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Trans-Caspian gas pipeline vital to Nabucco

Contentious trans-Caspian gas pipeline will be built; Shah Deniz gas will be transported through Nabucco; managing director Reinhard Mitschek talks to Kwok W Wan

The Nabucco pipeline depends on gas supplies from Turkmenistan through a Trans-Caspian pipeline, the project’s managing director told Petroleum Economist. The 31 billion cubic metre a year (cm/y) EU-backed Nabucco project – which aims to bring central Asian gas to Austria’s Baumgarten hub and help reduce EU reliance on Russian imports – is bidding for the first 10 billion cm/y from Azerbaijan’s Shah Deniz phase two project.

But it also needs gas from Turkmenistan and Iraq to fill the pipeline’s capacity. Nabucco expects to secure 10 billion to 15 billion cm each from Turkmenistan and Iraq, but would require a subsea link, beneath the Caspian, to receive Turkmenistani gas, Reinhard Mitschek said.

No plan B

“In Turkmenistan, there is enough gas – besides exports to Russia and China – to deliver gas to Europe,” Mitschek said. “There is no plan B to link Turkmenistan to Nabucco – we expect a connection through a Trans-Caspian pipeline.” The EU has initiated talks to build the subsea link to connect Turkmenistan to Azerbaijan, but faces potential political objections over the status of the Caspian Sea, as well as uncertainty over funding of the project. 

Turkmenistan has massive gas reserves, estimated by Cedigaz at 8.34 trillion cm – the fifth-largest in the world. But independent auditor Gaffney, Cline & Associates recently upgraded reserves at the South Iolotan gasfield alone to between 13.1 trillion and 21.2 trillion cm, making the field the world’s second largest, after Iran’s South Pars. And, according to President Gurbanguly Berdymukhammedov, the country has begun building a $2 billion East-West pipeline to link South Iolotan to the Caspian Sea.

Turkmenistan aims to more than quadruple production to 230 billion cm/y by 2030, up from 41.61 billion cm/y in 2010, and to export 180 billion cm/y. Its geography ideally places the country between the European and Asian markets. As well as sending around 40 billion cm to Russia, it exported 4 billion cm to China in 2010, during the first year of operation the Central Asia-China pipeline and is looking to raise flows to 17 billion cm in 2012 and 20 billion cm in 2015.

Iraqi exports

Mitschek said that Nabucco would most probably need a third gas supplier after Azerbaijan and Turkmenistan to fill its capacity and claimed the project is gaining attention from companies operating in Iraq. “In Iraq, exploration and production operators are showing more and more interest in Nabucco,” he said, adding that companies were looking at the pipeline as a way to export not just output from Iraq’s gasfields, but associated gas as well.

Iraq is considering gas exports to Europe through Turkey, but not necessarily through Nabucco, the oil ministry said last month.

Mitschek expected “at least 10 billion cm/y” of gas from Azerbaijan, adding that the volume would more likely top 15 billion cm/y. The result of bidding to secure output from phase two of Shah Deniz is expected in the fourth quarter. “I’m confident Nabucco present the most competitive and comprehensive offer … there’s no doubt that Shah Deniz gas will be transported through Nabucco,” he added.

“I expect Nabucco to be filled very, very soon once the first gas-transportation contract is concluded and a race for capacity will start. It’s what we saw for other pipeline projects and that’s what we’ll also see for Nabucco.”

Delays and cost

Mitschek also defended Nabucco’s cost projection and timelines. Austria’s OMV – one of Nabucco’s six shareholders – said first gas may be in 2018, a year later than the original project start date of 2017; while EU energy commissioner Guenther Oettinger said the pipeline could cost between €10 billion ($13.3 billion) and €14 billion, compared with the latest official estimate of €7.9 billion.

But Mitschek countered: “From the pure project perspective, we can deliver the project by 2017. We have to see and balance between the supply and demand markets. If the market needs the gas by 2017, the project will be ready by 2017. If that’s not the case, we can discuss another start-up date.”

Front-end engineering and design (Feed) work for Nabucco is under way. Mitschek said the work is 70-75% complete and should be finished by first-quarter 2012, with the investment costs to be evaluated by then. “It’s too early to change [the cost] figures. We’ll see after open season (a process to express interest and book pipeline capacity) and Feed completion what the investment figure will be, but I’m confident we are in an appropriate range for the time being.”

The other shareholders in Nabucco are: Bulgarian Energy Holding, Turkey’s Botas, Hungary’s Mol, OMV of Austria, German RWE, and Romania’s Transgaz. Germany’s Bayerngas is in talks to join the consortium.

Southern Corridor competition

Nabucco also faces competition from other so-called Southern Corridor gas-pipeline projects, including the Interconnector Turkey Greece Italy and Trans Adriatic Pipeline, which have also bid for Shah Deniz phase-two gas. Both are shorter, and cheaper, projects, which are expected to deliver 10 billion cm/y from Central Asia to Italy.

But Mitschek said the size and scope of Nabucco offered other advantages, including delivering gas to the “heart of Europe” in Austria. “Shorter or smaller means further pipeline extensions are needed. Customers also don’t need to book capacity, or contracts in several pipelines in several countries,” he added.

Competition also comes from other gas sources, including unconventional production and liquefied natural gas shipments. But rising European demand is expected to absorb all new supplies. “We expect consumption in Europe to grow and domestic production to decline, so the import gap will increase,” Mitschek said. He forecast European gas demand to increase to between 630 billion and 650 billion cm/y by 2025, reaching 700 billion cm/y by 2030 – consumption in 2010 was 570 billion cm, according to Cedigaz.

The EU is looking to reduce its dependence on Russian gas after supplies were cut in 2006 and 2009 during payment disputes with transit country Ukraine. While, adding to rising demand forecasts is the phase-out of German nuclear power plants, with replacement power generation likely to be gas-fired.

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