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.

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.

Bulgaria Playing Both Sides

Against all expectations, Bulgaria has emerged as a key player in the battle for control of the Southern Energy Corridor.  This Black Sea country is astride the most logical route between the gas fields and European markets for both South Stream and TANAP.  Bulgaria has agreed to cooperate with both consortiums, while playing for maximum advantage.

 

In August 2012, Bulgaria and Gazprom announced they would conclude an investment contract in November for the construction of South Stream.  Simultaneously, Bulgarian Minister of Energy and Economy Delyan Dobrev announced a new gas-supply contract that featured an 11% price in gas for the remainder of 2012.

 

Once having achieved its goal of obtaining Bulgarian cooperation, however, the Russians appear to have upped the ante.  For construction of South Stream to begin, the Russians declared they wanted $1.3 billion in compensation for the Belene nuclear plant.  This was a project that the former Bulgarian government had contracted with Russia, but that current Prime Minister Boiko Borisov cancelled when he took office last year.  Borisov was outraged.  "We are observing all our commitments on South Stream.  For Belene we continue to negotiate...That is why I think we have been absolutely treacherously surprised by that claim."  Bulgarian observers pushed back, threatening that the government would be forced to cancel South Stream.  Ilian Vassilev of Innovative Energy Solutions said, "There is no way Bulgaria can pay both the claim and let South Stream happen."

 

The dispute has led to a delay in a visit by Russian President Vladimir Putin, who was supposed to be present in Sofia on November 9 for the signing of the South Stream papers.  Instead, Putin has postponed his trip until December, possibly signalling his unhappiness with Bulgaria's recalcitrance.

 

Meanwhile, in September 2012 the European Union criticized Bulgaria for  supporting South Stream while lacking sufficient commitment to the EU's version of a Southern Energy Corridor.  The EU's concern was that South Stream only diversifies supply routes from Russia, but does not diversify the ultimate, Russian source of supply.  "Bulgaria needs to complete the ongoing investment projects on gas interconnectors with Romania, Serbia and Greece, and make reverse flows possible on its interconnector with Turkey...Bulgaria also needs to play a more proactive part in opening up the Southern Gas Corridor, which has the potential to diversify supply sources," said a leaked document.

 

The Bulgarian Prime Minister was non-plussed.  In an interview with Euronews, Borisov said he was commited to the European vision.  "It is very important that the Turkish Tanap-pipeline reaches Bulgaria and that Nabucco-West and the South East Europe Pipeline move closer to Europe...Regarding the Nabucco project, Bulgaria has done all it can:  the parliament approved its construction.  We have signed all the documents that are required and we can start construction work tomorrow if necessary.  I am looking forward to the launch of the Nabucco project."

 

Despite any agreement with Nabucco, however, as of 30 September 2012 there was no agreement between Bulgartransgaz and Turkey's Botas to connect with the Turkish pipeline network.  Without such a connection, any discussion of Tanap or Nabucco is moot.  To give the country some negotiating room, Bularia delayed its plans one year to connect its gas network with neighboring Balkan countries.  Bulgartransgaz announced the connection would take place in 2014, instead of the originally-planned 2013.

 

 

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.

Gazprom May Punish Hungary for Supporting Nabucco

Faced with Hungary's approval of an environmental permit for the construction of the Nabucco pipeline, Gazprom may be considering moving west the route for the rival South Stream pipeline. 

Reinhard Mitschek, managing director of Nabucco, announced on August 14 that Hungary was the first country to issue the project all its permits.  "The granting of this permit is a substantial step forward in Hungary and signifies the advanced stage of development of Nabucco West," he said. 

Within a week, Gazprom announced they were in talks with Croatia over the South Stream pipeline route.  "An intergovernmental agreement between Russia and Croatia on joint participation in the South Stream project was signed in 2010," a spokesman commented.  "Currently, based on the results of a pre-investment stage, Gazprom and Plinacro Ltd. are discussing the terms of a shareholder agreement for a joint compnay project with a view to its subsequent establishment."

The Croatian side is optimistic.  "At the moment the chances are 50:50 that we get the transit route of South Stream," said a source involved in the Gazprom negotiations.  The reasons for changing the route are uncertain.    According to the Voice of Russia, a Croatian list serve, Jutarnji, listed a number of possible concerns:  lower costs, differences between Gazprom and the Hungarian leadership, uncertainty over ownership shares of various Hungarian companies, and slow work on the Hungarian economic feasibility stateement.  Gazprom's board chairman Alexei Miller minimized these reasons, however, calling them "not significant."  An unnamed Plinacro source added that there could be no official confirmation on the status of the talks, as both sides are bound by a mutual confidentiality pledge.

Timing would indicate the talks are retribution for Hungary's cooperation with South Stream's rival, Nabucco.  Whether the talks will result in the route change, or are merely a pressure tactic on Hungary by Gazprom officials, is yet to be seen.

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."

South Stream Advancing

While Western companies still compete over which route will be the Southern energy corridor, Gazprom's South Stream continues to plan for its construction.

In December, the company made a slight modification to its originally-planned route.  Following the EU's blocking of Gazprom's purchase of 50% of the Central European Gas Hub in Austria, a Gazprom spokesman told Reuters the project was no longer considering that country as a transit route.  "Only a spur will run to them," he said, adding that the route would now end in Italy instead of Western Europe.  Whether this decision will hold is uncertain, however, since in April 2012 the head of ENI (Italian energy company and South Stream partner) announced that the northern leg of South Stream to Austria will be built before starting work on the southern leg to Italy.  This report was contradicted by Gazprom in May, when they published a story that they might abandon the offshore section of the pipeline to Austria entirely.  The report added that the line would end in the northeastern Italian city of Tarvisio.

Gazprom CEO Alexei Miller confirmed in February that final investment decisions on the pipeline would be made in November, with construction scheduled to begin in December.  "We have entered into the stage of actual construction of South Stream," he said in a statement.  "I can say without exaggeration that Gazprom is working on the project 24 hours a day."

There had been a discussion within Gazprom whether it should be built for its maximum capacity of 63 bcm per year, or if the project should be started with a smaller pipeline that could be expanded at a later time.  In Winter 2012, however, Italy shivered without natural gas during some of the coldest weather in recent years.  Many analysts believed Russia had cut back deliveries to foreign customers while servicing their domestic customers.  In their review of the situation, however, Gazprom blamed the shortages on Ukraine's siphoning fuel from the transit line.  Gazprom CEO Alexei Miller told Russian president Demitri Medvedev, "On certain days, as much as 40 million cubic meters of gas remained on Ukraine's territory...  Our Ukrainian partners took as much gas from the export pipeline as they felt necessary."  In reply, Medvedev told Miller to build the pipeline at full capacity.  This decision will eliminate the need to use the Ukrainian pipeline to export Russian gas to Europe.  (Ukraine denied any diversion had taken place).

Julian Lee, senior energy analyst at the Center for Global Energy Studies in London, theorized as to why South Stream's tempo has increased.  In an interview with New Europe, he said "We are seeing a general sort of shift at the moment in the region of countries that are favoring South Stream.  There is a realization that Nabucco is not going to happen, at least in its original form...I think supporting or at least voicing support for South Stream is no longer perhaps seen as undermining Nabucco because I think the idea of Nabucco has largely evaporated now."

The European Commission continues to oppose South Stream because it is only a diversification of supply routes, instead of a diversification of suppliers.  Others, such as Russian energy consultant Mikhail Krutihin, oppose the project because of the price.  Citing a potential cost of construction of $40 billion, he told Nezavisimaya Gazeta, "This is madness.  It would be cheaper to strike a deal with the Ukranians."

South Stream Becoming a Reality

On December 29, 2011, Turkey and Russia signed an agreement to allow the South Stream natural gas pipeline to transit the Black Sea waters in Turkey's economic zone.  This was an important development, in that South Stream now has the necessary permissions to bring the Russian pipeline system to Europe via the Southern corridor.  Russian Prime Minister Vladimir Putin was so excited by the development that he ordered Gazprom to move up the date to begin construction from 2013 to 2012.
There has been much speculation that the pipeline is a bluff--designed to either stop Nabucco construction or to force Ukraine to bend to Moscow's will.  The truth may be more obscure.  US Special Envoy for Eurasian Energy Richard Morningstar commented in a recent speech, "The Russians have...taken to building the South Stream Pipeline, although they are the only ones who know why."
The fact is that, regardless of what the original thoughts may have been concerning the pipeline, Russia has made so many commitments concerning this pipeline that it would be almost impossible for them to back out.  There are three Western European private companies who are partners in this project.  It is extremely doubtful that Germany's Wintershall (a division of BASF), Italy's ENI, and France's EDF would incur start-up expenses in support of a Russian political ruse.  Gazprom still controls 50% of the consortium and could unilaterally kill the project, but it would incur the wrath of its other partners.
The same goes for the various governments that have signed on.  Bulgaria has hired a company for a feasibility study, Slovenia has created a JV to build and operate their share of the pipeline, Serbia looks forward to being a key transit center, Greece (now to be on a spur instead of the main line) has identified the pipeline as a national priority, etc.
Much has been made that South Stream has not identified where it will get the 63 bcm annually it needs to fill the pipeline.  In fact, South Stream never planned to identify new sources of gas, but to use the gas that is presently transiting the Ukrainian pipeline system, according to South Stream CEO Marcel Kramer.  European Energy Review published an interview with Kramer on this subject.  "The basic and overriding target of Russia is to ensure the technical, managerial and economic reliability of its gas supply.  That is where South Stream comes in.  Don't forget that the pipeline system in Ukraine is in a poor state.  It's being said that it is old, dilapidated, without an integrated management system.  To upgrade the entire route through Ukraine would also cost a lot of money.  Then you get into questions of ownership, operatorship, who puts up the money, the chances of political interference.  The bottom line is, is this an arrangement that the buyers of gas in Europe can rely on?  If you put all this together, the answer is clear," he said.
Ukraine, of course, is opposed to the new pipeline.  Energy Minister Yuri Boiko called South Stream a threat to Ukrainian national interests.  "We will always be against it," he said according to UPI.
Another question has been whether there is sufficient demand for Russian natural gas to justify the building of the pipeline.  Andrea Bonzanni, former consultant to the UN and the World Bank, wrote in World Politics Review that the mid- to long-term outlook for gas demand does not seem to justify the construction of both Nabucco and South Stream.
The Russians believe Europe has a long-term need for additional gas, justifying the construction.  After a meeting between Gazprom Chairman Alexi Miller and Bulgargaz executive director Dimitar Gogov, UPI reported the participants issued a statement that both sides "share the opinion that given the inevitable gas demand growth in Europe, timely implementation of South Stream would meet the interests of millions of European consumers."  Miller has said, "It is clear that there will be need for additional pipeline capacities" that would help mitigate risks that could have a serious impact on the European market, according to Platts.  Alexander Medvedev, deputy chair of the Gazprom Management Committee, wrote in Today's Zaman, "The fact that South Stream is primarily an investment in energy security, not in boosting the market share of Russian gas, also means that it does not compete with other pipeline projects that intend to import fresh supply volumes from other possible gas sources.  South Stream does not oppose these projects." RIA Novosti quoted Gazprom's Medvedev, "Even if we take into account the Nord Stream, the South Stream, the Nabucco and liquefied natural gas, all the same, the shortage of gas supplies to Europe will be some 530-700 billion cubic feet."
Some within the European Union appear to agree with this analysis.  European Energy Commission Gunther Oettinger said "we don't want to block South Stream," and arranged for South Stream executives to make their case to the commission in May. At that meeting, the Russians took the opportunity to make the case that South Stream is a continuation of Russian trans-border pipelines, and third parties should not have access to it.  Ths would guarantee a Gazprom monopoly on the project flow. CEO Kramer said requiring the pipeline to open to competitors would affect the project's rate of return, and could make the project more "difficult" to carry out, according to the New York Times.  Oettinger, however, remained adamant:  "If South Stream...gives access to gas independents active in Russia, then South Stream would deliver on two essential criteria:  namely diversification of routes and counterparties.  That means a stronger contribution to European diversification efforts," he said in a speech reported by the Wall Street Journal.
Whether the doubters or the believers are correct, however, it appears that the construction of the pipeline will begin within the next twelve months.

Nabucco Down but Not Out

It's been a tough six months for Nabucco, the European Union-preferred route that is supposed to bring Caspian natural gas to Austria via Turkey, Bulgaria, Romania and Hungary.  Azerbaijan has received bids for its Shah Deniz II oil from several competing consortiums, and several of them are more attractive economically.  On top of that, Nabucco still is unable to find enough feedstock for its pipeline.  Despite these setbacks, some analysts believe the route remains the most viable route:  because it guarantees independence from Russian natural gas, and because it can carry more product than any of the competition (except for South Stream).
On June 8, the Nabucco Gas Pipeline International GmbH signed project support agreements with the transit countries, but Azerbaijan did not sign the agreement as this would have signaled their choice of a route.  Elshad Nasirov, vice present of the State Oil Company of Azerbaijan (SOCAR), said that Azerbaijan was not prepared to commit all its gas to one buyer.  "We prefer diversity among the buyers, so we sell gas to the EU and Iran, as well as Russia," Hurriyet reported him as saying.  Nasirov cast doubt on Turkish support of Nabucco, citing Turkish failure to provide Azerbaijan with a signed copy of the project support agreement, and failure to sign a bilateral transit agreement.  "If we have not yet signed the transit agreement, should we understand that Nabucco has still not been sanctioned byTurkey?"  he asked.  In a foreshadowing of Azeri support for the Trans-Anatolian pipeline proposal, he told the Wall Street Journal that he preferred a smaller pipeline that could be expanded later to meet additional capacity.  He also said that SOCAR would consider becoming a shareholder in this smaller pipeline, in order to influence transit tariffs and other decisions.
Contradicting Nasirov was Azerbaijan's Minister of Industry and Energy Natiq Aliyev.  UPI reported him as saying his country supported the Nabucco project.  "As part of this project, Azerbaijan can serve as a transit country, as well as a gas supplier, as the project is seen as a priority in light of the diversification of gas supplies," he said.  UPI reported the German energy company RWE, whose support had been questioned after they signed a purchase agreement with Gazprom, remained committed to Nabucco, according to RWE Chief Executive Officer Joergen Grossman. In addition, Bayerngas announced its desire to join the Nabucco consortium, according to the Dow Jones newswire.
Nabucco submitted its formal proposal to SOCAR at the end of September, along with all its rivals.  SOCAR spokesmen announced at various times that a final decision would be made as early as October 2011or as late as 2014.
Nabucco's inability to find gas supplies has forced it to delay by 3 years its scheduled date to begin operations.  Orignally scheduled to be completed in 2015, completion date is now scheduled for 2018--although construction is still supposed to begin in 2013, according to the CEO of OMV Gerhard Roiss the Sofia News Agency.  To solve this problem, Austria's President Heinz Fischer asked Turkmenistan to become a Nabucco supplier, according to Associated Press.  According to Dr. Friedemann Muller of the German Institute for International and Security Affairs, the Turkmenistan gas is crucial for Nabucco to be successful. (The issue of bringing Turkmenistan gas to Azerbaijan via the Trans Caspian Pipeline is addressed in numerous other entries on this blog.)
The cost of Nabucco has also become an issue.  Hungarian National Development Minister Tamas Fellegi complained, "No one can predict the final cost of Nabucco, but according to optimistic estimates, its cost may reach 24-26 billion euro," a far cry from the original projection of $8 billion.  The European Commission believes the price will be closer to $10 billion, and Nabucco chief Reinhard Mitschek does not believe financing will be an issue.  "I am confident that once we will have the gas supply and transportation contracts and...with political support we expect financing will be settled and will not create a bottleneck," quoted Reuters.
U.S. Special Envoy Richard Morningstar has never been a Nabucco supporter, and he has continued to denigrate its possibilities.  At a news conference in Baku, he said that Nabucco retained U.S. political backing but that economic concerns should take precedence.  "It's important if Shah Deniz producers and SOCAR choose a smaller pipeline as the first pipeline," he said according to Reuters.
Nabucco's primacy was challenged in December 2011, when SOCAR and the Turkish Pipeline Company (BOTAS) announced their plan to build their own pipeline, the Trans Anatolian pipeline.  According to SOCAR president Sabit Bagirov, however, this development actually helps Nabucco's prospects:  "With the implementation of the Trans Anadolu Dogalgaz Pipeline, the necessity to construct the Turkish section of Nabucco will disappear, and the builder will only need the gas pipeline section from Turkey through Bulgaria to the distribution point in Baumgarten in Austria.  In other words, with the implementation of the Trans Anadolu Dogalgaz Pipeline, only that section of the Nabucco route falling on European teritory will need to be built," quoted the Moscow Times.
As 2012 begins, Nabucco appears no closer to completion than it did at the beginning of 2011.  Construction is scheduled to begin on time, but completion will not be until 2018.  The consortium relies on Shah Deniz II gas, which SOCAR wants to pump through the Trans Anatolian Pipeline.  On the other hand, Nabucco could join this new project.  The price continues to rise, and no alternative feedstock sources have been found.  Nabucco is not dead, but it might be considered to be on life support.

Azerbaijan to Have its Own Gas Pipeline

Tired of Nabucco planning without implementation, Azerbaijan's Minister of Industry and Energy Natik Aliev and Turkish Energy Minister Taner Yildiz signed a memorandum in late December to build their own natural gas pipeline. The new project, entitled the Trans Anadolu pipeline, will upgrade existing Turkish pipelines to carry 16 billion cubic meters (bcm) of natural gas a year: 10 bcm throughput for the European market, and 6 bcm for domestic, Turkish consumption.
The pipeline will be 80 % owned by the State Oil Company of the Azerbaijani Republic (SOCAR). The remaining 20% will be divided between the two Turkish state-owned companies that control the pipelines: Petroleum Pipeline Corporation (BOTAS) and the Turkish Petroleum Corporation (TPAO.)
The question becomes, what will happen to Nabucco? Trans Anadolu will only deliver to Europe one third the capacity of the planned Nabucco pipeline, but it would deprive Nabucco of the Shah Deniz output that was essential to getting the project started. Gulmira Rzayeva, a research fellow at the Center for Strategic Studies, told Bloomberg, "Nabucco is impossible in the medium term because it is a costly project and needs more suppliers than Shah Deniz to be economically viable." RWE's Stefan Judisch said the new route "raises questions about access and financing."
The Turkish government says that this project is not necessarily an alternative to Nabucco, but could be a first step toward its ultimate completion. Given that Trans Anadolu can be built at a fraction ($9.2 billion) of Nabucco's cost (possibly as high as $20 billion), it remains to be seen if investors will be interested in spending the funds to complete the project(assuming additional feedstock can be found).

Transcaspian Pipeline Feasibility Study Launched

The State Oil Company of Azerbaijan (SOCAR) and KazMunaiGas (KMG), the state-run energy companies of Azerbaijan and Kazakhstan, have agreed to launch a feasibility study for the Trans Caspian Pipeline (TCP), according to the Energy Delta Institute. The two companies have issued a tender offer, and interested parties have until July 14 to submit their proposals, according to Open Central Asia. Vurgun Jafarov, head of the Kazakh office of SOCAR, said the two companies will set up a joint structure, or consider other ways, to handle the study which will completed by the end of 2011.

This is welcome news to the supporters of the Nabucco pipeline, which needs guarantees of feedstock to move forward. Turkmen President Gurbanguly Berdymukhammedov had previously said he would sell as much as 40 billion cubic meters of gas per year to the West, provided the TCP is built. Azerbaijan is willing to provide one third of the gas that is required, but without access to gas from the eastern side of the Caspian, Nabucco does not appear economically viable.

European Energy Commissioner Guenther Oettinger is predicting that the European Union will receive gas from the Caspian within two or three years. Following a January visit to the area, he reported that Azeri President Ilham Aliyev could sell up to 21 bcm of gas within five to eight years. He confirmed that Turkmen President Berdymukhammedov would commit to 10 bcm, and he speculated that Uzbekistan was readh to join, according to the Earth Times. There was no mention of a Kazakh involvement, but such a move makes sense given the huge offshore gas deposits that Kazakhstan controls.

The major impediment to the TCP remains the legal status of the Caspian. Russia and Iran claim they need to assent to a pipeline project that would traverse the sea bed; other countries insist that bilateral agreements between the countries where the pipelines travel are sufficient. In June, Russian Ambassador to Azerbaijan Vladmir Dorokhin claimed that a pipeline would hurt the ecology of the Caspian, according to Eurasianet. "Russia, as a Caspian country, is against the laying of pipelines and gas lines along the bed of this unique body of water, which could harm the ecological state of the Caspian," he said. Russia insists that a treaty governing use of the Caspian outlines the need for consensus on ecological issues; the problem is, the treaty he quoted has never been ratified. Such claims from Russia would be more believable if Russia's own ecological track record was not so dismal.

Kazakhstan and Azerbaijan's willingness to take the lead on this project, against the wishes of Moscow, shows that economics continues to trump political considerations in this vital part of the world.

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.

TAPI Being Discussed, Not Built

Plans to build a Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline continue to be discussed, despite the lack of security in transit countries that would allow the project to be built. In January, Indian External Affairs Minister S M Krishna met with his Afghan counterpart to discuss the pipeline, which has the support of the Asian Development Bank, according to DailyIndia.com. This was followed by a meeting between Afghan president Hamid Karzai and Russian President Dmitry Medvedev, after which the leaders expressed a willingness to cooperate on a range of energy projects, including TAPI, according to the Tehran Times. In a May meeting between Pakistani President Asif Ali Zardari and Medvedev, the governments announced Moscow may join the project with Gazprom serving as one of the suppliers, according to UPI.

To obtain Russian approval of the project, Karzai agreed that Gazprom could be involved in the construction and operation of the project, according to Central Asia newswire. The announcement was in contravention of the wishes of Turkmenistan President Gurbanguly Berdimuhamedov, who rejected Gazprom's involvement in the project in August 2010. The Turkmen president had characterized Gazprom's attempted involvement at the time as a Russian attempt to meddle in Turkmenistan's energy affairs.

The principle supporter of TAPI since the 1990s, and the force behind the Asian Development Bank's endorsement of the project, is the United States. According to U.S. Assistant Secretary for South and Central Asia Affairs Robert O. Blake, Jr., "The country's substantial natural resources may make Turkmenistan one of the top five countries worldwide in terms of gas reserves," which have "attracted the attention of many countries intersted in securing Turkmen gas for various pipeline projects...The U.S. has welcomed renewed interest in TAPI." Blake credited President Berdimuhamedov for "almost single-handedly" resurrecting TAPI, reports opednews.com. Blake was speaking at Rice University in Houston, and he said that if TAPI were built, it would occur without Russian or Chinese involvement. "Washington's vital interest in TAPI includes having an alternative route for Central Asian gas that will bypass the Russian pipelines' network...India has objected to any Chinese firm or consortium being given contracts related to the building of (TAPI)...The U.S. has supported TAPI...as a way to break Russia's and China's monopoly on exporting Caspian basin energy to the rest of the world." Blake did not explain, however, how to prevent Afghan President Karzai or Pakistan President Zardari from bringing Gazprom into the equation. In fact, in late May Pakistani advisor on petroleum and natural resources Assim Hussain signed a Memorandum of Understanding with Russian energy Sergi Shnatro pledging cooperation on a number of Pakistani energy projects, including TAPI, according to Oil and Gas Journal. Both presidents witnesses the signing ceremony.

Should TAPI be constructed, the President of the Russian Union of Oil and Gas Producers Gennady Shmal speculates that Turkmenistan would not have enough gas to fill both TAPI and Nabucco. "A gas pipeline to Afghanistan, Pakistan and India is of great geopolitical importance for Turkmenistan and, therefore, has more chances than Nabucco. If it is built, there will be virtually nothing left for Nabucco, which has no alternative resource base. TAPI's construction will seriously complicate the prospect of gas deliveries for Nabucco," he said according to the Voice of Russia. Such concerns remain of little interest, however, until it can be shown that Afghan and Pakistani insurgents would ever allow the project to be built.

EU Says Political Will for Trans Caspian Pipeline

In meetings this week between EU Commission chief Jose Manuel Barroso and Turkmenistan President Gurbanguly Berdymukhamedov, both sides pledged cooperation to build a Trans Caspian Pipeline. This project, long on the drawing boards but still unfunded, would bring gas under the Caspian Sea from Turkmenistan (with the fourth largest gas reserves in the world) to Azerbaijan. It would provide the crucially needed volume to fill the proposed Nabucco pipeline.

Berdymukhamedov pledged that partnership with Europe in the gas sphere was a priority. In return, Barroso said the European Union suppored his intention to build a pipeline. He said that Europe was ready to purchase gas from Turkmenistan, and that there was "political will" to build the pipeline.http://www.google.com/hostednews/afp/article/ALeqM5iXghI-2HeHbNy6V1V4s6iBXao4hA?docId=CNG.1013bcd54f88cdb52e0ba01db945fb52.e91 ITAR/TASS reported that Barroso called the construction of a pipeline at the bottom of the sea a necessity. http://www.itar-tass.com/eng/level2.html?NewsID=15859572&PageNum=0

Supporters of the Nabucco pipeline should be pleased at the expression of political will. They now await the funding that should accompany it.

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

No Green Light for NABUCCO

On January 13, 2011 the President of the European Commission, Jose Manuel Barroso, and the President of the Republic of Azerbaijan, Ilham Aliyev, signed the "Joint Declaration on the Establishment of the Southern Corridor." In it, Azerbaijan committed to supplying "substantial volumes" of natural gas to the European Union once the Southern Corridor is built. It is the first time that Azerbaijan has committed in writing to supply natural gas to Europe.

The declaration is being hailed as a major step toward the construction of the Nabucco pipeline. Commission President Barroso declared "This is a major breakthrough. This agreement confirms Europe's direct access to gas from the Caspian Basin, thus enabling the realization of the Southern Corridor. This new supply route will enhance the energy security of European consumers and businesses."http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/30 Separately, he said "From a political perspective, it's clear that the European Commission supports Nabucco and from the discussions with the President of Azerbaijan, I understood that Azerbaijan also supports the project." http://www.google.com/hostednews/afp/article/ALeqM5grhOEEWBY8lkzY5BsKck3_uxLc0Q?docId=CNG.cf47aa2fba1edb73982e4c0e962bed14.721

Alexander Rahr, the director of the German Council on Foreign Relations' Russia-Eurasia Center, commented "Despite all the risks, today we can say that Nabucco has passed from the stage of mythical conversations to the stage of realization. This is a clear signal to investors that the project will be realized." http://en.trend.az/1811752.html

Reinhard Mitschek, managing director of the Nabucco pipeline consortium, issued a statement from his office in Vienna, calling the agreement a milestone for his project. The declaration "serves to pave the way to the full implementation of Nabucco by providing a firm political basis for gas supply from Azerbaijan." http://www.upi.com/Science_News/Resource-Wars/2011/01/14/Nabucco-welcomes-EU-Azeri-gas-declaration/UPI-66251295023380/

Such optimism would appear warranted, as both European and Azerbaijani officials see the benefits of the project. Alexander Rahr said the EU considers the implementtion of Nabucco as its most important foreign-policy priority. Not only is it a new supply of gas for the continent, but Rahr cites a political context, as well. "This is a way to reduce Russia's influence in the South Caucasus and Central Asia, and weaken the influence of China in this region," he said. http://en.trend.az/1811752.html

Azerbaijani parliamentarian Ali Masimi, a member of the committee of economic policy, said that Nabucco is forming a new stage in political, economic and humantiarian cooperation between Azerbaijan, Turkey and Georgia, strengthening stability and a strategic alliance among the three countries. He said Nabucco must be built, and alluded to Caspian energy sources as a strategic asset: "Oil and gas are attributed not only to economy. These energy sources have no less geopolitical meaning...(C)old wars in the 21st century will differ from the cold wars of the 20th century. Cold wars in our century will be characterized with combat for oil and gas routes." http://www.news.az/articles/29741 Recognizing the strategic importance of Nabucco, Armenian political scientist Levon Shirinyan said his government must declare the Nabucco gas pipeline an Armenian priority, to overcome Armenia's estrangement from Europe. http://news.am/eng/44948.html

Despite all the hype, however, the Joint Declaration does NOT guarantee gas deliveries to Nabucco. Baku has the choice of any number of pipelines to use: Nabucco, South Stream, AGRI, TAP, and ITGI. All of them can be considered a part of the Southern Corridor, and all of them are counting on the gas coming from the Shah Deniz 2 project. The problem is that, as prolific as Shah Deniz is hoped to be, there are no estimates that there is enough gas to fill multiple pipelines. This is compounded by present Azerbaijani commitments, including a promise to the Russians to sell them two billion cubic meters of natural gas in 2011, and eventually doubling that amount thereafter.

Nabucco has a major problem: lack of financial commitments."Sluggishness is observed in the implementation of the Nabucco project. Therefore, Azerbaijan synchronizes its steps with these processes," said the otherwise hopeful Parliamentarian Masimli. http://www.news/az/articles/29741.

Russian Director of the National Energy Institute Sergei Pravosudov was dismissive of the Joint Declaration: "Mr. Barroso's visit did not actually add anything significant to the Nabucco project. Azerbaijan was initially prepared to supply gas to any consuming country for an adequate sum of money. The sides also did not sign any breakthrough agreements binding upon Azerbaijan in terms of prices and volumes of gas supplies. That visit resulted in just another memorandum of intent." http://english/ruvr.ru/39936848.html.

As reported in this blog earlier, the strength of support for Nabucco among Europeans and the US appears to be wavering. We previously reported on Ambassador Morningstar's comment that while a Southern Corridor was necessary, that did not necessarily mean Nabucco. These thoughts were echoed by Marlene Holzner, spokeswoman for the EU Energy Commissioner Guenther Oettinger: "For the EU it's decisive that a European project and a European firm gets awarded this contract," she said, omitting any mention of which pipeline would receive the business. http://www.today.az/news/business/79403.html

Azerbaijan promises to make its decision this year.

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