Smaller Nabucco pipeline has a fighting chance
A new contender has shaken up the battle to build gas pipelines from central Asia to Europe, but has failed to land the killer blow that would knock out the much-battered Nabucco project
A decade since the EU-backed Nabucco megaproject, which would ship Central Asian and Middle Eastern gas through Turkey to Austria, was first proposed, there have been lingering doubts over how it would fill its 31 billion cubic metre a year (cm/y) capacity. Only 10 billion cm/y of supply from Azerbaijan’s Shah Deniz II is on the table, expected to start in 2017, with other suppliers, such as Turkmenistan and Iraq, still far from being able to deliver.
Several smaller Southern Corridor pipeline projects have since entered the fray, proposing cheaper and more realistic ways for Europe to lessen its dependence on Russian gas and avoid a repeat of transit problems through Ukraine. These include the 10 billion cm/y Interconnector-Turkey-Greece-Italy (ITGI) and the similarly sized Trans Adriatic Pipeline (TAP), both aiming to use existing Turkish pipelines to carry Central Asian gas to Italy.
There is also the 10 billion cm/y South East European Pipeline (Seep) project, a pipeline from western Turkey to Austrian gas hub Baumgarten, the same delivery point as Nabucco. It, too, would use existing Turkish gas pipelines for the eastern leg.
But it is the Trans-Anatolia Gas Pipeline (Tanap), announced in December last year, forcing Nabucco to reconsider its own size and scope.
Tanap would take gas east to west across Turkey, from the Georgian border to Bulgaria, making the Turkish section of the Nabucco pipeline redundant. Tanap’s cost is estimated at between $5 billion-$7 billion and would be 80% financed by the Azerbaijan State Oil Company (Socar) and 20% by Turkish Petroleum (TPAO) and Turkey’s pipeline operator Botas. Construction could start this year, and the pipe could be on stream by 2017. Initial transport capacity is expected at 16 billion cm/y, but could be boosted to 30 billion cm/y. Turkey would take 6 billion cm/y, with the rest destined for Europe.
The proposal is a challenge to Nabucco. Indeed, says Frank Umbach, of theEuropean Centre for Energy and Resource Security (EUCERS), the Tanap memorandum of understanding (MOU), signed in December, has pushed the rivalry between Nabucco, ITGI and TAP into a “new and unpredictable phase”.
Turkey’s deal-making is making the test for Nabucco even more severe. Days after the Tanap announcement, Ankara signed a South Stream pipeline deal with Gazprom. That agreement would allow the Russian gas exporter to build a 63 billion cm/y pipeline across the Turkish sector of the Black Sea, further damaging the case for Nabucco.
“Both deals have been criticised inside Turkey and the EU, which argue that these two energy decisions will effectively kill the Nabucco project,” Umbach said. Although Turkey’s government has argued Tanap would complement Nabucco, reducing the cost of it and other smaller pipeline contenders, Tanap is now its priority, he suggests.
With Tanap muscling in, a smaller project – dubbed Nabucco West – has been presented to the consortium developing Azerbaijan’s Shah Deniz II gasfield. Transport capacity would be halved and the link would start from Bulgaria instead of Turkey. The Nabucco consortium submitted the original, longer Nabucco project plan to Shah Deniz II in October last year, but admits it was also discussing alternatives.
“In the current negotiation phase, the Nabucco consortium is evaluating various scenarios. However, these negotiations are ongoing and no final decision has been made,” a Nabucco spokesman said. He would not comment on Nabucco West. However BP, one of the Shah Deniz partners, said the plan for Nabucco West was a “much improved offer”.
And the proposal may sidestep the threat posed by Tanap. Under the Nabucco West plan, the pipeline would merge with Tanap at the western Turkish border and take gas into Europe as envisioned before. The reduced size and scope would make the pipe easier to fill, and cut costs by about half. That may be critical, because Nabucco’s costs have probably almost doubled from the original €7.9 billion ($10.5 billion).
Connecting the pipeline to Tanap is an “attempt to make Nabucco survive”, said Teymur Huseynov, global head of energy consulting at Exclusive Analysis, a consultancy. A smaller Nabucco would also satisfy struggling consortium stakeholder RWE. Profits at the utility slumped over 45% to €1.8 billion last year and its gas and trading arm also lost €800 million on oil-linked gas contracts, according to its latest financial results. Under pressure, RWE has grown wary of Nabucco’s high cost. In January, the company’s boss, Juergen Grossmann, said it could scrap plans for the pipe. It doesn’t matter which pipeline carries Caspian gas to Europe, he suggested. “On the contrary, we are pleased about all solutions that keep our own financial exposure limited,” Grossmann told the Wall Street Journal.
Even OMV, long Nabucco’s champion, has grown malleable, saying it would consider combining the project with another. “The less I have to invest to get it [Caspian gas to Europe], the happier I am,” OMV chief executive officer Gerhard Roiss said in February. He expects the Shah Deniz II consortium to make a decision on a pipeline by mid-2013.
Some of Nabucco’s competitors are struggling too. The Shah Deniz II partners have already chosen TAP over ITGI, should the consortium finally decide to transport gas to southern Europe, effectively knocking the Greek-Italian joint venture pipeline out of the race. “ITGI is out of the equation, Nabucco is now competing with TAP,” said Huseynov. “It turns out that the Shah Deniz gas export group, led by Socar, have decided to eliminate ITGI on the basis of unattractive tariffs and ‘Greece risk’.”
The “Greece risk” includes the privatisation of Greece’s state-controlled energy firm Depa, a major backer of the ITGI. That could hamper development of the pipeline, the Shah Deniz II consortium believes. But opting for TAP over ITGI brings other problems. ITGI is a joint-venture between Depa and Italy’s Edison and has already received agreements from the Greek and Italian governments. Greece also wants to build ITGI as it would be able to import 1 billion cm/y of gas from the project.
Meanwhile, TAP may have problems getting government approvals without an Italian or Greek backer.
TAP and ITGI (as well as Seep) would also rely on the existing Turkish gas transport system, which would likely need major work to make them reliable.
“The cost calculations for Seep, ITGI and TAP are based on existing Turkish pipelines, but these may need costly upgrades. Turkey would also be forced to build new east-west gas pipelines for its own rapidly increasing gas consumption in the next decade. It is highly uncertain whether these three pipelines would be much cheaper than the much longer Nabucco pipeline,” EUCERS’s Umbach said.
The BP-backed Seep pipeline remains the joker in the pack. It aims to start up from 2017 and would replace Nabucco entirely. For now, though, it is more of a concept than a project.
If Shah Deniz opts for a combination of Tanap and TAP as its way into Europe, then non-EU countries would control the route. (Germany’s E.On Rurhgas’ has a minority stake in TAP.) Although the European Commission has loosened its language recently to back any Southern Corridor pipeline, and not exclusively Nabucco, it would be a blow to years of work towards creating a strategic EU project.
ITGI, TAP, and Nabucco have signalled a willingness to work with Tanap, indicating the level of threat from the Azerbaijan-backed project. Tanap may also force the other three bidders to offer improved financial terms to Shah Deniz II. Azerbaijan’s Socar would have nothing to lose: it is a stakeholder in Shah Deniz II as well as financer of Tanap. ITGI, TAP, Nabucco and Seep submitted plans to the Shah Deniz II consortium at the end of last year, each proposing to buy 10 billion cm/y of gas. The Caspian field holds over 1 trillion cm of gas, according to Socar. Phase two is expected to cost around $22 billion.
However, Russia could still have a say. Although Southern Corridor gas pipelines are supposed to reduce the EU’s dependence on Russian imports, which supplies around 25% of Europe’s demand, Gazprom is pressing ahead with its own South Stream pipeline, which proposes to ship gas to the same southern and central European markets as those targeted by the other projects. The final investment decision on South Stream is expected in November. But there are doubts whether Russia, which has the world’s largest conventional gas reserves, has enough to fill South Stream. During the recent cold snap in Europe, Russian exports were not able to meet increased European needs because its own domestic consumption spiked.
Gazprom was forced to prioritise domestic customers over foreign sales, despite higher prices available in its export market – highlighting, once again, Europe’s concerns over the reliability of Russian supply. With the first half of the 55 billion cm/y Nord Stream pipeline, which ships gas through the Baltic Sea from Russia to Germany, starting up last year, Russia has ample transport capacity. Under-investment in its upstream means it may struggle to fill it all with gas. The Ukraine-Russia gas wars of 2006 and 2009, which resulted in supply cuts, also still linger in the memory.
The Southern Corridor pipeline battle is reaching the endgame, and it looks like a fight between Nabucco, TAP, and Tanap, or a combination of them. The Shah Deniz II consortium is expected to choose the victor next year. A leaner Nabucco has given itself a fighting chance.