Nabucco prays for a miracle amid problems
The project has evolved into a clumsy, expensive solution to a problem the market is already solving
People don’t believe in the Nabucco gas pipeline, and they haven’t for years. The EU-backed mega-project to diversify European gas supply and reduce reliance on Russia makes perfect political sense, but after nearly a decade in development it remains a pipe dream.
First touted in 2002, momentum for Nabucco peaked after a gas war between Russian and transit-state Ukraine in 2009 that cut gas supplies for the second time in three years. Soon after, Turkey and four EU member states – Bulgaria, Romania, Hungary and Austria – signed an intergovernmental agreement to bring gas from central Asia to Europe, and the US warmly congratulated them on pipeline plans that could unshackle Europe from Russia’s energy influence.
But development of the 31 billion cubic metres a year (cm/y) Nabucco pipeline has been slow and the persistent problem of securing enough feedstock remains. Add to this mix shale-gas extraction technology, which has fractured the old gas-market dynamics, and the growth of global liquefied natural gas (LNG) supplies and Nabucco’s progress could be permanently frozen.
Russia was never going to give up on its biggest and most important market without a fight. Gazprom started gas flows through the Nord Stream pipeline – its own €7.4 billion ($9.8 billion) solution to the Ukraine-transit problem – this year, giving the Russian export monopoly direct access to Germany and bypassing troublesome neighbours in between (PE 6/11 p24). With 55 billion cm/y of capacity when complete, Nord Stream also out-muscles Nabucco for size.
Gazprom on the offensive
Gazprom is also developing the speculative South Stream pipeline project into southern Europe, a direct competitor to Nabucco. With first deliveries scheduled for 2015, the company claims its 63 billion cm/y of capacity will be fully operational in 2018.
As well as developing alternative routes, Gazprom is also wooing one of Nabucco’s largest end-users and partners, beleaguered German utility RWE. Not only is RWE a shareholder in Nabucco, it is in extended talks with Gazprom to collaborate on power-generation projects and is also taking the Russian firm to arbitration over expensive oil-linked gas contracts. RWE’s gas business lost €591 million in the first half of 2011. In the same period last year, it booked a profit of €281 million.
Despite the political aspirations of Nabucco, Europe still needs Russian gas – and both European utilities and Gazprom know it. Gazprom is expected to export around 158 billion cm of gas this year, meeting around a quarter of Europe’s demand.
The perennial problem with Nabucco is finding suppliers to fill the pipe. This is the single biggest concern about the plan. The Nabucco consortium is certain Iraq can be one of the link’s main gas suppliers – once, Egypt was given that role. Azerbaijan and Turkmenistan remain on the list, but accessing their undoubted gas resources will not be easy.
Southern Corridor competition
Although Azerbaijan is pressing ahead with the second phase of development at the Shah Deniz gasfield, that output is being eyed by other Southern Corridor projects. The cheaper and less ambitious Interconnector Turkey-Greece-Italy and Trans Adriatic Pipeline projects have also bid to carry the first 10 billion cm/y from Shah Deniz phase two (see p6). These offers could be more attractive to Azerbaijan, simply because they’re more likely to happen. But even if Nabucco does win the bidding, Azerbaijan alone has insufficient gas reserves to fill the pipeline.
Other Southern Corridor pipelines, which didn’t bid for phase-two Shah Deniz gas include BP’s 10 billion cm/y South-East Europe Pipeline and the Azerbaijan-Georgia-Romania Interconnector, which needs an LNG link across the Black Sea. BP, a partner in the Shah Deniz development, said it advanced its own project, to carry gas from Turkey to the Romanian-Hungry border, because of slipping confidence in Nabucco.
Although Turkmenistan and Iraq sit on huge gas reserves, supplies from Turkmenistan would require a controversial pipeline across the Caspian Sea (see p4); while opting for Iraq means making huge investments in an unstable political environment. A pipeline from Iraq would also have to cross the volatile border between Turkey and Iraq’s Kurdistan region, where fighting broke out again last month.
Nabucco is scheduled to start operations by 2017, although shareholder OMV said first gas may not arrive until 2018. The consortium is also sticking to the €7.9 billion project cost, despite EU energy commissioner Gunther Oettinger claiming it could rack up costs of up to €14 billion. Meanwhile, Hungary’s minister for national development, Tamás Fellegi, who’s remit also covers energy matters, estimates costs could balloon to €26 billion.
The LNG alternative
And while Nabucco’s progress crawls along, Europe has found an alternative supply, in the form of LNG from Qatar, Nigeria and Trinidad and Tobago. Over the past decade, European regasification capacity has more than doubled to around 185 billion cm/y, equivalent to six Nabuccos. Most of the supply in the past two years has come from mopping up excess LNG cargoes on the spot market – available because of the US’ shale-gas boom and subsequent collapse of import demand. These could be turned into long-term contracts, providing greater supply security.
Spain, for example, has been importing LNG under such terms for years. There is no reason why other European gas buyers couldn’t do the same. And with Australia planning 100 million tonnes a year of LNG capacity (130 billion cm/y of gas exports), directed at the Asian market, producers in the Middle East and Africa will be on the hunt for new long-term buyers, even if their own local needs are starting to creep up.
On top of this, European shale-gas production could yet frack-up Nabucco. In the US, shale-gas production soared from nothing in 2006 to 123 billion cm in 2010, according to the latest government data. Environmental objections; population density; mineral-rights law; and a less-developed drilling industry mean Europe will struggle to repeat the US’ success. But there is still enough potential to bring significant indigenous gas volumes to market (see p46).
Poland, driven for political reasons to pursue unconventional production, claims it will be producing shale gas by 2014 and be self sufficient by 2035; while import-dependent Ukraine says it could be exporting shale gas in seven to 10 years. Consultancy Wood Mackenzie reckons European shale-gas output could hit as much as 60 billion cm/y by 2030 (PE 9/11 p38), enough to blow Nabucco out of the water.
The final act
The Nabucco pipeline takes its name from Giuseppe Verdi’s opera of the same name. In the libretto, King Nabucco is struck by lightning. He loses both his crown and his sanity in the strike, but, after praying for a miracle, regains his reason in the final act.
While there is nothing insane about the Nabucco plan, one must wonder what the denouement will be. Back in 2002, the pipeline seemed a great idea. In 2011, the fat lady has not yet taken the stage, but Nabucco appears to have evolved into a clumsy, expensive, solution to a problem the market is already solving.