkmen side apparently did not to mention this issue in its own statements on the visit (Turkmen government press service, Altyn Asyr TV, July 17, 18).

High-ranking Western visitors to Ashgabat in search of gas supplies for Nabucco, most recently Hungary’s Gyurcsany, invariably hear from Berdimukhamedov that Turkmenistan is ready to sell its gas at the Turkmen border to whichever party has a means of transport available. The answer from the West and Azerbaijan is a Trans-Caspian pipeline from Turkmenistan to Baku and onward to Turkey, where it should link up with Nabucco. A political summit, such as that proposed by Hungary, could help demonstrate Western support, as a prerequisite for putting together a consortium for the Trans-Caspian project and financing the Nabucco pipeline.

Turkey-Russia energy links thaw

Turkey wants to boost cooperation with its top gas supplier Russia, ending a frosty period marked by differences over the Nabucco pipeline to Europe, an official and analysts said – as Reuters reported on July 23, 2008.

Turkey gets most of its gas -- 68 percent of 2008 demand of 38 billion cubic metres (bcm) -- from Russia’s Gazprom under three long-term deals.

NATO-member Turkey and Russia had a decade-long lull in economic relations after Ankara blamed Moscow for selling gas to Ankara at more expensive rates than to other buyers.

They were also at loggerheads after Turkey backed four European countries on the 7.9-billion-euro Nabucco pipeline project planned to carry gas from the Caspian and Iran to Europe from 2013 to lessen Europe’s dependence on Russia.

But a senior Turkish energy ministry source said the two countries were now talking again. “A path has now been opened to doing business on several critical projects,” the source, who asked for anonymity, told Reuters.

Russia had said any pipeline project without its gas was doomed to fail and challenged Nabucco by broaching the South Stream project, which plans a pipeline to Bulgaria and Italy from Russia via the Black Sea. The source said the two countries agreed during Gazprom’s deputy CEO Alexander Medvedev visit to Ankara last week to set up a joint company to run Turkey’s urban gas grids. They also agreed to build an underground gas storage facility in central Turkey and have talks to renew a gas contract expiring in 2011.

“Gazprom’s offer also includes the extension of the Blue Stream pipeline to Israel,” he said, referring to the 1,200 km line that pumps 16 bcm of gas to Ankara through the Black Sea. Sinan Ogan of the Ankara-based think-tank Turksam said Turkey and Russia were now in a new period of cooperation. “The rivalry between South Stream and Nabucco has been to the detriment of both countries. But now Russia may be invited to take part in the Nabucco project during the planned visit by the Russian president to Turkey,” he said. Yurdakul Yiğitgüden, a Turkey-based international energy adviser, said the warmer period in bilateral relations “could end with Russia supplying” 10 to 20 percent of the Nabucco’s gas capacity, which is planned at 30 bcm annually. “Gazprom may apply the same model it has in several European countries. It wants to participate in the downstream business in Turkey,” he said. The energy ministry source said apart from extending Blue Stream gas to Israel, Gazprom will also consider its oil arm Gazprom Neft supplying oil to the Samsun-Ceyhan pipeline, proposed by Turkey’s Calik and Italy’s Eni, between Turkey’s Black Sea and the Mediterranean.

Also on the table is a project, described by some analysts as fantasy , which envisages carrying fibre optic cables, water, electricity and Russian gas and oil through a multi-purpose pipeline from Turkey to Israel under a 2-5 billion euro deal.

Turkey’s Energy Minister Hilmi Güler said last week Russia, Turkey and Israel would work on this Mediterranean Line project, which could later be extended as far as India. But Yiğitgüden said: “This project simply does not look very reasonable. Who will finance it?”

U.S. may help Ukraine uprade EU gas links

The United States is considering putting its weight behind a project to speed the flow of gas across Ukraine to Europe, a senior U.S. official said on Thursday, according to Reuters.

The project could add as much as 19 billion cubic metres of gas flow a year, equal to about two thirds the volume of the planned Nabucco pipline to Europe, U.S. Deputy Assistant Secretary of State Matthew Bryza told Reuters.

"In principle, we`re very interested in doing this, if it`s workable," Bryza said shortly before leaving for Ukrainian capital Kiev to discuss the plan.

"Now we are in the conceptual phase," he added. "We`re just scoping it out... we`ll have to look at feasibility studies and the possibilities of financing."

Ukraine is an important transit state for gas flows to Europe from Russia and Central Asian countries like Turkmenistan.

But regular disputes between Russia and Ukraine have prompted the European Union to seek new sources of energy or supply routes, such as the $12 billion Nabucco project.

Bryza said the work in Ukraine would build on an existing memorandum of understanding between the government there and Germany and Russia.

"A modest investment of around $800 million (could) bypass a bottleneck in the Ukrainian gas transit network into Slovakia," said Bryza.

"From our perspective, we`d want to pursue something like that only if we could make sure international standards of transparency would govern the project," he added. "We could build it from the ground up and therefore build in these transparency initiatives."

Bryza said the project should not be dependent on the survival of any single government.

Ukrainian President Viktor Yushchenko, swept to power by the 2004 "Orange Revolution", is keen to move closer to the EU and out of the shadow of Russia, but his administration has been beset by quarrels.

"What really does matter is whether the requisite political will will be there to break this really negative cycle of lack of transparency and corruption in the energy sector," said Bryza.