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.

Ukraine's Days Numbered as Natural Gas Conduit

Ukraine continues to argue that repair of its aging pipeline structure is an economical alternative to construction of the more costly South Stream pipeline.  According to Uralsib's Chris Weafer, however, such an alternative is a non-starter from Russia's point of view.  Weafer argues that repairs would continue to deprive Russia of control over the delivery of Russian oil, would remove Russia's ability to extend its economic interests into countries to be serviced by South Stream, and it would provide Central Asian gas a viable alternative transit route to Europe--thereby depriving Gazprom of its Eurasian monopoly. 

Russia could overcome one of these objections if it owned or controlled the pipeline network.  An unidentified Ukrainian  Presidential aide reported that Gazprom had offered $4 billion for the system.  The Ukrainians refused to transfer ownership of the pipelines, however, and various proposals for joint operations remained unconfirmed.  In December, 2011, Kommersant-Ukraine quoted an unnamed official in the Ukrainian Energy and Coal ministry as saying Ukraine and Russia had agreed to form a group to handle the pipelines.  The only real disagreement was that Russia wanted the new unit to be formed bilaterally, while Ukraine was hoping for European participation.  According to Ukrainian Ambassador Viacheslav Kniazhnytsky, however, "I have no information about this kind of consortium.  Besides, Ukrainian legislation doesn't provide for a consortium within which Gazprom can run Ukraine's pipeline."

To force the ownership issue, Russia is trying to use transit pricing as a weapon.  In December 2011, Prime Ministers Putin of Russia and Azarov of Ukraine failed to agree on a Ukrainian-demanded reduction in the price of gas, because Ukraine would not give Gazprom a stake in the pipeline network.  Gazprom CEO said Kyiv was demanding a $9 billion annual reduction in price, while citing the cost of modernization of the network between $3-8 billion.  Kyiv estimated the value of the system as roughly $20 billion, but Miller speculated the value could drop significantly once South Stream had been constructed. 

In reply, Ukraine announced it would reduce the volume of gas it would purchase from Russia from 40 billion cubic meters (bcm) in 2011 to 27 bcm in 2012 unless the price came down.  An angry Miller replied that gas sales to Ukraine were on a "take or pay" basis, and the price would be the same (based on 33 bcm per year) regardless of the quantity Ukraine imported.  "We are working strictly in line with the contract, strictly in line with this volume, " Miller told reporters.  Gazprom spokesman Sergei Kupriyanov added, "The time for discussion on contract volumes in the new year has passed.  And, unfortunately, we must remind our Ukrainian friends again that the terms of gas delivery are determined only by contract, and cannot be changed unilaterally by this or that letter."  Kuriyanov believed that time was on the side of the Russians:  "South Stream to full capacity, Nord Stream with additional lines and our existing capacity through Belarus and the Black Sea will reduce Ukraine's importance for transit to zero," he wrote in an email.

Ukraine may have felt pressured to procure a lower gas price because of pressure on its balance of payments position.  Deputy prime minister Serhiy Tigipko said that if the Russians did not agree to a lower price, the country would be forced to raise household gas fees by 30 percent.  Renaissance Capital's Anastasia Golavach explained:  "It is becoming crucially important for Ukraine either to reduce the volumes of the gas it buys or renegotiate the price, otherwise there will be huge pressure on its balance of payments, which are especially strained in the current global environment."  Golavach predicted it was only a matter of time before Ukraine gave in to Russian demands and sold the pipelines.  "The government realizes it's high time to sell the network because Russia has already launched one alternative pipeline and is planning construction of another.  But they won't do it before the elections because the move would be too unpopular domestically."  In the end, the government did not raise the rates.

Ukraine decided to up the ante by exploring alternative sources for its energy needs.  In January 2012, Minister of Energy and Coal Industry Yuriy Boiko told journalists he had entered into negotiations with Turkey for gas shipments via a new route.   There were also reports of plans to purchase LNG from Azerbaijan.  Prime Minister Azarov discussed plans to buy the gas from Germany.  No one addressed how any of these purchases would take place, since there was no direct pipeline connection with any of these countries, and Ukraine lacked a gasification plant if it tried to buy LNG.

In the midst of the controversy, Russia reduced the flow of natural gas to Western Europe because of a spike in domestic demand caused by an abnormally cold winter.  The Kremlin blamed the shortage on the Ukraine, arguing that the transit country was stealing the gas destined for Europe.  Ukraine denied the charges.  (See my blog entries "Kyiv Pulling Away from Moscow" and "Russia-Ukraine Price Dispute" for additional details.)

As Moscow threatened to cease using Ukraine for any gas transport, the European Union weighed in on the side of Ukraine.  EC spokeswoman Marlene Holzner demanded Ukrainian officials develop a plan to maintain their crucial role."The unique geographical location of Ukraine and its gas storage capacities mean that Ukraine can offer increased flexibility of gas supply.  The European Commission is convinced that Ukraine needs to elaborate a long-term strategy to ensure its position as the leading gas transporting country."  To help, the European Bank for Reconstruction and Development agreed to a $308 million dollar loan for emergency repairs, but only if the state energy firm Naftogaz agreed to a restructuring.

The Ukrainian parliament agreed to the breakup to the company in March 2012, lifting a previous ban on any reorganization of the company.  The law required, however, that the successor gas companies to be fully state owned--which would prevent Kyiv from selling shares to Gazprom, according to Reuters.

Ukrainian President Viktor Yanukovych held out hope for a new gas deal with Russia, but IHS Global Insight analyst Andrew Neff said such a deal "would probably be part of an agreement that would give Gazprom a stake in or control over Ukraine's gas transmission system."  Russia cranked up the pressure, with Gazprom confirming they were redirecting gas to the newly-opened Nord Stream and through Belarus. Gazprom spokesman Kupriyanov e-mailed, "We are at the start of a big move to redistribute gas transit volumes from Ukraine to our Beltransgas unit and new undersea pipelines."  Naftogaz's deputy CEO Vadym Chuprun admitted at the end of March that gas-transit flows to Europe had been halved. 

In April, the Ukrainian National Commission of Energy Regulation announced the gas distribution and storage system would be open to any gas producer, Ukrainian or foreign.  In theory, this removed the monopoly held by Gazprom; in practice, however, without alternative sources of gas, nothing changed. 

Gazprom then agreed to make an advance payment of $2 billion to Naftogaz so the company could purchase sufficient gas to fill its storage facilties.  "If Ukraine needs more money to fill up underground storage facilities in order to live through the next winter without any issues, we will consider providing these additional funds,"  said Gazprom's Miller.  Such actions would indicate that, while the Russians continue to pressure Ukraine by reducing gas flows, they are not abandoning the transit route entirely.  It is unclear that this money was ever received, however; as President Putin in December 2012 said Russian would have filled the system with fueld if Ukraine had agreed to its offer to lease the pipeline network--implying that it had not occured.

In a July meeting with Russin President Putin, Ukrainian President Yanukovich held out a possible compromise:  instead of giving Gazprom ownership rights in the transit network, Ukraine would consider a different Russian request--Ukraine might join a Customs Union with Moscow.  "We are not saying 'No', we are thoroughly and seriously studying these integration processes," he said. 

Such words were not backed up by action, however.  Instead of pulling closer economically to Russia, in August Ukraine passed over the Russian oil company Lukoil in favor of ExxonMobil and Shell for an $8.1 billion project to develop the Skifska hydrocarbon field in the Black Sea.  Prime Minister Azarov expressed confidence that Ukraine could become energy independent.  He predicted domestic gas production would increase 25% over the next three years, and opined that hydrolic fracturing technology could cover all of Ukraine's needs.  (There is an estimated 5.5 trillion cubic meters (tcm) of shale gas in Ukraine, of which 1.18 would be recoverable using current technology).

Boyko announced the country had begun importing gas from Germany, at a price 20 percent cheaper than Gazprom.  He also said there were plans to build an LNG terminal on the Black Sea, to be completed by 2015.  Buying gas from Germany is a reversal of gas flows, which traditionally have been East to West.

Azarov again brought up the possibility of a trilateral consortium (Ukraine, Russia, Europe) as a way to modernize the pipelines, He proposed transferring control of the network to the group, which would then involve all members in the projected 4.5 billion Euro modernization project. The EC's Holzner's response was coy, stating no specific proposals had been presented.  She then offered qualified support to the idea:  "The EU has consistently emphasised that it is up to Ukraine to decide how to manage its gas transmission system and should Ukraine and other parties be willing to move in the direction of a consortium, including the EU gas industry, the European Commission is ready to play a facilitiating role, provided that the application of EU and international law, including as enshrined in the Energy Community Treaty, is guaranteed."

Putin claimed that Russia supported the consortium, and that Ukraine had ultimately rejected t.  "It was a strategic error on the part of Ukraine to turn down an offer by Russia and its European partners to lease its gas pipeline network without breaching the Ukrainian legislation and providing for it to remain Ukrainian property," he said.

In the end, the two countries appear to be in a lose-lose situation.  Ukraine wants to remain the main transit route for Russian gas, but only if Russia will sell gas to that country at rates significantly below those stipulated in the 2009 project.  Russia refused, and Ukraine unilaterally announced a reduction in the amount of Russian gas it would take.  In retribution, Russia reduced the amount of gas it was selling--to the levels Ukraine had previously unilaterally set.  Russia, on the other hand, wants to buy or lease the Ukrainian network, a demand Ukraine has refused.  In the meantime, the valuable transit route continues to age, without sufficient money to effect necessary repairs.

South Stream: Plans Still Premature

Russian President Vladimir Putin travelled to the town of Anapa on the coast of the Black Sea, to participate in the inauguration of the South Stream pipeline.  On December 7, 2012, the first two sections of the long-awaited, multinational, natural gas pipeline were welded together under the gaze of various industry leaders and heads of state.  This fulfilled Putin's December/January directive to Gazprom leader Alexey Miller that the pipeline had to be launched by the end of 2012.  "Today we are attending a very important event, an event that is important not only for Russian energy but for European energy as well," said the Russian President.

Putin's congratulations may be a bit premature.  There are still a number of issues surrounding the proposed pipeline that have yet to be addressed.  The biggest issue, in the middle of the shale gas revolution, is that the pipeline has a capacity that dwarfs any projected European need for Russian gas.  Mikhail Korchemkin, founder and managing director of East European Gas Analysis, noted that once the annual 63 billion cubic meters of South Stream gas is added to Russian current capacity, Gazprom would have the ability to deliver 318 bcm to Europe, twice what the company has promised to Europe by 2020.  "Gazprom has abandoned its guiding principle--sell gas before building expensive infrastructure," he said.   These large infrastructure projects are beginning to pay a toll:  Nordstream is only transporting 30% of its capacity, and Blue Stream is only at 37% of capacity, according to members of the Bulgarian right-wing opposition.

Gazprom currently lacks the supplies to build the pipeline.  According to Jonathan Stern, head of the Natural Gas Research Program at the Oxford Institute for Energy Studies, Gazprom has not yet ordered pipe or organized barges for the pipeline.  He predicts that the offshore section of the pipeline cannot begin until at least 2014.

The gas is being shipped to the European Union, and so the project must meet the demands of the European Commission.  They have not done so, and European Union Energy Commissioner Guenther Oettinger did not attend the ceremony.  Oettinger had previously referred to the pipeline as a "phantom project."

The Commission has, of course, read in the press that South Stream will pass through the Turkish economic zone in the Black Sea, make landfall in Bulgaria, and then proceed though Serbia, Hungary, Slovenia, Austria and Italy.  The reaction from the EC has been telling.  Guenther Oettinger's press spokeswoman Marlena Holzner said, "For the moment we have not seen a plan for South Stream.  We take note of all the media reports but neither our experts nor Commissioner Oettinger have seen a plan where it says South Stream will start here, it will deliver gas to this entry point and it will go exactly following this route and it will deliver gas from Russia.  We have not seen this."  Holzner expanded her comments:  "To the European Commission, it has never been communicated that there is a final route...There is no environmental impact assessment for the whole route.  As far as we can see it, we don't regard this as a final investment decision."  

By 16 February 2013, Russia needs to submit to the EC copies of the intergovernmental agreements it has negotiated with the transit states, and the EC then has nine months to express its concerns.  In addition, before construction can truely get underway each country involved must submit both environmental impact studies, and social impact studies.  Bulgaria, in particular, must submit an environmental impact study on the pipeline's landfall. Countries who are not party to the agreements but who are adjacent to the route also need to weigh in on a transboundary assessment.   Russia appears to be aware of these issues, as the Russian-European Chamber of Commerce President Sergei Shuklin confirmed the 7 December ribbon cutting was only a signal of Russian seriousness about the project.  "Everything will be concluded (according to EU legislation), especially since Russia just became a member of the World Trade Organization."

As of this writing, South Stream consists of two pieces of pipe welded together on Russian soil, with no permission to extend that pipe into European territory.
 

Gazprom Formally Agrees to Build South Stream



The speculation is over:  after years of planning and speeches by Russian President Vladimir Putin, Gazprom has formally committed to the construction of the South Stream natural gas pipeline.  This route, to be filled with natural gas Russia formerly transported to Europe via Ukraine's Cold War-era Peace Pipeline, is expected to deliver 63 billion cubic meters (bcm) annually to Europe.  According to the company, it has signed the final investment agreement with its European partners and will commence construction in December 2012.

The last hold-up before making a financial commitment had been Bulgaria, the first European country the pipeline would transit.  The Bulgarians had little choice except to sign.  They had been receiving Russian gas since 1 April at an 11% discount, but the discount was predicated on Bulgaria's agreement to South Stream.  If Bulgaria had refused to allow Gazprom to build the pipeline, it would have been obligated to repay the discounted funds, estimated at $70 million.  Russia increased the pressure when state-run Atomstroiexport filed a $1.3 billion compensation claim against Bulgaria before the International Court of Arbitration for a planned nuclear power plant at Belene that Bulgaria cancelled.

In the end, the Bulgarians received a sweet deal.  When the government signed the investment agreement with Gazprom, they also signed a long-term gas contract with a 20% price discount beginning January 1, 2013.  While the discount is a plus, Gazprom also got good news:  maintenance of the linkage between oil and gas prices, and a take-or-pay obligation for 80% of the contracted 2.9 bcm annually.  "We've agreed on very preferential prices for Bulgaria," said Gazprom CEO Alexey Miller.  "With South Stream, Bulgaria becomes the biggest transit country for Russian gas in Europe."  Interestingly, Miller denied the price discounts were part of the South Stream negotiations.  "These issues are not related," he said.

Bulgaria does not have to pay anything for construction of its share of the pipeline.  Gazprom will lend the funds to Bulgarian Energy Holding, to be repaid out of dividends earned on the project.

Obtaining financial commitments is not the entire battle, however.  Since the pipeline will go through members of the European Union, the European Commission must approve an environomental impact statement before construction.  Without an official communique to get the review started, the European Commission does not even acknowledge that South Stream is a viable project.  "It was never communicated to the Commision that South Stream has a final route," said EC energy spokesperson Marlee Holzner.  "We don't regard this as a final investment decision."

There have also been various reports that Russia believes a quick start to the project will mean the project does not have to meet the EU's third energy liberalization package, requiring the divestment of the distribution network from the transportation network.  According to the Commission, however, the package is already in effect and South Stream must abide by it.  To that end, it has held meetings with South Stream transit countires to make sure any bilateral agreements with the Russians will comport with EU rules and regulations.

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.

 

 

Transcaspian Back on the Board

Recent armed spats between Azerbaijan and Turkmenistan in the Caspian Sea placed the future of the Trans Caspian Pipeline in doubt, but European Union-backed talks in Ashkabat appear to have put things back on track.  According to EU spokeswoman Marlene Holzner, the Turkmenistan Energy Minister Myrat Artykow and Azerbaijan Minister for Industry and Energy agreed with EU Energy Commissioner Gunther Oettinger that the project could be an important part of efforts to reduce Europe's dependence on Russian gas supplies. 
Holzner said both Azerbaijan and Turkmenistan had expressed a desire to supply Turkmen gas to Europe, but neither country was willing to make any firm commitments.  "Turkmenistan said it continues to be interested in delivering gas to Europe.  Azerbaijan also confirmed its interest in being an 'enabler', meaning it would also be a transit country for gas."

Despite the expressions of good intentions, who moves first to make the pipeline a reality remains in doubt.  Holzner said that the EU was waiting for a gurantee from Turkmenistan on supply (despite the fact that Turkmenistan President Gurbangulu Berdimuhammedov is on record as promising 40 bcm per year for the project).  At the same time, she said that the EU would neither own the pipeline nor pay for it.  For his part, Berdimuhammedov has previously said that while he would sell the gas to Europe, it would be up to the Europeans to figure how to get it from Turkmenistan.  So, all good wishes aside, no progress appears to have been made other than to get the parties talking again.

Turkmenistan appears to have turned its attention east, with most of its gas sales going by pipeline to China.  For Azerbaijan's part, the pipeline could be seen as either competition for its own future gas production, or for Gazprom's South Stream.  In either case, the benefits of a Trans Caspian Pipeline do not appear to be overwhelming.  The one country that would benefit is Turkey, who would like to see Turkmen gas made available to expand the proposed TANAP pipeline.

"With the TANAP project we have created a structure that will allow gas to transit across Azerbaijan and facilitate trade.  This structure is also targeting Turkmen gas.  We are seeking Turkmen gas," said Turkish Energy Minister Taner Yilmaz.

According to Gulmira Rzayeva of the Center for Strategic Studies of Azerbaijan, an expanded TANAP could increase Turkey's chances of joining the European Union.  "Turkey can achieve political gains with this pipeline; it can be an ace in terms of its European Union membership negotiations.  With the finalization of this project, Turkey will have a whole new position within the region."  Whether Turkey wants to join Europe is, of course, an open question.  Turkey's annual growth continues at around 7%, while Europe continues to stagnate and -- possibly--sink back into recession.

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.

Higher Priced Gas Not Detering South Stream

Faced with competition from TANAP, Nabucco-West, LNG and alternative fuels, Gazprom is coming to grips with lower anticipated revenues from their proposed South Stream pipeline.  Sergei Komlev, head of price formation for Gazprom Export, believes Europe will buy the gas anyway.  In June, he told the World National Oil Companies Congress in London, "Our estimate is that the difference (between hub-priced gas and South Stream supplies) is $2 per million British thermal units," according to Reuters.  Komlev said the price would be attractive because Gazprom would provide South Stream gas via long-term contracts, which would provide more security of supply than spot-priced hub gas.

Revenues will suffer, however, because of price breaks to various countries.  As an example, to keep Bulgaria in the South Stream consortium, Gazprom has agreed to an 11% price discount for the upcoming year, a loss of USD 115 million.  Bulgarian Economy and Energy Minister Delyan Dobrev gave the results of these negotiations to reporters in June.  "Currently, there is no danger of Bulgaria not participating in South Stream," he said.  "We support the South Stream project.  We believe it is profitable for Bulgaria, but we have to specify all the details."

While Dobrev is pleased with the negotiations, there is a question as to whether Bulgaria can finance its share of the pipeline.  According to an unconfirmed source, Gazprom might pay for the Bulgarian section of the pipeline and then repay itself by deducting the gas transit fees the company would otherwise owe the country.  Regardless of the financing, South Stream has begun the Environmental Impact Statement for the 250 kilometer section that will run off the Bulgarian Coast, according to the Sofia News Agency.

South Stream has also recruited a new member of the consortium, Macedonia.  According to Macedonian Vice Premier and Minister of Finance Zoran Stavreski, membership will secure gas supplies for future generations of Macedonians, although the country was not originally considered for membership.  "This was in fact done (through a myriad of contacts and high-ranging talks) from a position where there were no plans to be included in the project," he said.  "There is no more dilemma--Macedonia is joining the international gas pipeline corridor 'South Stream' as it has been agreed between PM Nikola Gruevski and President Vladimir Putin.  We've received the text of the draft-agreement."

Russian President Putin continues to remain optimistic toward the project, and in June said the pipeline could begin natural-gas flows as early as 2014.  This would inaugerate the pipeline years before the Nabucco-West rival, which is scheduled for completion in 2017-2018.

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."

Russia Buys Bulgarian Support for South Stream

Since coming to power in 2009, Bulgarian Prime Minister Boyku Borrisov has halted every Russian energy project in his country.  Before he was even sworn in, he asked former energy minister Petar Dimitrov to halt negotiation on all energy projects.  Since then, he cancelled his country's involvement in the Burgos Alexandroupolis pipeline, and the partially completed Belene nuclear power plant (one of the largest Russian energy projects in Europe).

As Andrew McDowall reports in his Financial Times blog, however, this has not landed Bulgaria in hot water.  One day after announcing suspension of the power plant, Bulgarian Minister of economy and energy Delyan Dobrev held meetings with Gazprom chief Alexey Miller.  At the end of the meeting, the leaders announced that Bulgaria would receive a price reduction for natural gas purchases of 11.1 percent for nine months.  This is a significant saving, since Bulgaria imports 100% of its natural gas from Russia.

Prime Minister Boyko linked the price reduction to the construction of South Stream.  He said that the only condition for the price discount was "honest and open relations" between the two sides, but that Bulgaria was ready to provide "full cooperation" for the South Stream project.  "You bring in pipes, you bury them underground, you take taxes, for many years, this is budget revenue for decades.  In short, full cooperation on the project," he told Darik national radio. 

By securing Bulgaria's cooperation, South Stream can speed up its construction plans, as Russian President Vladimir Putin has ordered.

Russia Eyes Exemptions to Third Energy Package

Russian Ambassador to the EU Vladimir Chizhov

Vladimir Chizhov has explained that the European Union's Third Energy Package is harming European energy markets and customers, in remarks he made before the 3-4 June EU-Russia summit.  "There is a paradox now in the EU energy market.  We see that major companies involved in infrastructure projects are prepared to invest only in those projects, which are guaranteed to be exempted from the provisions of the Third energy package," he said.  "This is a clear indication that this particular set of rules runs counter the interests of business and I would add, of consumers, too." 

Chizhov insisted that the countries holding back on investment were not just Russian.  Faced with the negative reprecussions to the EU's actions, Chizhov speculated on the EU's inability to reverse course:  "I understnad it might be difficult for the EU to backtrack on its own decisions.  Well, some people compare the EU with a crocodile," he said sarcastically.  "Not because of its teeth, but because of its inability to move backwards."

Chizhov continued to lobby for the EU to make exceptions that benefit Russian oil and gas interests.  He insisted that the EU should name South Stream a TEN-E project, which would accord the pipeline the status of a "project of European interest" and therefore eligible for EU assistance.  Russia in the past has lobbied for this status, which was enjoyed by the Russian-sponsored Nord Stream project and by South Stream's rival, the Nabucco pipeline.  The EU has maintained that Nabucco, and not South Stream, is the preferred project because Nabucco gives the EU access to additional sources of energy other than Gazprom.

Despite the opposition in European corners, however, Gazprom plans to ask that South Stream be exempted from the Third Energy Package.  "we have a legal opportunity to do so," Alexey Golubnichiy, Deputy Head of Gazprom's subsidiary Gazprom Export, told RT.  "Commissioner Oettinger indicated the European Commission will look at the possibility of granting South Stream these exemptions."  (Gunther  Oettinger is the European Commission's Minister of Energy.)

Golubnichiy worries that the appeal will take to long.  "The main problem is that giving us such exemptions will take from four to eight years.  And this is too long for South Stream."  South Stream is currently scheduled to go on line in 2014-2015.

While Russia has continued to push its campaign to have its oil pipelines exempted from the Third Energy Package, Europe has remained resolute in denying the exemption.

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.

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.