Azerbaijan: Kuwait of the Caucasus?

James J. Coyle: Azerbaijan, Kuwait of the Caucasus?

 

By JAMES J. COYLE / For the Register

Published: Jan. 9, 2014 Updated: 2:28 p.m.

It was the coldest January in a century. Throughout Italy and Southern Europe, people shivered in their homes. The year was 2009 and Russia had turned off the flow of natural gas over a price dispute with Ukraine. It was the second time in three years the Russians had closed the spigot. The European Union decided something needed to be done to protect their citizenry. Europe imports one third of its natural gas from Russia and the Russians had shown themselves to be unreliable suppliers.

The EU decided to support a pipeline to bring natural gas from the Caspian Sea to Europe, avoiding Russian territory and Russian infrastructure. This project was declared to be of community-wide importance, and was deemed eligible for EU grants to help with the construction costs. The original pipeline, named Nabucco after Verdi’s opera, was supposed to run from Baku, Azerbaijan to Baumgarten, Austria. It would carry 33 billion cubic meters, or bcm, per year. Azerbaijan pledged 10 billion bcm and encouraged the EU to find additional sources.
The Russians were alarmed: while Nabucco would only supply approximately 5 percent of Europe’s gas needs, it would break Gazprom’s monopoly on delivering pipeline gas from the East. It would gradually move Russia more to the edge of European energy concerns, instead of keeping it front and center. To counter this, Gazprom announced its own, rival pipeline project: South Stream. Designed to carry 63 bcm per annum, South Stream would take gas that had previously transited Ukraine and send it directly to Europe under the Black Sea. The EU refused to grant it the status of a community project, because it did not diversify the source away from Russia.
When the EU proved unable to make Nabucco work, Azerbaijan and Turkey decided to build the Trans Anatolian Pipeline. From 2018 on, this line is designed to carry 16 bcm per year of natural gas from Azerbaijan’s Shah Deniz gas field, one of the largest of its kind in the world. Six billion cubic meters will be offloaded in Turkey, leaving 10 bcm for delivery to Europe. TANAP will link up with the Trans Adriatic Pipeline at the Turkish border and the natural gas will be delivered to Greece and Italy. Eventually, as more Caspian gas becomes available, TANAP can double its capacity. Over the longer term,TANAP/TAP could supply 20 percent of Europe’s energy demand. A group of companies led by British Petroleum has signed a $45 billion deal to expand the gas field and construct the pipelines. The big question is whether TANAP/TAP can be built since Russia has already begun construction of the much larger South Stream to service the same markets?
On Dec. 4, the executive arm of the EU, the European Commission, announced that South Stream would not be able to operate on EU territory unless it complies with the EU’s Third Energy Package. This is a series of rules and regulations designed to increase competition in the European energy sector. The major impact on Russia: the package states that an energy supplier must “unbundle” itself from the energy distribution system. In other words, if Gazprom wished to sell natural gas to Europe, it could not own the pipeline system that would deliver it.
When the package was originally announced, Russian President Vladimir Putin had cried foul. He said the Third Energy Package was theft, a European attempt to seize Russian strategic assets. Gazprom decided to ignore the package and signed bilateral agreements with seven European transit countries (six EU members and Serbia, an EU-aspirant).
A European Commission official stated that if negotiations began immediately, it would take at least two years for the community to reach an agreement with Russia over implementation of the package. In the interim, the bilateral agreements that Russia had negotiated were all in breach of EU law. “We have told these states that they are under the obligation, either coming from the EU treaties, or from the Energy Community treaty, that they have to ask for re-negotiation with Russia, to bring the intergovernmental agreements in line with EU law,” said Klaus-Dieter Borchardt, director for energy markets at the European Commission.
The objection is not only to Gazprom’s failure to “unbundle” its ownership of the pipeline. The project also fails to meet the requirement that any pipeline system must grant access to other suppliers, and there are unresolved questions over how the price of the gas will be determined.
Dmitry Medvedev, Russia’s prime minister, took the position that the bilateral treaties were governed by international law, which trumped EU law. EU energy spokesperson Marlene Holzner responded that any member state who did not renegotiate with the Russians would be subject to penalties for infringement of EU regulations. The pipeline could be built, and Russia could fill it with gas, but no European state would be able to purchase it. Holzner added that, in her opinion, no bank would be interested in financing a project based on such legal uncertainty.
Given the complexities of the issues involved, southern European hopes are now squarely on the TANAP/TAP Southern Energy Corridor. British Foreign Secretary William Hague commented, “It will increase our energy security by providing an additional route and a new source for gas supplies to Europe. There is also the potential to expand the southern corridor to reach major gas suppliers in the Middle East, which could bring huge additional benefits.” BP’s vice president, Al Cook, concurred, noting that the pipelines were being built to accommodate gas from other suppliers.
Thus, European energy independence begins with the delivery of Azerbaijani natural gas.
James J. Coyle is a professor and the director of Global Education at Chapman University and chair of the Eurasian Committee of the Pacific Council on International Policy.

South Stream Moving Toward 2015 Completion

While the Western news outlets have been full of information on the Shah Deniz 2 consortium choosing the Trans Anatolian Pipeline (TAP) to deliver Caspian gas to southern Europe, Russia has quietly continued work on the rival South Stream pipeline.  The pipeline, which will cross the Turkish economic zone in the Black Sea, is scheduled to make landfall in Varna, Bulgaria.  After that, plans call for the line to split.  One spur will provide product to Russia's traditional client states in Central Europe; the other will challenge TAP by transiting Greece and ending in Italy.  Italy's biggest energy company, Eni SpA stated it expects to receive the first gas from South Stream by the end of 2015.

The key to the project is Bulgaria:  both the pipeline's landfall and the location of the split.  Bulgaria's Minister of Transport, Daniel Papazov, confirmed the project was a top priority of the government, and that everything was ready to begin construction.  "This project will be implemented very soon," he said.  According to a Gazprom spokesman, the company is ready to begin construction in Bulgaria by the end of 2013, with the first phase completed by 2015. Such planning is ambitious, as the project is already behind schedule.  Gazprom CEO Miller said, "The project has been implemented with certain delays from schedule...We are however certain that the deadlines for the start of construction will be met."  Bulgarian Minister of Economy and Energy confirmed Miller's statement:  "We will speed up work on South Stream as it is important to diversity our natural gas delivery routes and have direct deliveries from Russia without passing via third countries.  We need to have final detailed site development plan, environmental impact assessment and front end engineering design by the end of this year and apply for construction permit."

According to  Deputy Head of Project Management Alexander Syromyatin, the need for South Stream continues.  "South Stream is an answer to the increased demand in natural gas and will enable diversification of the Russian gas supply routes to the EU, decrease transit risks, guarantee stable gas supplies to Central and southern Europe and help improve the environment," he said.

The project has the support of the overwhelming majority of Bulgarians.  According to a survey conducted by World Thinks, 68% of Bulgarians support the project.  "Very few feel opposed or strongly opposed," said company director Ben Shimshon.  "Only 5% felt negative about it and the remainder were either unsure or undecided on how they feel."  Shimshon said the public supported the project primarily for the jobs it would create, with good gas prices in second place.  "The public are much more clear," he said, "that there will be economic benefits:  61%  of people agree that Bulgaria will benefit economically from the pipeline."

One reason support may be so high is that the project will not cost the Bulgarian taxpayer any money.  Gazprom CEO Miller confirmed that Russia was prepared to fully finance the construction of the Bulgarian section.  Russia would lend Bulgaria 3.1 billion euros (approximately 5 billion dollars) to be repaid with transit and gas transportation fees.  Bulgarian Economics Minister Dragomir Stoynev confirmed "The South Stream will be financed on a project principle--there will be no money of the Bulgarian taxpayers to be spent."

Not everyone agrees that the pipeline should go through Bulgaria, however.  Julian Lee, a senior energy analyst at the Center for Global Energy Studies in London, claims that Bulgaria does not need South Stream.  "Bulgaria will still have access to gas from Azerbaijan via TAP and the Interconnector Greece-Bulgaria," he said.  Lee is joined by the citizens of Varna, the city where the pipeline will land.  The townspeople are concerned about noise and air pollution from both the construction and the operation of the pipeline and compressor station, to be built less than one mile from the city's southern suburbs.  The entry point is supposed to be the Pasha Dere Beach, which is a protected area under the EU's Natura 2000 program.  However, the project's environmental impact statement lists a number of advantages for Varna, including 2500 new jobs, profits of 30 million euros for the port, and a local business boom with profits for all.(The job creation figure is suspect, since South Stream Bulgaria's CEO Georgi Gegov claims the construction phase will create 2500 jobs in the entire country, not just in Varna.  Once it is built, South Stream Bulgaria will need an addition 3500 jobs to service and supply the pipeline.

Russia also plans a branch of the pipeline to go to Macedonia.  Russian Prime Minister Dmitry Medvedev ordered the Russian energy and foreign affairs ministries to begin discussions with Macedonia for a feasibility study.  Assuming this study shows the viability of the spur, the two countries would establish a 50/50 joint venture to complete the project, although Russia would retain the right to use the pipeline's full capacity, according to a Russian draft agreement that was signed by both countries on July 23.

Serbia is also excited (73% public approval rating) about the pipeline.  Serbian Prime Minister Ivica Dacic said, "South Stream is the most important international project that Serbia is currently involved in and will be key to the country's economic development, ensuring job creation, and energy security for the region...Our objective is to ensure energy sector supply and develop our partnership with Russia."  The Serbian Minister of Energy predicted the pipeline would create at least 1,000 new jobs.

What is clear is that, with Central Europe mired in a recession, the lure of jobs is stronger than the fear of dependence on a Russian monopoly for energy supplies.

Still a Future for Nabucco?

The vote is in, and the Shah Deniz 2 Consortium has chosen to link the Trans Anatolian Pipeline (TANAP) to the Trans Adriatic Pipeline (TAP) instead of Nabucco West.  Natural gas flowing from the Shah Deniz 2 field will feed the industries of Greece and Italy, instead of Austria and Central Europe.  Conventional wisdom is that the Nabucco project is dead.  "The Nabucco project is over for us," said Gerhard Roiss, CEO of OMV, the Austrian leader of the Nabucco consortium.

The funeral oration may be premature, however.  Nabucco has not disbanded.  Upon learning of its loss of the Shah Deniz 2 gas, Nabucco announced it was continuing to look for new sources for its project, justifying its continuation on the European energy market's need for diversification.  "We remain convinced that the Nabucco route offers the only possibility to answer these needs," the company said.  "Nabucco is confident of developing opportunities based on alternative gas sources."  Construction of the long-debated Trans Caspian Pipeline would bring gas toward Europe in quantities that far exceed TAP's projected initial capacity of 6 bcm per year.

One of the major members of the Shah Deniz 2 consortium, the State Oil Company of the Azerbaijan Republic (SOCAR), also has held out hope for a future Nabucco role.  Rovnag Abdullayev, president of SOCAR, noted that Shah Deniz 2 is not the only offshore gas field the company is developing.  As additional fields come on line, such as ACG Deep, Absheron, Umid and Shafag-Asiman, "We clearly see the Nabucco pipeline corridor as the natural market for our future volumes of gas...We expect that the ability of the southern corridor to bring new sources of supply to European markets will extend beyond the immediate areas transited by TAP."

The European Commission has also not totally abandoned its favorite pipeline project.  Despite statements welcoming the choice of TAP, the commission issued a statement holding out a lifeline to Nabucco.  "In principle, gas from the Caspian Sea could be delivered to the EU both to Baumgarten/Vienna (Nabucco West) or to Italy (TAP)," it said.

An open question remains:  will Europe need all this pipeline gas?  With TANAP/TAP poised to bring gas from the Caspian, North and South Stream scheduled to export Russian gas, the development of shale gas, LNG coming from Algeria...it may be that Nabucco's future will be hostage to the pending glut in natural gas supplies.

Shah Deniz Consortium choose Trans Adriatic Pipeline

After two years of deliberation, the Shah Deniz Consortium (BP, Statoil, Socar, Lukoil, Nico, Total ) has decided to connect the Trans Anatolian Pipeline (TANAP) to the proposed Trans Adriatic Pipeline (TAP), instead of the longer Nabucco West pipeline.  TAP will carry Caspian-origin natural gas through Greece and Albania to Italy.  Nabucco West had planned to carry the gas northward to Baumgarten, Austria.  Speaking on behalf of the consortium, BP's regional director Gordon Birrell made the announcement to journalists in Baku on June 28, 2013.

The decision appears to have been made based on a number of factors such as  lower construction costs because of a shorter pipeline route, and  higher gas prices in Southern Italy.  Andrew Neff, an analyst with the Moscow market research firm IHS, said that a tipping point may have been the State Oil Company of Azerbaijan (SOCAR)'s purchase one week earlier of a majority stake in the Greek gas company Desfa.  "This gives Azerbaijan a direct supply relationship with Greece," he commented.

The government of the United States welcomed the announcement.  A statement issued by the US State Department called the choice "another important step in the process of advancing Europe's energy security and promoting competition in the supply of energy resources."  European Commission President Jose Manuel Barroso also expressed pleasure.  "This is a shared success for Europe and a milestone in strengthening the energy security of our Union," he stated.

Western support has little to do with the amount of gas that will be delivered to Europe.  At 6 bcm per year, TAP will only carry about 1% of European gas consumption.  The financial rating company Fitch Ratings commented that the limited capacity meant TAP would probably not contribute any downward pressure on gas prices.

Rather, the importance of TAP, and the TANAP line to which it will be connected, is that it challenges Russia's hold on natural gas exports to Europe.  US Heritage Foundation analyst Ariel Cohen called TAP an achievement, especially for Azerbaijan.  "This is the first gas pipeline from the former Soviet Union that is not controlled by Russia," he said.  "This is a precedent and a model for Europe to get gas by pipelines from the Caspian region or from other regions without the Russian control."

A country that will benefit substantially from the new pipeline is economically beleaguered Greece.  Prime Minister Antonis Samaras said the decision to use his nation as a transit zone was a vote of confidence in his country.  Samaras issued a statement that TAP would invest 1.5 billion euros (approximately $2 billion dollars) in Greece to construct the pipeline, would generate 2,000 direct jobs, and an additional 10,000 jobs in companies that would be supporting the project.  "After the TAP announcement, the 'disaster scenarios' for Greece and its exit from the euro definitely stop," he said.

Trans Adriatic Pipeline Takes the Lead

With only weeks to go before the Shah Deniz consortium chooses which route will bring Caspian gas to Europe, the Trans Adriatic Pipeline (TAP) has taken a commanding lead.  The decision is supposed to be made by the end of June, according to the director of the State Oil Company of the Azerbaijan Republic (SOCAR) Rovnag Abdullayev.  "At present, the work is under way to choose a route of transporting Azerbaijani gas to Europe," he told Trend.  "The final decision will be made at the end of the month."

TAP has a number of advantages over Nabucco-West, its rival for the fuel that is scheduled to be delivered to the western border of Turkey by the Trans Anatolian Pipeline (TANAP).

• It is shorter.  TAP will extend 800 km, while Nabucco West will stretch 1300 km.
• It is cheaper to build.  Because of the shorter distance covered, TAP is estimated to cost $500 million less. 
• It has political support along the route.  Greece, Albania, Croatia, Montenegro and Bosnia-Herzegovina all support construction.  The Baltic countries hope to gain access to the line through an  Ionian Adriatic Pipeline.
• Azerbaijan stated in February they prefer TAP.  One possible reason is that TAP will not cross directly through former Eastern bloc countries, and Azerbaijan might want to avoid antagonizing Russia.
• Europe has approved TAP.  In May, the European Commission granted TAP the Third Party Access exemption, giving TAP permission to offer capacity for export of gas for the next 25 years.  Previously, the Europeans had given their backing to the Nabucco project.
• TAP will strengthen the Greek economy by providing transit revenues to the beleaguered nation.
• Israel could use TAP to ship its new-found gas to Europe.  Valeria Termini, vice president of the Council of European Energy Regulators, has held talks with senior Israeli officials on the project, according to Platts.

Despite all the advantages to the TAP route, there is still backing in some quarters for the Nabucco-West route to Austria. "Both have advantages and disadvantages," said Gulmira Rzayeva of the Azerbaijani Center for Strategic Studies.

Trans Adriatic Pipeline Receives Funding Commitment

The Trans Adriatic Pipeline (TAP), the southern competitor for carrying Caspian gas from the Turkish border to Europe, has received an economic boost.  British Petroleum and Total have signed an agreement with the State Oil Company of Azerbaijan (Socar) to fund the pipeline, designed to bring natural gas to Italy.   (The proposed Nabucco West would carry gas from the Turkish border to Baumgarten, Austria).  "These funds will contribute toward continued work in several important areas during the period running up to the final routing decision, expected in 2013," said a TAP spokesman.

Kjetil Tungland, TAP's managing director, issued a statement, "The signing of this agreement is a significant vote of confidence in the quality of TAP's technical and commercial solutions from key industrial players, and underpins the cooperation agreement that was signed between TAP and Shah Deniz in June."

While the Shah Deniz consortium has not yet decided between TAP and Nabucco West, TAP's chances have been improved by both the funding, and by the pipeline obtaining government support.  Both the Greek and Italian governments have agreed to support the pipeline, something they previously had not done.  According to the Greek Foreign Ministry, Greek Deputy Energy Minister Makis Papagergiou and his Italian counterpart reached a "close cooperation agreement" to support the pipeline.  The Italian Foreign Ministry added, "Athens and Rome have decided to back the project after Aszerbaijan's Shah Deniz 2 consortium chose TAP to transport gas to western Europe.  Nabucco West remains an alternative..."

With the Shah Deniz consortium sitting on the fence, other interested parties are also trying to cover all their bets.  the European Commission, which had previously said that Nabucco was a priority European project, has backed away.  It now says that it does not favor any project or route over another, as long as it carries Azeri gas, would diversify EU supplies, and would reduce EU dependence on Russian resources.  Similarly, BP is trying to support both TAP and its rival, Nabucco West.  "Our aim is to be involved in all aspects of the project so the aim is to be involved in Nabucco and TAP as well, and this is still being negotiated," BP spokesman Toby Odone said.

Nabucco West Wins Semi Finals

Nabucco West, the European remnant of the EU supported Nabucco pipeline, has been chosen by the Shah Deniz 2 consortium as their potential northern route.  The original Nabucco pipeline, now known as Nabucco classic, was shorn of its length in Azerbaijan and Turkey by the intergovernmental approval of the TANAP pipeline.

The victory of Nabucco West is not a small one.  The lead investor in Shah Deniz 2 is British Petroleum, and BP had their own pipeline proposal:  the South East Europe Pipeline (SEEP).   Nabucco West was probably able to secure the consortium's support because it has transit approvals from the countries through which it would run; SEEP had not advanced beyond the concept page.

"The Nabucco West project, with a route running from the Turkish-Bulgarian border to Baumgarten (in Austria) has been selected as the single pipeline option for the potential export of Shah Deniz Stage II gas to Central Europe,"  BP announced.

Nabucco welcomed the news.  Reinhard Mitschek, managing director of Nabucco Gas Pipeline Internation, issued a statement that, "This decision is an important milestone for the Nabucco project and a major step towards the final investment decision."

While Nabucco West has been chosen as the consortium's choice for a route to Central Europe, the consortium has also picked the Trans Adriatic Pipeline (TAP) as their choice for a delivery route to Southern Europe.  Nabucco will chose in 2013 whether the gas will go north or south.  So, the semifinals in this competition are over, and the final competition will face off Nabucco West and TAP.

EU Energy Commissioner Guenther Oettinger did not take a position on which route was preferable.  "With this pre-selection, we are a step closer to getting gas directly from Azerbaijan and other countries in the Caspian region.  Whatever the final decison on the whole route from the eastern part of Turkey to Europe, Azerbaijani gas is certain to come to Europe," he wrote.  "This is a success for Europe and for our security of supply."

Nabucco Reduced to Rump Project

With the announcement of the proposed Trans Anatolian Natural Gas Pipeline (TANAP) in December 2011, Nabucco has recreated itself as a pipeline proposal that begins at Turkey's western border.  Instead of being the European Union's premier pipeline project in the Southern Energy Corridor, it is now a regional competitor to the Trans Adriatic Pipeline (TAP) and the Interconnector Turkey Greece Italy (ITGI).

The weakness of the original Nabucco proposal could never be overcome:  there was no source for the natural gas that the pipeline was supposed to carry.  In January Sergey Pravosudov, Director of the Russian Institute of National Resources, said, "Europe has long been discussing supply alternatives.  However, nothing is being done in their main project Nabucco.  Europeans themselves admit that the more time passes the fewer chances remain to breathe life into Nabucco."

Because of this inaction, Turkey decided it could not wait for the European actors to get their act together, and Azerbaijan did not want their market to be limited to Russia.  According to a report in Hurriyet Daily News, a Turkish Foreign Ministry official stated, "With the economic slowdown that will reflect in the use of natural gas, Europe put the breaks on."  A Turkish Energy Ministry official added, "Azerbaijan wanted to sell the gas that it will produce from Shah Deniz 2 gas fields.  It did not want to sell it to Russia and did not have the time to wait for the EU to decide."  Azerbaijani parliamentarian Valeh Alasgarov characterized Europe's approach as indifference.  "No one takes care of this project," he said.  The result was TANAP, an abridged Nabucco to carry 16 bcm of natural gas from the fields.  Turkey would consume 6 bcm themselves, and pass 10 bcm to its Western border for onward movement to Europe.

Mark Adomanis, a contributor to Forbes magazine, declared Nabucco a failure.  As a project to demonstrate European unity against Russian energy policy, the pipeline showed the European Union as "almost comically incompetent and incapable."  Adomanis noted that in 2012 Gazprom was arguably more deeply entrenched in Europe than it ever had been.  Jamestown Foundation's Vladmir Socor noted that while the Nabucco shareholders would never leave the consortium, there were chinks in the armor.  German shareholder RWE was making overtures to TANAP, and the Turkish government (owner of the shareholder Botas) was prioritizing TANAP which was "easier to implement" than Nabucco. Hungary's MOL went on record that as long as there was no definite source of natural gas supply, no final investment decision could be reached on the project.   Julian Lee, an analyst at the Center for Global Energy Studies, declared the project dead.  "I think that Nabucco in the way that it was originally envisaged as a pipeline running from Turkey's eastern border all the way to Europe...is probably over.  I don't think that is going to happen.

In April, Hungary's Prime Minister Viktor Orban met with Gazprom CEO Alexey Miller.  Less than a week later, he announced that MOL would leave Nabucco in favor of South Stream.  In an email, they held out hope that they could rejoin a Nabucco in a different format.  MOL cited "uncertain costs and gas sources and, with the current structure and project management, the implementation of the Nabucco project is not secured.  We believe in the South Corridor concept, that could eventually also include a re-considered Nabucco."  

Austrian shareholder OMV began to consider a Bulgaria to Austria version of Nabucco.  It would use the intergovernmental agreements and regulations that had been negotiated for the original Nabucco, and would cost considerably less since the distance would be shorter.  The consortium submitted the modified proposal for a 1,300 km pipeline to the Shah Deniz consortium.  Nabucco's Managing Director Reinhard Mitschek put the best face he could on it:  "We are convinced that we have submitted a competitive and comprehensive proposal...and that this proposal represents a win-win situation for our shareholders and for suppliers alike."  In changing its size, Nabucco West may have lost the support of the EU.  European Commission spokeswoman Marlene Holzner told the press it did not matter whether Nabucco or a rival won, as long as the EU got direct access to the Caspian gas, and that the initial 10 bcm capacity could be increased in the future.

Nabucco's construction costs for a 10 bcm pipeline are now approaching the per kilometer price of the 63 bcm South Stream pipeline, according to Investcafe's Grigory Birt.  Given the convergence in price, he predicted the new Nabucco had little chance for success.  "The lower the capacity of the project, the less profitable that project will be," he said.

While the final decision rests with the Shah Deniz consortium, the question remains if the European Commission will bring enough political pressure to bear to keep Nabucco-West in the game.  The original Nabucco was designed to carry only 5% of the projected natural gas needs of Europe, and Nabucco-West has less than one-third of the original capacity.  The new proposal does little to meet Europe's desire for a modicum of energy independence from Russia.

Trans Anatolian Gas Pipeline Strongest Game in Town

The Trans Anatolian Natural Gas Pipeline (TANAP) is the latest proposal to bring Shah Deniz II gas to Europe.  It currently holds the inside track, since the owners of the project are the state owned oil and gas companies of Turkey and Azerbaijan.  The pipeline will originate at the Caspian, and will take natural gas to Turkey's western border.  Ever since it was proposed in December 2011, it has frightened competing pipeline projects.

According to Olgu Kumus, an analyst at CERI Sciences Politiques in France, TANAP is the main competitor for Nabucco, and not the Gazprom-supported South Stream.  "The Trans-Anatolian pipeline aims to transfer the same gas source to Europe as Nabucco," he told SE Times.  "The most important partner in the Trans-Anatolian pipeline is SOCAR (the State Oil Company of Azerbaijan), which manages the Shah Deniz II gas field with BP.  In other words, the Trans Anatolian pipeline will not have a supply problem because the region's dominant supplier is a stakeholder."  Faced with such competition, Nabucco has now proposed a scaled-down version of its pipeline that starts at the western Turkish border, aptly named Nabucco West.

Not only is TANAP a threat to Nabucco, however, but as more Shah Deniz II gas comes on line the pipeline could expand its capacity.  This puts it in competition with South Stream.  SOCAR president Rovnag Abdullaev said that Azerbaijani gas production would reach 30 bcm by 2015, and 50 bcm by 2025.  He claimed that TANAP, originally planned to carry 16 bcm per year, would have the capacity to carry 60 bcm annually with a possibility of an increase.   Such expanded capacity would leave room for Turkmen gas if the Trans Caucasian Pipeline were to be built.

As plans proceed, SOCAR has invited other companies to join in the TANAP project.  "We would like other large international companies to be part of the project as well," said Abdullayev.   Ukraine's Ambassador to Turkey, Sergiy Korsunsky, told reporters that Ukraine would like to take a stake of up to 10% of TANAP and could pay for it with cash, or by supplying the project with pipes.  In addition, competing pipeline consortiums TAP (Trans Adriatic Pipeline) and ITGI (Interconnector Turkey Greece Italy) said that their projects were compatible with TANAP.  "TAP will be happy to work with the developers of TANAP for any required coordination between the two pipelines, thus providing a fully integrated solution for the delivery of Caspian gas to Europe," External Affairs Director Michael Hoffman told Reuters.  Similarly, the CEO of IGI Poseidon, ITGI's operator, said "The ITGI project starting at the Turkish-Greek border is fully compliant with any option to transit Azeri gas through Turkey, including TANAP."

Trans Adriatic Pipeline Chosen for Italy

Trans Adriatic Pipeline (TAP) Managing Director Kjetil Tungland told EurActiv he has received a letter from the State Oil Company of the Azerbaijan Republic (SOCAR), inviting TAP to enter into "exclusive negotiations" with the Shah Deniz consortium.  SOCAR added the invitation was supported unanimously by all the members of the consortium, and the decision is final.  What this means is that the Interconnector-Turkey-Greece-Italy (ITGI) project, an alternative route to Italy supported by the Italian and Greek governments and whose members are primarily Greek corporations, has been eliminated from consideration because of the continuing economic turmoil in that country.  The Shah Deniz consortium is a group of companies led by Statoil and British Petroleum (BP).  Other members include SOCAR, LUKOIL, NICO (Iran), Total and TPAO (Turkey). 

TAP is sponsored by the Swiss energy company EGL, Germany's E.ON AG, and Statoil ASA from Norway.  A weakness of this consortium is that it lacks an Italian partner but, with the Shah Deniz decision supporting TAP, ITGI supporter Enel SPA of Italy has expressed interest in joining the TAP group.  "Enel is interested in all projects that bring gas to the country, includiing TAP," said Enel CEO Fulvio Conti. 

If built, TAP will carry 16 bcm of natural gas from the second phase of the Azeri offshore gas field, Shah Deniz.  They would pick up the gas at the Turkish border, and carry it 800 kilometers. While the Shah Deniz consortium has agreed to use TAP if it sends gas to Italy, it still has not made a decision to use that corridor, at all.  Harry Sachinis, CEO of the Public Gas Corporation of Greece (DEPA-an ITGI member) said, the Italian pipeline portion of the Southern gas corridor is only a "provisional decision."

Critics of the project point out that TAP has no intergovernmental agreement among the three countries (Greece, Albania and Italy) through which it would pass, although it was included in an Albanian-Italian bilateral from 2009.  They also says that unless Enel or another Italian firm joins the TAP group, it would be difficult to get Italian government permission for the project, according to Reuters.

Is Nabucco a Pipeline or a Pipe Dream?

Nabucco is even further from completion today than it was a year ago. There is no commitment for feedstock, and no real financing. Other competitors for the same initial gas, the Trans Adriatic Pipeline (TAP) and the Interconnector Turkey-Greece-Italy (ITGI), have a better chance of success because they are less ambitious, and less costly. The only possible way for Nabucco to survive appears to be in partnership with one of these smaller pipelines, or with its Russian-backed rival, South Stream.

In May, the pipeline announced it was pushing back the start of construction by three years to 2013, and the start of operations would be delayed until 2017. According to Nabucco managing director, the delay is due to the uncertainty surrounding the supply of raw materials, reports Russia Profile. Reinhard Mitschek said in a conference call that construction would start "as soon as there are firm indications that gas supply commitments are in place."

There are a number of indicators that Nabucco remains a serious contender. Reuters reports that the CEO of one of Nabucco's partners, OMV, insists that the pipeline will be completed despite delays and costs overruns. Turkey's energy and natural resources minister Taner Yildiz is on record stating the "Realization of the Nabucco project is among the key priorities for the Turkish government," according to the website Today.Az. In January, EC President Jose Manuel Barroso visited Azerbaijan and Turkmenistan to discuss the pipeline. "Our goal is to have the clear commitments of those countries regarding the Southern Corridor and including, of course, Nabucco," wrote Hurriyet Daily News. European Energy Commission Guenther Oettinger remains a strong supporter, telling Austria's Die Presse that Nabucco owners must be bold and construct the project, because there are enough supplies to build it. "It is clear that there is a certain risk. but if you want to try and make profits without risk, well that doesn't work," he said according to Reuters.


Bulgaria is willing to issue state guarantees for loans taken by state-owned Bulgarian Energy Holding to fund the project, according to Economy and Energy Minister Traicho Traikov as reported in the Sofia Echo. Bulgarian Prime Minister Boiko Borissov said the European Investment Bank was willing to extent a 1.2 billion euro banking guarantee to finance Bulgaria's share of the project, representing 100% of Bulgaria's operation, according to the Sofia Echo.

The Fukiyama nuclear disaster, and Europe's reaction to it, seem to be helping the Nabucco cause. In June, the Nabucco consortium signed agreements with transit countries, confirming that the laws of 2011 would apply regardless of what year the pipeline were built, according to UPI. Claudia Kemfert, an energy analyst at the DIW economic institute (Berlin) said, "The new German energy strategy will be a push for Nabucco. It seemed almost dead but the nuclear decision revived it," according to Hurriyet Daily News.

Despite all the positive play, the difficulties for Nabucco seem insurmountable. Russian Prime Minister Vladimir Putin identified some of these issues when he said, "Nabucco's major problem is a lack of guaranteed volumes of raw materials and no source to fill the system...Russia will not deliver anything there, Iranian deposits are not explored, and Azerbaijan's volumes are small. Moreover, Azerbaijan has signed a delivery contract with Russia," according to RIA Novosti. Since the initial gas is supposed to come from Azerbaijan, Putin was saying there was not enough volume to both fill the Russian contract and the pipeline at the same time.

Indeed, State Oil Company of Azerbaijan (SOCAR) Vice President Elshad Nassirov was lukewarm about Nabucco in an interview last year that was published in the European Energy Review. Nassirov said that Azerbaijan was not prepared to "put all its eggs in one basket," meaning the Southern Corridor; that Azerbaijan would decide on which pipeline to support based on purchase prices, and transportation terms and tariffs; that it was conceivable that the Azeri gas would be sold only in Turkey and Azerbaijan; that if a pipeline was operating below capacity (because Azerbaijan is only promising 10 bcm per year and Nabucco can carry 31 bcm) Azerbaijan would not subsidize the pipeline's operation.

Azerbaijani President Ilham Aliyev reiterated his neutrality when speaking to the World Economic Forum in Davos. He said he was giving equal priority to Nabucco as he was to other projects, according to Reuters. In an interview with Rossiya-24 television, he again hedged his support. "We support this project (Nabucco) but with respect to mutual interests. Primarily, we must secure commercial interests and ensure fair prices. There are very many issues related to the transit of our gas, its price for the end consumer and the financing issues of building a new gas pipeline, the role of Azerbaijan as a transit country, since it is clear that Nabucco cannot be filled only with Azerbaijani gas." Aliyev said the Southern Corridor was not just Nabucco, but included at least two other options.

As for the United States, Richard Morningstar continues to hedge his bets. As reported in News.Az, he said at a Baku press conference, "We prefer the Southern Corridor as a whole... As far as what's preferable from the strategic standpoint...the Nabucco pipeline would be the most preferable...we would support any of those pipelines. The question that one will have ultimately to determine is whether a Nabucco pipeline is commercially viable...If a determination is made that the full Nabucco pipeline is not commercially viable...then one would have to look at a smaller approach that would expand as more gas becomes available. That could be ITGI, it could be TAP, or it could even be some form of Nabucco." Morningstar also commented that a merger of the Southern Corridor projects would be helpful.

Since Azerbaijan will not commit its gas resources to Nabucco, the pipeline needs to look at alternative sources such as Turkmenistan, Iraq or Iran. According to Andreas Heinrich, a researcher at the University of Bremen's Center for East Asian Studies, the project does not have a chance unless Central Asian partners, especially Turkmenistan, join the project, according to Today.Az. Turkmenistan is on record as stating they can provide as much natural gas as the pipeline can handle, but has insisted that someone must build a Transcaspian Pipeline to get the gas to the Azeri side of the sea. Political considerations make Iranian gas problematic, and Iraq has not committed to Nabucco, according to UPI. "We have an agreement with the European Union where Iraq is going to supply the EU with some gas, not necessarily from Nabucco," says Iraqi Deputy Prime Minister for Energy Hussein al-Sharistani. "Iraq is not committed to that project."

Even if the source of gas is eventually determined, BP may have administered a death blow to an independent Nabucco when they doubled it's assessment of the cost of construction to almost 14 billion euros.


In addition, human rights organizations are opposed to Nabucco. On 20 January 2011, a group of 37 civil society groups sent a letter to the International Finance Corporation, which is planning to invest 800 million euros in the project. According to Eurasianet, the letter characterized Nabucco as unsustainable, and called for a review that would involve both supply and transit countries. The activists want civil society concerns factored into the equation. They also point out that it will be difficult to get oil from Turkmenistan across the Caspian, as the legal status of the Caspian remains unresolved. They posit that it would be difficult to get approval from Iran and Russia to build a Trans Caspian pipeline. The group also discusses the possibility of earthquakes and ecological damage.

ENI's CEO summarized the criticisms of Nabucco in testimony before the European Parliament: "We have never seen a pipeline, which needs tens of billions of dollars of investment, that does not have a gas producer as a partner. Nabucco is a consortium of gas consumers, so from our point of view it is not a solid project," reported the M&C website.


There is a possibly viable alternative: the merger of Nabucco with South Stream. In December, Turkish Ambassdor to the European Union Selim Kuneralp told conference participants in Brussels that the ITGI and Nabucco projects were not competitive, but complementary. His comments were followed by US State Department officer Louis Bono wh said the US government favored diversification of European energy sources, and that the best solutions were those with the best chance of commercial viability, according to the website Today.Az. There was no discussion of the strategic importance of Nabucco over the ITGI.

US Ambassador to Italy David Thorne told the Italian daily La Stampa that Nabucco and South Stream might merge. Thorne discussed the role of ENI, the Italian gas giant that is also a major shareholder in South Stream. He commented that ENI's CEO Paolo Scaroni had been in a number of meetings on this subject in both Rome and in Washington. "ENI has changed its approach, favoring a merge under the South Stream and Nabucco pipelines. I would say that we are in a constructive phase," La Stampa quoted the Ambassador, according to UPI. (Scaroni denied the remark, saying it would be impossible to merge with Nabucco since it was a project that still didn't exist, reports Bloomberg. Italian Industry Minister Paolo Romani also said South Stream, ITI and Nabucco were incompatible, according to Hurriyet Daily News.)

Dr. Manuela Troschke, senior researcher at the University of Regensburg's Institute for East European Studies, is also on record as stating a joint solution is what makes economic sense, according to News.Az. At another venue envoy Richard Morningstar made a more forceful statement that the US supports the integration of the Nabucco and ITGI pipelines. "But the final decision will be made by the consortiums," he said according to Today's Zaman. Nabucco CEO Reinhard Mitschek told the Hungarian business daily Vilaggazasag that Russia could ship gas thrugh the pipeline at a later stage, according to Azernews.az. Even EU Energy Commissioner Gunther Oettinger has reversed himself and said that Nabucco and South Stream were not direct competitors, according to the Sofia News Agency. The Director of the American Association for the Advancement of Slavic Studies at Harvard University, Dmitry Primus Gorenburg, has also weighed in that "it may make sense to incorporate Gazprom into the Nabucco project--to reduce the political competition over routes and perhaps improve financing prospects," reported the Azeri Press Agency.

Former German foreign minister, Joschka Fischer--himself a consultant for Nabucco--has advocated Nabucco merging different partners: ITGI and/or TAP. "We have to integrate the European projects," he told the 2011 European Gas Conference in Vienna. "Business interests would be brought toegether, but, above all, it would allow Europe to diversify." Fischer was not interested in merging with South Stream, however, as merging with a Russian company would do nothing to diversify Europe's energy supply, according to the New York Times.

Reuters also reported that European Union officials are pushing for a merger of Nabucco and ITGI to help secure supplies from Azerbaijan. The European Commission is urging representatives of both projects to merge their operations to keep costs down, and make the project technically and commercially viable. Christian Dolezal, head of communications for Nabucco, acknowledged that talks were taking place at the political level, but denied discussions within the consortium itself. BPmay also be supporting a merger. It's chief of refining and marketing supported ITGI and Nabucco at the same time. "We are going to build a 10 bcm line into Europe that's expandable," reports Fox News. "We've got to stop being preoccupied by the word Nabucco."


If the two pipelines merged, the project would be built in two phases, according to Eurasianet. Southern Corridor Phase I would take the pipeline to Greece and Italy, and Southern Corridor Phase II would include a spur north to Austria.

There are also indications that the Russians may be softening their stand on Nabucco. Gazprom chief Alexi Miller told Der Spiegel that diversification was a good strategy for European energy. When asked about the rival Nabucco pipeline, he said "If the Europeans want a Nabucco pipeline, they should build it. We have nothing against the idea. Nabucco is their problem. Our job is to deliver our gas to our customers as stipulated in our contracts," according to UPI. Prime Minister Vladimir Putin told Austrian President Heinz Fischer that South Stream was important, but that Nabucco was also important, according to ITAR-TASS.

Conclusion: while there is still much support for an independent Nabucco pipeline, the number of government officials, businessmen and independent analysts who have criticized the viability of the project is telling. More and more, the indications are that before construction begins in 2015 Nabucco may merge with another pipeline.