Nabucco: The Fat Lady Sings?

The EU has long sought imaginative ways to feed the idea of the proposed Nabucco pipelines as a means of diversifying gas supplies by pulling away from Russia and establishing a new gas corridor from Central Asia via Turkey to the EU.

While Central Asia remains a major gas focus for the EU, the European Commission has also claimed that it would import an additional 7 billion cubic meters (bcm) of gas from Iraq and Egypt via Syria in the next few years. In reality, neither of these things are likely to happen. 

The strategic view is to see the Arab Gas Pipeline, which links Syria to Egypt via Jordan, extended to Turkey and Iraq by some time this year. This, in turn, would link to the 30bcm-per year Nabucco pipeline, connecting the EU to new gas sources in the Caspian Sea and Middle East.

The stumbling block is that some 5bcm of the supposed 7bcm to be fed from the Middle East will come from the Akkas field in Iraq, which, at this stage, is largely undeveloped. Furthermore, most international oil companies will want to see the Iraqi Oil Law passed before they recommence major operations in the country, with security issues remaining far from settled.

Egypt will also find it hard to increase its pipeline exports to Europe, not least because the domestic gas market is growing rapidly. Egyptian President Hosni Mubarak will be tempted to allow further liquefied national gas expansion to offset companies for subsidized domestic prices, rather than sending it through the Arab Gas Pipeline.

Booming consumption along the proposed supply route in Jordan, Syria and Turkey presents further difficulties to realizing Egyptian supplies, while Turkey remains determined to leverage its position as a regional energy hub for political and commercial effect, rather than simply signing standard transit deals for gas. This will inevitably continue to drag down any supply deals for Nabucco.That said, the EU has managed to strike an easier bargain with Turkmenistan to feed Nabucco with 10bcm annually. Yet the problem here is that Ashgabat probably does not have the capacity to deliver such reserves amid competing supply contracts with Russia and China.

The EU is also looking at the Shah Deniz project in Azerbaijan as a potential supply source for Nabucco, although negotiations appear to have been superseded by the National Iranian Gas Company, which has secured a "very large" amount of gas from the State Oil Company of Azerbaijan. Gazprom also recently approached Azerbaijan to buy all its gas to help feed the competing South Stream pipeline. Even if the EU could get its hands on Azerbaijan’s considerable reserves, they would need to channel it through Georgia. This would not be a task for the faint hearted.
While this all hardly constitutes a fatal blow to Nabucco, at best, it makes it increasingly likely that it will resemble an enabling project requiring gas from multiple sources drawn from the Middle East and Central Asia, should the pipeline ever be built. On that basis, Iran would also need to be considered as a serious supply option: It easily has the natural reserves to become a net exporter in the next five years provided the necessary investments are made.

The outcome of the June presidential elections in Tehran are clearly critical to any such prospects, but even if hardliners lose out, the EU would still need to seriously consider whether limited Iranian supplies would be a more politically desirable option than increased dependence on Russia.

The nuclear question would still remain in play in the Persian Gulf, and even if the EU could align its Middle East interests to deliver an extra 7bcm for the Nabucco project, it does not change the strategic reality that Europe already takes 160bcm annually from Russia.

Indeed, the EU is also well aware that the proposed extension of the Blue Stream pipeline and the political buy-in from South Stream pipeline states such as Hungary, Austria and Bulgaria, gives Russia a major strategic advantage over Nabucco.

Russia is also making life difficult for Nabucco downstream, following Gazprom's joint venture with Austria-based OMV for the Baumgarten Central European Gas Hub (CEGH), the trading platform in Austria through which Nabucco supplies would be channeled. The fact that OMV has also had its eye on acquiring Hungary-based MOL (both of which currently hold a 16.7 percent share in Nabucco) would give OMV a blocking majority of 32 percent on the Nabucco project if a merger were to be successful. This underlines the limited prospects that Nabucco has of ever being genuinely devoid of Russian influence.

On this note, although Turkey was initially berated by the EU for daring to suggest that Nabucco should consider what supply options Gazprom might be able to offer, the European Parliament did exactly that this month. The reply was a predicatable "no.”

Despite Gazprom’s current woes, Russian President Dmitry Medvedev knows that the South Stream pipeline holds the political advantage over Nabucco, not least through the virtue of more credible supplies. 

Rather than putting considerable effort into chasing shadows in its external energy policy, the EU would be better off focusing on developing an integrated internal market to reduce bilateral pressures felt from key suppliers in the form of Gazprom in the East and West, and Algeria-based Sonatrach, by forging greater European solidarity and negotiating positions.

This will not be a panacea by any means (particularly as European gas demand will continue to rise as a by-product of its drive toward cleaner forms of energy), but without greater internal market liberalization and European solidarity to enhance bargaining positions, it will be all too easy for Russia to use its hydrocarbon endowments to optimal bilateral effect.

Thus the fact that the EU has now failed to stump up any additional cash for Nabucco to help get it off the ground, while relabeling it the "Southern gas corridor" in the process, is in fact, a good reality check. Making progress on the now dormant external pageThird Packagecall_made  for gas and power market liberalization remains far more important than trying to hypothetically prove that it can one day fill Nabucco. That said, at least it keeps Russia on it toes and makes for entertaining sport.