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Friday, September 21, 2007

Annals of the Energy War, Part II

Writing in the Eurasia Daily Monitor, Vladimr Socor reports good news from the energy battlefront; Europe is getting its act together on the Nabucco pipeline, designed to circumvent deliveries of gas from Russia.


by Vladimir Socor

PART I: The Project

All players involved in the Nabucco gas pipeline project got their act together at a conference on September 14-15 in Budapest. The European Union demonstrated for the first time a hands-on commitment to the project. The Hungarian government announced its re-commitment after a year’s wavering. Azerbaijan’s Energy and Industry Minister, Natig Aliyev, confirmed his country’s willingness to help kick-start Nabucco’s first phase from the Shah-Deniz gas field’s first and second production phases, pending solutions to Central Asian gas supplies for Nabucco’s second phase.

The United States had worked quietly with all these parties.The European Union’s Energy Commissioner, Andris Piebalgs, termed Nabucco “an embodiment of the existence of a common European energy policy” in his speech at the conference. He announced the appointment of Jozias van Aartsen, former minister of foreign affairs of the Netherlands, as EU coordinator of the Nabucco project, with a four-year mandate. The EU had included Nabucco among the four top-priority energy projects already last year, but the Commission took a long time before filling the coordinators’ posts.

The proposed pipeline would originate in eastern Turkey and run for 3,300 kilometers via Bulgaria, Romania, and Hungary to Austria, with a projected capacity of 30-35 billion cubic meters of gas annually. The consortium includes Turkey’s pipeline company Botas, Bulgaria’s pipeline operator Bulgargaz, Romania’s Romgaz, Hungary’s MOL, and Austria’s OMV as project leader. The initial feasibility study, funded by the EU and completed in 2004, awaits updating. The cost of building the pipeline is currently estimated at €5 billion.The consortium seeks a sixth participant company in Western Europe.

At the Budapest conference, top executives of Germany’s RWE and of Gaz de France announced the respective companies’ willingness to seriously consider joining the consortium. RWE, a major energy conglomerate in northwestern Germany, also announced its availability to invest up to €1 billion in Caspian upstream operations. Gaz de France -- which is now merging with the other French champion, Suez, into GDF-Suez, to be 35% state-owned -- had earlier begun negotiations to join Nabucco and confirmed its interest at this conference.

French President Nicolas Sarkozy, on a visit to Hungary that coincided with the Nabucco conference, encouraged GDF to support the Nabucco project. Sarkozy, who is the son of a Hungarian post-war refugee to France, addressed the Hungarian parliament to underscore his support for a common EU policy on energy and, specifically, for the Nabucco project to reduce dependence on Russian gas.Hungarian government leaders did their best to dispel the year-old perception that they would go for Gazprom’s Blue Stream-Two pipeline project, which is Nabucco’s rival. Prime Minister Ferenc Gyurcsany and Economics Minister Janos Koka (Socialist and Free Democrat, respectively) delivered keynote addresses re-committing the government to Nabucco. The prime minister pledged “Hungary’s total support,” as “it would be dumb for a country or a region to feel content with a single supplier.” In an accompanying statement, Koka admitted, “We were mistaken in repeating too often that the [Nabucco] project was just a dream, and so we actually contributed to the project’s remaining a dream.”

Left almost unsaid was the opposition Fidesz party’s consistent political support for Nabucco, leading ultimately to the formation of a cross-party Hungarian consensus in favor of the project.The project’s financial picture looks encouraging, on the whole. The consortium expects to cover 70% of the construction costs through bank loans, primarily from the European Investment Bank, which clearly shows interest in the project. The consortium is also in discussions with the European Bank for Reconstruction and Development and other institutions. Some of the consortium’s companies or governments are, however, reluctant to contribute to the remaining 30% portion of the construction costs.

The consortium, Nabucco Gas Pipeline International, hopes to reach decisions in the coming months with regard to choosing the sixth participant company, preparing the inter-governmental agreements, front-end engineering for the pipeline’s construction, and its first-phase financing. The consortium’s managing director, Reinhard Mitschek, presented a rather ambitious calendar for these steps, expecting construction work to begin in 2009. In that case, the first gas should flow through the pipeline in 2012.

Azerbaijan is waiting to be approached with specific, binding contracts on a take-or-pay basis for gas supplies to the Nabucco pipeline’s first phase. But this can only be a stopgap solution, if the pipeline is to be used at the projected capacity -- that is, if the project looks commercially viable in order to line up the investment funds. That issue in turn hinges on opening direct access to Central Asian gas or Iranian gas, assuming a major U.S. and EU engagement to resolve the political issues involved.

Part II: The Obstacles

[As described above, t]he Nabucco gas pipeline project is back on track, preparing for an actual start. However, this project has a history of being derailed before even starting. In order to avoid any more derailments, this project needs to resolve a number of strategic issues, some of which necessitate consistent and hands-on involvement by the European Union and the United States. Most of these issues are long-standing, but some have only arisen recently for the planned Turkey-Bulgaria-Romania-Hungary-Austria gas pipeline.

The latest pitfall is the attempt by one Nabucco consortium member, Austria’s OMV, to orchestrate a hostile takeover of another consortium member, Hungary’s MOL. The OMV chief, Wolfgang Rutterstorfer, has directly or indirectly reaffirmed this goal in several statements ahead of the September 14-15 Budapest conference, which firmed up the commitments by all parties to the Nabucco project. Meanwhile, MOL is defending itself through market and legislative mechanisms against the takeover attempt, behind which many observers discern possible Russian interests (see EDM, July 24, 25, August 7, 17, September 4). It is not only for Hungary, but also for the EU to make clear to OMV that the latter must not jeopardize the Nabucco project by targeting MOL’s assets.

The consortium and the EU need to make a clear decision in Nabucco’s favor regarding the Baumgarten terminal. Baumgarten, the 100% OMV-owned gas distribution junction near Vienna, has long been designated as the final station of the Nabucco pipeline, as well as a storage and distribution center for Nabucco’s Caspian gas in Central Europe and beyond. However, in May of this year, OMV and the Austrian government (part-owner of OMV) changed their mind and signed an agreement of intent with Gazprom during Russian President Vladimir Putin’s visit. Under this agreement, Baumgarten would become a Gazprom-OMV joint venture, to be expanded as a Central European Gas Hub and Gas Transit Management Center, complete with storage sites, for Russian-delivered gas (see EDM, May 29, 31).

Moscow lured the Austrians with the promise of turning Baumgarten into the largest gas hub in continental Europe. That promise is a dubious one, as Gazprom’s own output is stagnant. Ironically, Russian gas commitments to Europe might only be sustained if Russia absorbs more Central Asian gas, thereby depriving Nabucco of a gas source and raison d’etre. EU authorities would be justified to ask Austria to clarify where it actually stands on European energy security.

Russia played off Austria and Hungary against each other on the “hub” issue. The Nabucco project -- an Austrian initiative originally -- reserved the hub’s role for Austria, while Hungary would participate as a transit country and national recipient of the gas. However, not unreasonably from a Central European perspective, the Hungarian government and MOL also sought a hub role for Hungary to some extent. Moscow seemed to offer Budapest this chance by proposing to extend Gazprom’s Blue Stream pipeline from Turkey to Hungary: not only to “guarantee” gas supplies to Hungary, but also to build there a 10 billion cubic meter storage facility for further transmission of the gas in Central Europe.

Gazprom’s Blue Stream extension, Blue Stream-Two, would follow the same route as Nabucco from Turkey to Hungary, thus preempting the regional markets and killing the Nabucco project. During the last year or so, the Hungarian government gave serious consideration to Blue Stream-Two. The government and MOL are now on the same page with the Nabucco project again. To keep them on the same page, it would seem reasonable for EU authorities to encourage Austria and other Nabucco consortium members to give Hungary a share of the hub’s function. With Baumgarten retaining the main role, Hungary could also host on its territory a storage and transmission site for Nabucco gas, not for the rival Gazprom.

Initially planned to carry Iranian gas, the Nabucco project has yet to identify accessible and commercially viable sources of gas. Azerbaijan’s Shah-Deniz production can only help kick-start Nabucco’s first phase; but a kick-start also requires confidence that supplies would be available later for the second phase. This is also an issue of political signals. Implacable-looking U.S. opposition to development of Iranian gas is depriving the Nabucco project of that source, despite Washington’s equally ardent well-wishing for Nabucco. The United States is threatening to impose sanctions against Austria if the latter proceeds with gas field development in Iran. Washington is also asking Turkey to give up the memorandum of understanding it recently signed with Iran on gas field development and supplies for the Nabucco project (Turkish Daily News, The New Anatolian, September 19).

In this situation, Turkmen gas has become the fallback option for the projected pipeline. However, this issue is clearly beyond the ability of the five countries in the Nabucco consortium to resolve. Russia has recently made some further strides in controlling Turkmenistan’s gas export and gas field development (see EDM, May 16, 17, June 5, 7). Only high-level engagement by the United States and the EU can change this situation in the West’s favor through Nabucco. The years since 2002 have been wasted in this regard, leading to a real crisis of confidence in the Nabucco project and a temptation by some European countries to seek bilateral deals with Russia. Along the proposed Nabucco route, only Romania remained fully and steadfastly loyal to this project during these years.

That crisis of confidence has been overcome thanks to the demonstration of coherent planning at the Budapest conference just held by all players. However, confidence could not possibly have been fully restored from one day to the next, just by this event. Key participants mused aloud in media interviews that Russian gas volumes -- that is, Russian-delivered Central Asian gas -- may after all be necessary for making the Nabucco pipeline viable.

For example, four different news agencies cited Hungarian Economics Minister Janos Koka as suggesting that Russia be given access specifically to the Nabucco pipeline, in the event that not enough gas becomes available to it from Central Asia or Iran (Reuters, Dow Jones, AFP, MTI, September 11). And Hungary may continue looking at Blue Stream-Two in such a situation (Nepszabadsag, Portfolio Hungary, September 17). Similarly, the EU's Nabucco project coordinator Jozias van Aartsen, Nabucco managing director Reinhard Mitschek, and Gaz de France top executive Jean-Marie Dauger underscored the need to dispel the real concerns about the availability of sufficient gas to justify the investment in building the pipeline (Financial Times, September 17, 18).

These are some of the strategic issues that need to be addressed by Washington and Brussels convincingly in the wake of the conference, building on its momentum and weighing in at the highest official level, particularly with Turkmenistan.

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