Tuesday, December 14, 2010

Morningstar Abandons Nabucco

In a surprise development, it appears that the United States is abandoning its support for the Nabucco gas pipeline. In an interview with Kommersant newspaper, Morningstar stated that the United States supports a South Energy Corridor, but that did not necessarily mean the Nabucco project. "We would have preferred Nabucco, but that does not mean it will be implemented first," he said. "It could be Nabucco, ITGO or another project. The main thing is to have the ability to expand the pipe." (www.today.az/print/news/business/77920.html, 09 December 2010) Given that Nabucco is designed to carry 31 bcm annually of gas, and South Stream is projected to carry 63 bcm annually, Morningstar would appear to be signalling surrender to Russia and to Gazprom.

Morningstar has been hedging his support of Nabucco since at least September, when he told a group of journalists, "There will be a Southern Corridor. As for initial gas coming from the Caspian through the Southern Corridor, I think it will be likely that there will be only one pipeline, whether it be Nabucco or ITGI (Interconnector Turkey-Greece-Italy) or TAP (Trans-Adriatic Pipeline)." Morningstar said that sometime in the future when more gas was available multiple pipelines would become complementary ("Nabucco moves a step ahead in pipeline wars," Hurriyet Daily News, 1 October 2010).

Projects such as ITGI, TAP or AGRI (Azerbaijan-Greece-Romania Interconnector) are all designed to provide small, alternative routes for delivery of Caspian gas to Europe. None are scheduled to take the place of Nabucco, however; only South Stream would have that capability. If South Stream were to become the backbone of the South Energy Corridor, then Gazprom would continue to hold a monopoly on gas deliveries from the East.

Nabucco's problem stems from a lack of feedstock for the pipeline. Azerbaijan has pledged 10 bcm annually to the project, meaning the pipeline would only be 1/3 full. The Vice President of Azerbaijan's national energy company Socar said "We are not willing to pay for the empty capacity of Nabucco. Azerbaijan wants to keep all doors open to alternative sources of transportation. We will not put all our eggs in one basket, however attractive and beautiful it may seem." (www.today.az/print/news/business/77676.html, 04 December 2010)

The project initially hoped to fill the remainder of the pipeline capacity with gas from Turkmenistan, but the Trans-Caspian pipeline remains mired in legal disputes over the status of the Caspian itself. Without Turkmen oil, Nabucco backers have proposed various alternatives such as, Iranian natural gas (stymied by sanctions), or Northern Iraqi natural gas (supplies unsure because of physical security issues and ownership of the gas itself).

Left with a limited amount of gas, Nabucco is having difficulty raising the money to build the pipeline. Turkish Prime Minister Recep Tayyip Erdogan complained about this at the Black Sea Energy and Economic Forum in in September. "We say we are ready for everything, but those playing the coordination role have not yet come up with serious action," he said. ("Turkish PM complains about delay in Nabucco project," Hurriyet Daily News, 29 September 2010). The European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD) and the World Bank's International Finance Corporation (IFC) have begun a due diligence investigation with the aim of providing up to 4 billion euros for the project, but that is only 50% of the money that is needed to complete the pipeline. ("Massive Funding in Prospect for Nabucco Pipeline Construction," Eurasia Daily Monitor 7/164, 14 September 2010)

South Stream, by contrast, is growing by leaps and bounds. Bulgaria had previously opted out of South Stream, but after a November visit by Russian Prime Minister Vladimir Putin, Bulgaria' Energy Holding signed an agreement with Gazprom establishing a 50-50 partnership to build the pipeline. Construction is scheduled to begin in 2013, and may cost Bulgaria up to a half billion euros. Estimates are that the money would be recovered in approximately 2 years, as Bulgaria would earn 200-250 million euros annually in transit fees ("Bulgarian part of South Stream to cost 500 mln euros," Hurriyet Daily News, 15 November 2010). Putin returned home with both an agreement and a puppy!

The German energy company Wintershall denies any interest in joining Suoth Stream but Putin told Italian Prime Minister Silvio Berlusconi that German companies were showing great interest in joining South Stream ("Putin Hints at German Entry in South Stream Project," The St. Petersburg Times, 12 October 2010). Serbia and Macedonia have also expressed interest in the project.

Unless Ambassador Morningstar and his team can find additional funding, it looks like Nabucco might founder on the drawing board.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.