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Nabucco in Limbo – “Götterdämmerung“ on the Horizon

Nabucco Pipeline Source:

The European Nabucco pipeline project was first discussed in 2002 as a means of bringing the energy riches from the Caspian Sea Basin region and possibly the Middle East to the heart of Europe via a new southern corridor (via Turkey) that would bypass Russia. The opera this project was named after tells the biblical story of how the Israelites had been liberated from Babylonian captivity. What a telling name for an European pipeline project to become more energy independent from Russia – at least that was the tacit goal back in 2002. The Nabucco natural gas pipeline would bypass Russia and the Ukraine, both countries whose reliability as energy partners had become questionable after Russian natural gas supplies to EU countries via the Ukraine (80 percent of supplies are in transit here) were halted over payment and transit fee disputes in the past. This has had a knock-on impact on suppliers to Western Europe because the Ukraine is the main transit country.

Nabucco, which originally aimed by 2013 to supply Europe with gas, is in the hands of private companies in the form of a joint venture and does – although backed by the European Union – not receive any EU financial support. Nabucco’s consortium of stakeholders are European energy and utility companies such as Austria’s oil and gas company OMV, Hungary’s MOL, the state-owned Rumanian Transgas, the state-owned Bulgarian BEH, the Turkish state-owned BOTAS and finally Germany’s utility-behemoth and majority stakeholder RWE. The current price tag for constructing the long-planned 3893 km (2419 miles) natural gas pipeline is estimated to run upwards of $10.4 billion. Once completed, the pipeline will bring up to 31 billion cubic meters (bcm) of gas a year from the Caspian basin and the Middle East across Turkey and into Europe. So goes the theory.

However, the project has faced repeated delays due to various problems which now may actually kill the original plan of the project as some investors become nervous. Only recently, Viktor Orban, the Hungarian prime minister, stated publicly that the planned Nabucco natural gas pipeline for Europe was in “trouble“. Following that, on April 26 the Financial Times reported that MOL, the Hungarian member of the Nabucco consortium, said it was pulling out of the Nabucco pipeline infrastructure project effectively withdrawing further financing for its share of the project. This can be interpreted as a major blow to Europe’s most ambitious infrastructure project and European Energy Security, even though the Nabucco consortium said it would proceed regardless of what MOL decided to do. Nevertheless, financing problems could get worse in the current European austerity environment.

Moreover, Nabucco’s probably single biggest failure – it had failed to secure gas sources before its construction and now struggles to find sufficient gas supplies to justify its construction – might deliver its final lethal blow to this project as various alternatives exist and seem to become more attractive. BP put forth a conceptual proposal for an alternative route to transfer Azeri gas to Europe; namely, the so-called South-East European Pipeline (SEEP) which could easily rival and replace Nabucco as the most suitable option to bring gas from the Caspian Sea to Europe. SEEP’s major advantage over Nabucco is that BP is one of the stakeholders of the Shah Deniz field and its capacity of 10 bcm would match the additional gas output of Shah Deniz second development stage post-2017. However, this capacity of 10bcm will not be sufficient to reduce Europe’s dependence on Russian gas deliveries. Nabucco is also simply too big for the 10bcm of Shah Deniz alone. Sure, there are other sources in the region for natural gas –  such as Iraq, Turkmenistan, Kazakhstan amongst others – and most importantly one day Iran. But all these options have underlying political risks which do not really encourage European investments in the short term while at the same time the governments of those gas producing countries are unwilling to invest in any costly pipeline projects to Europe unless they can be certain that Europe is going to import a large quantity of natural gas in line with an “European Natural Gas Strategy“. The latter would guarantee appropriate and long-term energy infrastructure funding. Azerbaijan’s gas reserves might be enough in the beginning but will not be enough to fill Nabucco to capacity. Thus, Europe needs to convince the littoral states of the Caspian Sea basin region to contribute to it and sign multiple supply contracts for enough gas to fill the pipeline. There is not enough supply given the current and expected European demand in the future. Currently, Nabucco’s up to 31 bcm per year is less than one tenth of Europe’s yearly demand. Also note that half of the via Nabucco transported natural gas will go to the participating countries while according to EU regulations half of the capacity has to be opened for bidding and offered to paying third parties.

Other alternative projects, such as the Russian South Stream or the TAP, seem more suitable if not for anything else than the fact that they are smaller (TAP should carry 10 bcm compared to Nabucco’s 31 bcm) and therefore more in line with the natural gas available in the second development stage of the Shah Deniz field in Azerbaijan or most importantly they have the financial backing (in South Stream’s case by Russia’s Gazprom as well as Italy’s ENI), or they are at least endorsed by a stakeholder of the Shah Deniz field (TAP by Statoil).

Routes of Nord & South Stream, Nabucco Source: BBC News

Potential further competition also may come from increasing LNG supplies to Europe from the U.S. East Coast (lower priced shale gas reserves), Nigeria or Qatar. Thus, political arguments may end up on the back burner and economic arguments may be favored instead. What I mean by that is that this pipeline was supposed to help the EU achieve greater energy independence from Russia – being an absolute priority for the so-called Visegrad Group of countries (the Czech Republic, Poland, Hungary and the Slovak Republic) in order to break Russia’s monopoly on natural gas in this part of Europe. The disadvantage Nabucco has against its competitors in the Caspian Sea region is that in order to compete with South Stream it would need to tap Iranian gas supplies in the medium term. Given the nuclear standoff with the U.S., this is not in the cards for now.

In conclusion, it would be smart for the Europeans to go ahead and construct Nabucco irrespective of the current headwinds and holding on to their long-term political goal of  “Diversification“ away from Russia. In this respect, Azerbaijan cannot be the main source of Nabucco’s gas alone – only in the beginning. Otherwise this would only create another dependence. Above all Iran, Iraq, Kazakhstan, Turkmenistan and Egypt need all be considered as potential suppliers to Nabucco in the longer term and need to be pursued aggressively. Note, that Russia might buy Iranian gas instead and sell more of its own Siberian gas to China for higher prices.



Roman Kilisek
Roman Kilisek

Roman Kilisek is a Global Energy & Natural Resources Analyst.
His research focuses on global energy politics, mining, infrastructure and trade, global political risk and macroeconomics. He is fond of using scenario development and analysis.

He has lived on three continents and traveled to over 40 countries around the world. He now lives and works in New York City.