The Nabucco gas pipeline project represents an opportunity for the EU to diversify its gas supply options and lessen its reliance on Russian gas imports.
Despite widespread EU support, there remain questions as to whether Nabucco will be able to attract sufficient gas volumes in order to make the project viable within its current development window. This article provides a brief overview of the project, its goals and the remaining challenges. It also explains why a gas pipeline project is named after an opera by Giuseppe Verdi.
Isn’t Nabucco An Opera?
Nabucco is a proposed 3,300-km, 56-inch diameter gas pipeline starting at the Georgian/Turkish (and/or the Iranian/Turkish border) and running to Baumgarten in Austria, via Turkey, Bulgaria, Romania and Hungary. The Nabucco project is heralded by its sponsors as “a new gas pipeline connecting the Caspian region, Middle East and Egypt via Turkey, Bulgaria, Romania, Hungary with Austria and farther on with the Central and Western European gas markets”. From a political standpoint Nabucco is also seen to represent an opportunity for the EU to diversify its gas supply options and, symbolically if not in reality, lessen its reliance on Russian gas imports, which in 2008 amounted to around 156 Bcm (billion cubic meters) or around 32% of total EU gas demand.
The Nabucco project takes its name from the opera that its sponsors attended immediately following their first project meeting in Vienna. The phase 1 capacity of the pipeline is planned to be 8 Bcma (billion cubic meters per annum) in 2014, increasing in phase 2 to 15 Bcma in 2018, and to a maximum of between 25 and 31 Bcma by 2022. Construction is currently slated to commence in 2011, with first gas to flow in 2014.
The Project’s shareholders comprise BOTA? (Turkish state-owned), Bulgarian Energy Holding (Bulgarian state-owned), the Hungarian company MOL, the Austrian company OMV Gas & Power, the German company RWE and Transgaz (Romanian state-owned). Each shareholder has an equal 16.67% interest in the project company, Nabucco Gas Pipeline International GmbH. The project contemplates that 50% of the pipeline’s capacity will be reserved for shareholders, with the remaining 50% available to other gas shippers on commercial terms to be agreed.
Show Me The Money
The Nabucco shareholders estimate the project’s investment costs, including financing costs, to be approximately 7.9 billion Euros. Without sufficiently long-term binding gas through-put commitments, however, the project has been unable to secure the necessary finance. On January 27, 2009, at the Nabucco Summit held in Budapest, it was reported that the heads of the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) committed to provide financial backing for the Nabucco gas pipeline. However, this “commitment” was conditioned on the project meeting “the requirements of solid project financing”. Without dedicated gas supplies, and the associated cash-flows, Nabucco may be unable to complete any project financing (at least on a commercial basis).
The Scramble For Gas
Nabucco is often described as being in direct competition with other proposed “southern route” gas export projects, such as the Gazprom-backed South Stream project (a proposed gas pipeline to transport Russian natural gas to the Black Sea to Bulgaria and farther to Austria and Italy). The economic reality is that the success of any one project does not necessarily preclude the success of the others – the European gas market is large enough to accommodate many such projects and the associated gas volumes. Some commentators have criticized the perceived over-politicization of the Nabucco vs. South Stream media coverage, which has at times seemed to style project rivalry as Russia against the West. Indeed, some media coverage would suggest that competition between the current crop of pipeline projects is something akin to a space race for the new millennium. Despite these criticisms, however, cross-border hydrocarbon pipeline projects are by their very nature political, and such projects often compete with each other for windows of market opportunity.
A number of factors are stacked against Nabucco in the scramble for available gas, not least being the natural lack of cohesiveness amongst Nabucco’s multinational shareholders with respect to a preferred supply strategy. This lack of convergence has contributed to neither the EU nor the U.S. being in a position to provide focused or sustained support in progressing supply commitments. Since its inception, there has been talk of sourcing gas from Egypt, Iran, Iraq (including Northern Iraq), Azerbaijan, Kazakhstan, Turkmenistan and even Russia (via the Blue Stream expansion).
If Nabucco is to meet its stated goal of delivering first gas to Europe in 2014, it needs to secure gas through-put commitments in order to support its financing and construction plans. Nabucco’s short-term ability to secure gas through-put commitments has been made more difficult by Gazprom’s success in soaking-up immediately available gas production in the Caspian Region (including securing gas supplies from Turkmenistan and Azerbaijan), and by the emergence of demand for Caspian-region gas from China. As a consequence, there remain questions as to whether Nabucco will be able to attract sufficient gas volumes in order to make the project viable within its current development window. Competing “southern route” gas export projects, such as South Stream and the proposed expansion of Blue Stream, are both backed by Russian gas producers with available gas to transport. In contrast, Nabucco is being promoted by European companies that need to source gas from third parties. The consensus view is that Egypt, Iran and Kazakhstan are unlikely phase 1 gas suppliers. Azerbaijan and Turkmenistan now seem to be the preferred phase 1 gas suppliers, but each presents its own challenges.
Currently, around two-thirds of Turkmenistan’s gas is sold to Gazprom, and is exported to Russia via the Central Asia Centre Pipeline (CACP). In terms of diversification of its gas exports, Turkmenistan has previously indicated that it preferred export options to Iran, China and Pakistan/India ahead of a Trans-Caspian/European route. However, suggestions that China may be over-supplied with gas in the near-term, a recent dispute with Russia over an explosion on a gas export pipeline between the two countries, and the continuing political and security challenges facing the proposal to build the TAPI gas pipeline (from Turkmenistan through Afghanistan, to Pakistan and India), seem likely to persuade Turkmenistan to seriously consider further diversification of its gas export options. That said, any supply of gas to Nabucco from Turkmenistan would also necessitate a Trans-Caspian link to Azerbaijan (or, less likely, Russia).
The idea of a Trans-Caspian gas pipeline is not new. Such a linkage was initially proposed in 1996, but the project was abandoned due largely to Russian political opposition, as well as the unresolved status of the Caspian littoral state’s offshore boundaries, and Azerbaijan’s desire to ensure the viability of its own gas export project to Turkey ahead of any project to export competing Turkmen gas. Proposals for a Trans-Caspian pipeline were revived in December 2008 when two Nabucco shareholders, OMV and RWE, established the Caspian Energy Company to assess options for the building of a Trans-Caspian pipeline. The obstacles facing such a project today are largely unchanged from those faced in the late 1990s. The delineation of the Caspian Sea and the rights to several key hydrocarbon fields remain in dispute between Turkmenistan and Azerbaijan. Recent reports to the effect that Turkmenistan may move for this issue to be decided by international arbitration, suggest that agreement between Turkmenistan and Azerbaijan on this issue may be a necessary precursor to any deal on a Trans-Caspian gas link. It is also worth noting that any Trans-Caspian link through Azerbaijan would need to be compatible with Azerbaijan’s objectives regarding the export to Europe of Azerbaijani gas and, in particular, gas from the further development of the Shah Deniz field.
Azerbaijan has long been touted as an obvious initial supplier of gas to Nabucco from the phase 2 development of the Shah Deniz field. Shah Deniz gas is currently sold into Azerbaijan, Georgia and Turkey via the South Caucasus Pipeline (SCP), which runs to the Georgian/Turkish border close to the proposed intake to Nabucco. However, Nabucco faces competition from Russia to buy additional Shah Deniz gas, with the recent agreement of Azerbaijan to supply 0.5 Bcma of gas to Russia from 2010, and the stated Russian desire to significantly increase these volumes and to potentially include Shah Deniz phase 2 gas (although, in some circles Azerbaijan’s move is seen as a bargaining chip in order to achieve a better gas sales/transit deal with Turkey and the other Nabucco shareholders). Perhaps more troubling for Nabucco are reports suggesting that Shah Deniz phase 2 start-up may be delayed until as late as 2016, well past the 2014 Nabucco first-gas target. On top of these factors, Turkey is progressing its own plans to ship gas from Azerbaijan to Greece and Italy, thereby providing a ready-made export route for Azerbaijani gas to western Europe without the need for Nabucco.
On July 13, 2009, Turkey, Bulgaria, Romania, Hungary and Austria signed an inter-governmental agreement (IGA) confirming their support for the Nabucco project and agreeing on a single, stable legal framework to govern gas transit and the calculation of transit tariffs across all five countries (courtesy of www.nabucco-pipeline.com).
With two Nabucco shareholders, OMV and MOL, each having recently acquired an interest in gas field licenses within the Kurdish (KRG) controlled territory in Northern Iraq, this region has emerged as a potential contender for Nabucco phase 1 supply. However, nothing is simple in this part of the world and conflicting messages have been coming out of Iraq, with Baghdad pouring cold water on proposals to export gas from Northern Iraq. It will also be interesting to see Turkey’s reaction to any proposal to export gas from KRG controlled territory, given the historically strained relations between Turkey and its Kurdish neighbors.
One Step Forward
Despite the significant challenges Nabucco faces, the project recently took a positive step towards becoming a reality. On July 13, 2009, Turkey, Bulgaria, Romania, Hungary and Austria signed an inter-governmental agreement (IGA) confirming their support for the Nabucco project and agreeing on a single, stable legal framework to govern gas transit and the calculation of transit tariffs across all five countries. The signing of the IGA is a significant step forward and provides the necessary legal foundation for the project. If it is to deliver on its promise to transport first gas to Europe in 2014, the next critical task facing the Nabucco Project is to secure binding gas through-put commitments from shippers, sufficient to make the project bankable and provide the platform for project finance (at least for phase 1). On Nabucco’s side is the realization by Caspian region gas producers that their best interests may be served by the further diversification of their gas export options. However, time may be against Nabucco in the ongoing scramble for gas and it remains to be seen whether Nabucco will be able to attract sufficient gas volumes in order to make the project viable within its current development window. But as they say in the world of opera – “it ain’t over ‘til the fat lady sings”.
Mark Rowley is partner in the Global Projects practice group at Baker Botts (UK) LLP, based in London. His expertise covers large-scale energy and corporate matters, with a particular focus on upstream and midstream gas projects. He is a veteran in cross-border pipeline projects, having been involved with the original Trans-Caspian (TCP) project and the South Caucasus Gas Pipeline (SCP), and is well-versed on the Nabucco pipeline project. 44-20-7726-3414, firstname.lastname@example.org, www.bakerbotts.com.