Major Eurasian Pipeline Deal to Help Diversify Gas Supplies

The highly anticipated $11 billion Nabucco pipeline, connecting the energy-rich Caspian region to Eastern Europe, moved forward Monday when five countries signed an agreement in the Turkish capital Ankara.

Proposed Nabucco pipelinePlanning for the 2,050-mile natural gas pipeline first began in 2002. It will run from eastern Turkey through Bulgaria, Romania and Hungary into Austria, bypassing Russia and competing with the Russian energy company Gazprom, which currently supplies up to a quarter of Europe’s gas.

“The Nabucco project is being labeled a pipe dream,” Turkish Prime Minister Recep Tayyip Erdogan said at a signing ceremony, according to media reports. “This project will be a success story that will prove the doubters wrong.”

The agreement paves the way for the five countries — Turkey, Bulgaria, Romania, Hungary and Austria — to begin selling capacity commitments in the pipeline. RWE, OMV, Hungary’s Mol Nyrt., Bulgaria’s Bulgargaz EAD, Romania’s Transgaz SA and Ankara-based Botas hold equal stakes in the pipeline, according to Bloomberg News.

While Nabucco’s planned capacity of 31 billion cubic meters of gas would meet “a small fraction of Eastern Europe’s needs, it will have a major impact for certain countries like Bulgaria, which at the moment is 100 percent dependent on Russian gas,” said Alexandros Petersen, associate director of the Eurasia Energy Center at the Atlantic Council in Washington, D.C.

“Most of all,” Petersen added, “it serves as an important symbol that the EU is diversifying its gas imports away from over-dependence on Russian reserves and the geopolitical uncertainties they bring.”

In January, a flap over Ukraine’s debt to Russia and discounted gas prices caused Russia to shut off gas to the country. Pipelines in Ukraine also supply parts of Europe, sending countries scrambling to seek other potential sources of fuel. The dispute was settled within weeks, but illuminated the potential fragility of European countries’ gas resources and the desire to find alternative suppliers.

Monday’s agreement comes after months of talks between transit countries, prospective suppliers, and EU-backed consortium members, as well as negotiating by Gazprom to court prospective Nabucco suppliers and proceed with its own new pipeline into Eastern Europe.

The project had been stalled when Turkey, a major corridor for Nabucco, insisted that 15 percent of the pipeline’s capacity be used for domestic consumption and for re-export. Monday’s agreement did not resolve this issue.

“The agreement itself is nothing major, it doesn’t really clarify the issues of supply, the different branches, the timing. The agreement also keeps away from some of the more politically sensitive points,” Ana Jelenkovic at Eurasia Group told Reuters.

While the agreement created a framework for where Nabucco will run, the sources of the gas for the pipeline remain an issue.

“Every potential source of gas for Nabucco has problems,” said Jeffrey Mankoff, associate director of international security studies at Yale University and adjunct fellow for Russia studies at the Council on Foreign Relations in Washington, D.C.

Azerbaijan’s Shah Deniz gas fields, located in the Caspian Sea south of the capital Baku, are a potentially key source for Nabucco. The second phase of Shah Deniz, opening in 2014, could add 12 billion to 14 billion cubic meters of annual gas output, Azerbaijani President Ilham Aliyev said in April, according to Bloomberg News.

In June, U.S. special envoy for Eurasian energy Richard Morningstar said 8 billion cubic meters of gas was a “sort of prerequisite for getting Nabucco going,” adding, “frankly the initial gas will come from Azerbaijan because it will take longer to get some of the other gas across or into the system.” The United States has voiced early support for the pipeline.

Earlier in July, with the Nabucco agreement stalled, Russian President Dmitry Medvedev traveled to Baku to seal a Russo-Azeri deal giving priority to Gazprom for gas from the second phase of the Shah Deniz fields.

“We’re ready to buy the whole volume of Shah Deniz II,” Gazprom Deputy CEO Alexander Medvedev said in an interview with Bloomberg Television in May.

The deal “serves mostly a symbolic purpose,” Petersen said, adding, “Moscow can say that it controls more energy supplies in its ‘backyard’ and for Azerbaijan it serves as a warning to Western countries that Baku has many options besides Nabucco.”

Mankoff said the deal “mainly complicates the process of getting Nabucco built. … Financing is hard enough right now, but without a secure source of gas, firms are going to be very wary of sinking money into the project.”

Still, Gazprom may push for a competitive edge as it works on its own new pipeline into Eastern Europe, the South Stream, which is planned to run under the Black Sea from Russia to Bulgaria and onto Italy. In May, the Wall Street Journal reported Gazprom plans to double South Stream’s capacity, from 31 billion to 63 billion cubic meters, doubling Nabucco’s capacity.

The head of Azerbaijan’s State Oil and Gas Co., Rovnag Abdullayev, said Nabucco and the South Stream are not in competition for Azeri gas. “Azerbaijan’s gas reserves are very rich, we can supply gas to each project separately,” Abdullayev said, The Associated Press reported July. “Politically, we have decided to give support to Nabucco and we have given importance to Nabucco. But we have to look at conditions.”

Iranian and Iraqi gas fields also have been suggested as sources for Nabucco, though U.S. envoy Morningstar, echoing earlier statements, said Monday in Ankara, “We do not think that Iran should participate at this point.”

“The issues with Iran are simple,” according to CFR’s Mankoff. “The U.S. won’t do business with the current regime in Tehran, and its European allies are reluctant to spark a quarrel with Washington, though the Nabucco consortium itself would like to get its hands on Iranian gas very much.”

In Iraq, disagreements between gas suppliers in the northern Kurdistan region and the central government in Baghdad have complicated Iraq’s possible participation in supplying Nabucco. Leaders in the Kurdish region of Iraq, against pressure from Baghdad, are moving forward with a new constitution that asserts Kurdish control over oil and gas in the semi-autonomous region, the New York Times reported.

According to Reuters, Iraq’s Prime Minister Nouri al-Maliki said at Monday’s signing ceremony that Iraq can contribute 15 billion cubic meters of gas to Europe. He did not give a timeframe and it was reportedly unclear whether al-Maliki was committing to the Nabucco project.

Other potential natural gas sources for Nabucco are Turkmenistan and Kazakhstan to the east and Egypt and Qatar to the south.

Construction of the pipeline is scheduled to begin in 2011 with first deliveries by 2014.