Transit states release tension on Nabucco

By Ed Crooks and Delphine Strauss

Nabucco, the ambitious pipeline proposal to bring natural gas to the European Union from the Caspian region, will pass its first significant milestone on Monday when an inter governmental agreement between the project’s backers is signed.

Turkey, where the pipeline is intended to start, had been obstructing a deal but a solution has been found to meet the country’s demands for security of supply without making a legal commitment to provide it with a fixed amount of gas.

A crisis in January caused by a gas dispute between Russia and Ukraine gave momentum to the slow-moving Nabucco project, reinforcing European consumers’ view of the need for alternative supply routes and sources of gas.

Many European industry executives and officials now believe the pipeline is likely to go ahead at last.

However, the commercial prospects for Nabucco still look highly uncertain because of a shortage of readily available gas supplies and competition from cheaper and quicker projects. If it is to be built, it is likely to require further support from member states and the EU.

The intergovernmental agreement is set to be signed in Ankara on Monday by the five transit countries – Turkey, Austria, Hungary, Romania and Bulgaria. Energy companies from those five countries make up the Nabucco consortium, along with RWE of Germany.

Turkey has been demanding it should be able to buy 15 per cent of Nabucco’s gas for its domestic use or for re-export. For now, that demand appears to have been shelved.

Instead, Ankara has been promised other guarantees of security of gas supply, such as a commitment that the pipeline will be built so that gas can flow in both directions. In emergencies such as the Russia-Ukraine dispute, it would be able to call on stockpiles of gas held in the EU.

But while the politicians may now be in agreement, the business case to support the €8bn ($11bn, £7bn) investment to build a 3,300km pipeline is more tenuous.

The demand is certainly there. A year ago, companies interested in using Nabucco made non-binding bids for 100 per cent of its capacity from its earliest planned start date of 2013.

The problem is the lack of gas to fill it. The only country that can definitely supply Nabucco from the start is Azerbaijan, which will begin production from the large Shah Deniz 2 project in the next decade.

However, that gas is also sought by two other planned pipelines running from Greece to Italy: the Interconnector Turkey Greece Italy (ITGI) and the trans-Adriatic pipeline (TAP). Umberto Quadrino, the chief executive of Edison, the Italian energy company that backs ITGI, says: “This pipeline can be realised much more easily. There is just a small infrastructure investment. Nabucco is much more complex and more gas is needed.”

ITGI would have about 8bn cubic metres per year going to Italy, compared with Nabucco’s planned maximum capacity of 31bn cubic metres per year.

For Nabucco, Iraq is a promising source of gas, following the plan announced in May for Mol of Hungary and OMV of Austria, partners in the pipeline, to invest $8bn in developing gas production in the Kurdistan region of northern Iraq.

Gas-rich Turkmenistan, locked in a gas dispute with Russia and likely to look favourably on alternative export routes, would be another source if the problem of crossing the Caspian could be solved. If ITGI goes ahead, however, it will take away the cheapest and quickest source of supply for Nabucco.

If the latter pipeline is built, it will encourage investment in gas production and so, eventually, it is likely the supply will come. That would mean the pipeline being used at less than full capacity for many years. But Jonathan Stern of the Oxford Institute for Energy Studies believes the political will may now be there to do that.

“European governments will just have to encourage their utilities to back Nabucco,” he says. “They will say ‘this is a test of EU energy policy and a test of European solidarity, and you have got to do it’.”

Next steps

Securing an intergovernmental agreement is only the first step on the road to taking a final decision to proceed with Nabucco. The next steps will be:

● Completing the engineering design work, which will be the basis for the environmental impact assessment.

● Signing agreements with natural gas trading companies to book capacity on the pipeline. The gas traders will be trying to agree deals with the supply countries, likely to be Azerbaijan, Iraq and Egypt for the first phase, and then possibly Turkmenistan for the second phase.

● Securing financing. The European Commission has promised €200m ($280m, £170m) of stimulus funding, but that is only a fraction of the project’s estimated cost of about €8bn.

The European Investment Bank has said it is prepared to finance up to 25 per cent of the pipeline’s cost, implying a further commitment of €2bn.

Commercial funding should be relatively easy to secure once the capacity is booked, because the gas transit fees are reliable revenues.

The problem will be in securing the gas to be transported.

Once those elements are in place, the Nabucco consortium says that it will be able to take the final investment decision, which is scheduled for the first quarter of next year.

It can then begin to sign contracts with contractors, steel providers and other suppliers. Construction could begin next year.