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paper series

Should the
Nabucco Pipeline Project
be Shelved?

Katinka Barysch
Centre for European Reform
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Should the Nabucco Pipeline Project be Shelved?

Transatlantic Academy Paper Series

May 2010

Katinka Barysch*
Centre for European Reform

*Katinka Barysch is the deputy director of the Centre for European Reform.
“No demand, no supply, no money.” This is how Finance Corporation (IFC, a part of the World
one leading energy expert summed up the chances Bank that lends to the private sector) said it might
of the Nabucco pipeline being built in early 2010. also chip in.
Nabucco—a 3,300 km pipeline planned from
Turkey’s eastern border through Bulgaria, Romania, In May, the leaders from all the countries through
Hungary, and into Austria—is the flagship project which Nabucco is supposed to run met high EU
of the EU’s fledgling energy security policy. It could officials and representatives from potential supplier
eventually bring 31 billion cubic meters (bcm) countries for a Southern Corridor Summit. The
While 2010 may
of Caspian and perhaps Middle Eastern gas to aim was to give the project a much-needed political
well be the critical
Europe each year. It is at the heart of the European push. In July, the governments of the transit
countries signed a long-awaited intergovernmental
year for Nabucco,
Union’s “southern corridor” strategy, which aims it is also a year
to connect the European energy market to these agreement (IGA) on the rules that will govern
the shipment of gas through Nabucco. By March during which it will
gas-rich regions. Nabucco would lessen the EU’s
2010, all of them had ratified the IGA and some be exceedingly
dependence on Russian gas, contribute to stronger
ties between the European Union and the countries had started the environmental impact assessments difficult to get
in its eastern neighborhood and prove that the required for the pipeline construction. such a big pipeline
European Union and Turkey can work together project going.
From the summer of 2010 onward, the Nabucco
at a time when the accession process seems to be consortium is planning to ask energy companies to
running out of steam. submit binding offers for the use of the pipeline (a
If the Europeans believe that Nabucco will achieve process known as open season in the gas industry).
objectives that go beyond enabling some energy If this goes well, the final investment decision
companies to make a profit by shipping additional could be taken before the end of 2010. Another
gas to Europe, then they should give it stronger international Nabucco conference has been
public support. The European Union can help to called for the autumn to sort out any remaining
finance the pipeline and, together with the member issues. “Progress toward Nabucco could become
states, provide political backing. But it has limited irreversible within one year,” predicts Mihaly Bayer,
influence over many of the make-or-break issues Hungary’s envoy for energy security. The Nabucco
for Nabucco—in particular whether and when consortium members still insist that the first gas
gas will become available from places such as will flow through their pipeline in 2014.
Turkmenistan or Iraq. While 2010 may well be the critical year for
Nabucco, it is also a year during where it will be
Progress at last exceedingly difficult to get such a big pipeline
Preparations for Nabucco have been under way for project going. In the 2008–2009 recession,
almost a decade. In 2009–2010, they finally made European demand for gas fell for the first time
some headway. In March 2009, the European Union ever, and it is likely to stay depressed as long as
allocated €200 million from its economic stimulus Europe’s economic recovery remains sluggish.
package to support the project. The European At the same time, a massive boost in the output
Investment Bank (EIB) and the European Bank of “unconventional gas” (gas coming from rock
for Reconstruction and Development (EBRD) formations) in the United States has added to a
promised to lend a significant share of the money global gas glut. Liquefied natural gas (LNG) that
needed for the construction. The International is no longer needed in the United States started

Should the Nabucco Pipeline Project be Shelved? 3


arriving in Europe instead, depressing prices on Most importantly, it is still not clear where victory for its rival South Stream Project that would be borrowed from international markets. Europe’s
the “spot” market for short-term gas contracts. Nabucco’s gas will come from. Since prospects for compete with Nabucco for both Caspian gas and two big multilateral lenders, the EIB and the EBRD,
With gas prices heading downward and markets gas exports from Turkmenistan and Iraq remain European markets.  have promised to lend a significant share of that
oversupplied, some are asking why Europe uncertain, the initial gas for Nabucco would have money. This is normal practice: big infrastructure
would need another gas pipeline. Medium-term to come from Azerbaijan—which is embroiled in If Nabucco does not make much headway in projects, especially complicated ones that span
uncertainty over European gas demand will only a heated commercial and political dispute with 2010, those who have always doubted the project’s borders, usually benefit from some sort of public
add to the caution of investors who remain risk Turkey. Another reason why many observers are commercial viability will feel vindicated. Others financial backing, be it subsidized loans or export
Medium-term averse in the aftermath of the financial crisis. giving up on Nabucco is that Russia is declaring will argue that Nabucco’s lack of progress is a finance guarantees. The EIB and the EBRD would The governments
uncertainty over failure for EU energy policy. Neither is entirely lend money to Nabucco on terms similar to those of Central and
true. The whole debate about Nabucco is muddled available in the markets but they may well be more
European gas Eastern Europe all
and short-sighted. willing to take the risk attached to the project.
demand will only support Nabucco
How Nabucco works
add to the caution to varying degrees
What the EU has (not) done The perception of that risk would fall if the
of investors who Gas pipeline projects are usually attached sold it to customers. Such companies had
European Union gave the project its full political since it would
remain risk averse to big, long-term supply contracts. Pipelines few incentives to let competitors use their The European Union has declared the “southern
are built by the companies that supply the infrastructure. EU attempts to break up all backing. Many European Commission officials mitigate their
in the aftermath of corridor” a priority for its emerging energy security
gas or the ones that buy it, or both, as is vertically integrated energy companies have and members of the European Parliament whole- over-dependence
policy. Nabucco is not the only pipeline in this
the financial crisis. the case with Nord Stream (a joint venture not succeeded. But a new law requires them heartedly support the pipeline, which they see as an on Russian gas.
scheme (more later on the other plans), but it is
between Gazprom, on the one hand, and to at least run their supply, transport, and important step toward a more unified EU energy But Nabucco has
clearly the flagship project. Nevertheless, political
German, Dutch, and French gas distribution sales businesses separately. policy and a contribution to the EU’s overall energy enjoyed a lot less
backing for Nabucco has been inconsistent and
companies, on the other). Nabucco is security. For the same reason, several smaller EU
financial support has been meager. encouragement
different. The Nabucco consortium is made In so far as the Nabucco consortium member states also like Nabucco. The governments
up of companies from the countries that lie members are already “unbundled,” it will be from the larger
In 2003, the EU agreed to cover half the costs of of Central and Eastern Europe all support Nabucco
along the pipeline’s prospective route: Botas the transport bits of these companies that member states.
the initial feasibility study for Nabucco. In 2009, it to varying degrees since it would mitigate their
(Turkey), Transgaz (Romania), Bulgargaz build and operate Nabucco. The upstream
allocated €200 million from its European economic over-dependence on Russian gas.
(Bulgaria), MOL (Hungary), and OMV (Austria). and distribution businesses of the same
Germany’s RWE (a big gas distributor that companies may or may not use Nabucco to recovery package (which contained a total of €4
Nabucco has enjoyed a lot less encouragement
also has ambitious plans for getting into ship gas to the European Union. More likely billion for energy and infrastructure projects). Since
from the larger member states. German
production abroad) has joined the consortium. than not, they will. MOL, OMV, and RWE (or the money is part of the EU’s stimulus package, it
Chancellor Angela Merkel has been lukewarm
But no gas supply company from the Caspian their exploration businesses) are involved needs to be spent by the end of 2010; otherwise the
in gas projects in Azerbaijan, Turkmenistan, about Nabucco and initially vetoed the EU’s €200
or the Middle East has signed up. The Nabucco consortium will lose it. The EU’s grant is
consortium members will build the pipeline and Iraq. If these projects are successful, the million grant to the pipeline. She later spoke
only a tiny portion of Nabucco’s total construction
and mostly sell the rights to use it to others. companies may use preferential rights to ship out in favor of Nabucco, but only after the EU
costs, estimated at €8 billion by the consortium.
their gas through the Nabucco pipeline. reconfirmed its support for the German-Russian
But it is important because it symbolizes the
One EU official describes Nabucco as a test led Nord Stream—despite visceral opposition
case for big infrastructure projects under the EU’s continuing support and therefore could give
These preferential rights stem from the EU from Poland and other new member states.
EU’s new system of “regulatory unbundling.” practice of granting a partial exemption from other investors more confidence to invest in the
Neither has French President Nicolas Sarkozy
Under EU rules on third party access (TPA), the TPA rule for newly built pipelines. The project. Conversely, if the consortium had to hand
been a champion of the “southern corridor.” The
companies in the European Union that Nabucco consortium members will get the the money back at the end of 2010, investors and
Turks—incensed about a French parliamentary
operate pipeline must allow other companies right to use or directly sell 50 percent of potential suppliers would interpret this as a signal
resolution about the Armenian genocide and
to use them on commercial terms. In practice, Nabucco’s maximum capacity, while the rights that Nabucco is in trouble.
this has not worked well because it was often Sarkozy’s open opposition to full Turkish EU
to use the other 50 percent will be auctioned
the same companies that bought the gas, off in an open tender. The companies that form the Nabucco consortium membership—had rebuffed Gaz de France’s offer
shipped it across the European Union and have committed themselves to paying 30 percent to join the Nabucco consortium. Sarkozy now
of the construction costs, with the remainder to seems to prefer that France’s big energy company

4 Transatlantic Academy Should the Nabucco Pipeline Project be Shelved? 5


join forces with Gazprom in projects such as Nord share of European gas demand of around 450 for emergency supplies in case of an accident or as a whole would gain. First, although the volumes
Stream and South Stream. Sarkozy’s stance may bcm annually. Russia is, and will remain, by far crisis. The European Union has allocated money coming through Nabucco would be small compared
change if—as some observers expect—a French Europe’s most important gas supplier. This is in its 2009 stimulus package to help build some with total EU demand, the availability of alternative
company is joining the Nabucco consortium in the true—and beside the point. interconnectors in the new member states. But supplies could strengthen the position of the
future. Italian Prime Minister Silvio Berlusconi progress has so far been slow. Moreover, most European gas companies vis-à-vis Gazprom. They
also prioritizes bilateral relations with Russia. The European Union as a whole is not over- interconnectors only have very limited capacity may be able to buy Russian gas at a cheaper price
Italy’s ENI is Gazprom’s main partner in South dependent on Russian gas: Gazprom’s sales so they would reduce, but not eliminate, the and more advantageous conditions. Something
The Europeans Stream. That leaves the United Kingdom as account for around one-quarter of total EU gas energy security dilemmas of the Central and East similar happened in 2009, when LNG that was Most Europeans
cannot have it the strongest backer of Nabucco among the big consumption (and 40 percent of EU imports). European countries. originally destined for the American market started do not deem
member states. Although Britain can for now rely France, Germany, and Italy buy gas not only from arriving in Europe. Although the volume of LNG in
both ways. Either it acceptable
on its own gas reserves and growing LNG import Russia but also the Netherlands, Norway, Algeria, Nabucco, on the other hand, would make a huge overall European supplies is still limited, Gazprom
they insist that that Slovaks
capacities, it knows that it will need more pipeline and in the shape of LNG from places such as Qatar. difference for the newer member states. A third was eventually forced to allow its big customers to
Nabucco is a or Bulgarians
gas in the future and it cares about the geopolitical They have well thought-out emergency plans and of the gas flowing through Nabucco would be buy a certain amount of Russian gas at the “spot”
private endeavor big gas storage tanks. Their leaders think that earmarked for consumption in the countries along should freeze in
benefits that a “southern corridor” would provide. price (which had fallen very low compared with
and a risky one at the best insurance against supply disruptions is its route. Spurs could be built to other countries in a gas crisis while
pipeline gas shipments that are governed by long-
that, or they get to maintain good relations with Russia. For the the region that also want to diversify their supplies. German and
More than a steel pipe term contracts). If Nabucco allowed EU companies
serious about the big EU countries, getting access to Caspian gas What is more, the flow of gas in Nabucco would be Italian houses
to negotiate slightly more advantageous contracts
political nature Although the European Union has declared the supplies or those from Iraq would be nice, but it is reversible. This feature, together with the pipeline’s are snug.
with Russia (and perhaps also Algeria and other big
of the “southern “southern corridor” to be at the heart of its energy not essential. many entry and exit points, would for the first time suppliers) then all European customers would gain.
corridor.” security policy, it relies almost entirely on a handful allow flexible gas trading in a region where national
of private companies to get the pipelines built. The However, some of the smaller EU member states, gas markets have so far been largely sealed-off. Second, Nabucco could help to eliminate divisions
Europeans cannot have it both ways. Either they in particular those in Central and Eastern Europe that are poisoning the atmosphere within the
insist that Nabucco (and other southern corridor and the Baltics, are overly dependent on Gazprom. In an emergency, the 31 bcm Nabucco gas could European Union. The main responsibility for
projects) are private endeavors and risky ones at Countries such as Bulgaria, Poland, Hungary, and supply the main Central and East European gas securing energy supplies will continue to lie with the
that—in which case no one should be surprised if Slovakia rely on Russia for 70–100 percent of their markets for up to six month, claims the Nabucco individual EU countries and their companies. But
the pipelines suffer from the setbacks that usually gas consumption. Some of them suffered badly in consortium. The fact that the flow of gas in the European Union has declared energy security a
befall big infrastructure projects; and no-one 2006 and 2009, when Russian gas stopped flowing Nabucco would be reversible provides additional common concern, and member states now expect
should interpret such delays and difficulties as a through Ukraine and into the European Union after insurance. If for some reason the gas stopped “energy solidarity” from their neighbors. Most
setback for EU policy. Alternatively, the European Moscow and Kyiv had fallen out over gas prices, flowing from east to west, the pipeline could Europeans do not deem it acceptable that Slovaks
Union can get serious about the political nature of debt and transit fees. swiftly be used to ship rather large amounts of gas or Bulgarians should freeze in a gas crisis while
the “southern corridor”—in which case it should from Austria’s central gas hub of Baumgarten into German and Italian houses are snug.
These countries need to diversify their gas Eastern and Southern Europe. The Nabucco IGA
make it clear that Nabucco is a public policy
supplies and work out better emergency plans. contains detailed procedures about what happens The East Europeans have repeatedly accused the
objective as much as a private commercial project.
There are some encouraging developments: the in the case of a gas cut-off, unlike the agreement big EU countries of having adopted a sauve qui
One could make a number of arguments why European Union is working on a new law that that governs Nord Stream—not to speak of the peut attitude in energy while leaving the new
Nabucco is more than just another pipeline and would require all member states to make their opaque and unpredictable Ukrainian gas transit member states out in the cold. Such divisions do
therefore warrants political backing and public national energy markets more resilient. All East system. “Nabucco has built-in solidarity,” says one not only affect EU energy policy: the new member
financial support. European countries now have at least some plans EU official, “that’s why the new member states all states think that France, Germany, and Italy feel
to build more interconnectors between their love it.” compelled to be nice to Moscow to keep their
Energy security and solidarity: Skeptics never national gas (and power) markets. Such cross- energy relationship with Russia smooth. Politicians
tire of pointing out that Nabucco, even at full border infrastructure links would not only result in Not only the Central and East European countries in Berlin and Paris insist that it is mainly up to the
31 bcm capacity, would only deliver a tiny more healthy competition; they would also allow would benefit from Nabucco. The European Union East Europeans to improve their energy security

6 Transatlantic Academy Should the Nabucco Pipeline Project be Shelved? 7


and thus reduce their vulnerability to Russian to gain a greater degree of independence to choose among these countries (the INOGATE and BAKU Potential synergies abound. Yet energy cooperation
trouble-making. It is unlikely that the European their own destiny rather than falling under a initiatives, respectively). Nevertheless, many between the European Union and Turkey has been
Union will be able to speak with one voice on Russian sphere of influence. So long as the likes politicians in the Caspian countries (and analysts complicated. It took the Europeans a long time to
Russia as long as such suspicions persist. If the big of Azerbaijan and Turkmenistan could only sell in the West) remained skeptical whether the convince Ankara that Nabucco could only be built
member states fully supported Nabucco, they could, their energy via Russia, their room for maneuver European Union was serious about supporting if all transit countries agreed to the same rules, and
in turn, demand that the new member states step was limited. For an energy producing country new energy links. A high-profile trip by the EU’s that these rules should be those of the EU acquis
up their own efforts to make their energy markets “freedom is multiple pipelines,” as one Turkmen new energy commissioner, Gűnther Oettinger, to (which means that pipeline owners need to sell
For an energy more resilient. Nabucco—by making the most official put it at London’s Chatham House think Turkmenistan and Azerbaijan in April 2010 may access to their pipelines on the open market). Improved EU-
producing country, vulnerable EU countries a lot less so—could help tank in February 2010. signal that the European Union is moving toward Turkey cooperation
to address the EU’s energy security and solidarity a more proactive approach. The Turks had argued, with some justification, that
freedom is on energy could
conundrum in a sustainable way. Russia understands this reality very well, which if the European Union wanted Turkey to take over
multiple pipelines. improve the
is why it is pushing so hard to foil Nabucco and Turkish accession: Turkey’s accession negotiations the energy acquis, it should open the accession
Neighborhood policy: Over the last five years, the tie South and Central European countries to its with the European Union have slowed to a snail’s talks in that particular area. Cyprus, however, keeps atmosphere
European Union has shown a growing interest own pipelines. Successive U.S. administrations pace. Turkey no longer seems as keen on political blocking talks on the energy chapter (and much between Ankara
in, and engagement with, the countries of the have also been acutely aware of the importance of and economic reforms as it was before the talks else). By signing the IGA in July 2009, Turkey has and Brussels, and
Caucasus, Black Sea region, and Central Asia. The making former Soviet countries less dependent started in 2005. A bust-up over Cyprus in 2010 now accepted that Nabucco will be governed by send a powerful
EU’s declared policy objective is to help foster on Russia pipelines. In the 1990s, the Clinton cannot be ruled out. Alternatively, the European EU-compatible rules. Ankara has also given up its signal to those
stability, democracy and economic prosperity in administration pushed very hard for new energy Union and Turkey could simply run out of things long-standing opposition to joining the Energy who have become
the countries around its borders. The European links to get Caspian oil and gas to Western markets. to talk about as most of the chapters of EU law and Community Treaty. The ECT is a multilateral cynical about
Neighborhood Policy (ENP), launched in 2004, The most visible result has been the Baku-Tblisi- policy that Turkey needs to plough through before agreement under which the countries of the Balkan the prospects of
offers former Soviet countries and those of the Ceyhan (BTC) pipeline that now ships crude oil it can join are now blocked by the European region (and in the future perhaps the Black Sea too) Turkish accession.
southern Mediterranean new opportunities for from Azerbaijan via Georgia to the Turkish coast. A Union or its national governments. Opposition are aligning their energy laws and policies with
cooperation and economic integration. Since small gas pipeline (usually referred to as the South to Turkish membership remains strong in many those of the European Union.
many thought the ENP less than fully effective, Caucasus Pipeline, or SCP) runs along roughly EU countries. Some Turkish political leaders,
the EU launched the Eastern Partnership in 2009, the same route. But the big gas link between the and a growing share of the Turkish people, think Improved EU-Turkey cooperation on energy, and
specifically designed to draw eastern neighbors Caspian and Europe is still missing. The Obama that Turkey should walk away from the accession in particular tangible progress on Nabucco, could
such as Ukraine, Azerbaijan, and Georgia closer. administration therefore strongly supports plans process. That would be a huge shame since both improve the atmosphere between Ankara and
In 2007, the EU formulated its first Central Asia for Nabucco and the southern corridor. However, sides would gain significantly if Turkey joined the Brussels, facilitate cooperation in other areas, such
strategy. The same year, it launched the Black U.S. officials admit that Washington has a less European Union under the right circumstances. as foreign and security policy, and send a powerful
Sea Synergy Initiative to support integration and clout with the former Soviet countries than it used signal to those who have become cynical about the
cooperation among the littoral states. to have. They advise the Europeans to do more to To improve the political atmosphere, and perhaps prospect of Turkish accession.
support the construction of new pipelines as part of restore some momentum to the accession process,
The EU’s aim of helping East European and the European Union and Turkey should look for For the European Union, a lot of credibility hinges
a successful neighborhood policy.
Central Asian states become more democratic and ways in which they can cooperate outside and on the Nabucco pipeline. It is widely seen as the
economically open is an ambitious one. Countries Stronger energy ties—through dialogue, beyond the narrow confines of the membership flagship project of the EU’s diversification strategy.
such as Turkmenistan and Azerbaijan are unlikely regulatory convergence, and investment—are talks. Energy is an area where the European It could add to the EU’s overall energy security
to respond well to EU advice about political and a prominent objective of the ENP, the Eastern Union and Turkey have clear common interests. and reduce divisions among the member states.
economic reform unless clear incentives are on Partnership, and the EU-Central Asia partnership. The Europeans want to get direct access to It would be an important ingredient of the EU’s
offer. If the European Union manages to create In 2004, the EU launched targeted programs to hydrocarbons in the Caspian region and the Middle neighborhood policy. And it could help to restore
facts on the ground, through investment, trade, support energy cooperation and transport links East. Turkey has aspirations to become a Eurasian momentum to EU-Turkey relations. These are clear
and energy links, a more fruitful dialogue may between the European Union and the countries energy hub. It also wants to reduce its dependence benefits. But they do not accrue to the companies
develop. EU policy can also help these countries of the Black Sea and the Caspian, as well as on Russian gas (currently over 60 percent). that are planning to build the pipeline or the

8 Transatlantic Academy Should the Nabucco Pipeline Project be Shelved? 9


banks that put up the money for it. These private diplomatic relations, re-open the bilateral border
players will only look at the likely return on their and set up a panel of historians to look into might also want to be careful not to rely too much the beginning of 2010, Turkmen gas has been
investment. And that return still looks uncertain. the massacre of Armenians by Turkish troops on tightly controlled yet unreliable markets such flowing to China through a newly-built pipeline
The main question for Nabucco and other possible during the first World War. Azerbaijan, which as Russia or Iran (and shipping the gas across that could one day transport as much as 40 bcm,
southern corridor pipelines is still: Where will has traditionally had close ties with Turkey, the Caspian to China makes little commercial once a trans-Turkmenistan pipeline has been
the gas come from? The answer to this question was incensed that Turkey could contemplate sense). The leadership in Baku seemed to share added. Iran is also buying some Turkmen gas and
depends on various factors over which neither the normalizing its relationship with Armenia without such considerations when it declined a Russian says it wants more in the future (this gas could be
The main question European Union nor the companies of the Nabucco insisting that Armenian troops first withdraw from offer to buy Azerbaijan’s entire gas output in 2009 re-exported through “swaps,” which means that Azerbaijan’s
for Nabucco and consortium have much influence. at least some of the territories around the disputed and instead agreed to sell only symbolic amounts Iran would import Turkmen gas into its north- strategic interest
other possible enclave of Nagorno-Karabakh. To drive the point northward. However, Russia’s offer still stands and eastern region and sell the same amount of its own should be to
southern corridor Will Ankara and Baku make up? home that it does not need Turkey and its transit Azerbaijan can take its time to develop its gas and gas on to Turkey in the west). build a gas link
pipelines is still: pipelines to sell gas, Azerbaijan started shipping find the right buyer. The country already produces
The original Nabucco plan foresees that the to the lucrative
some gas to Russia in 2009. It has also indicated and exports sizeable amounts of oil, which brings in Since Turkmenistan has developed alternative
Where will the pipeline will be built in stages: it will start with a European market
that it may sell more gas to Iran, establish an LNG plenty of foreign exchange. export options, Russia now feels compelled to
gas come from? relatively small capacity of perhaps 8 bcm a year. and to become a
terminal at the Black Sea and even look into sales offer European market prices for Turkmen gas. A
Then it will be expanded to its full capacity of up gateway between
to China. In the spring of 2010, EU officials stepped up year-long interruption in Turkmen-Russian gas
to 31 bcm as more gas comes on stream in the Europe and the
their efforts to mediate in the dispute between shipments was resolved at the start of 2010. But
potential supplier countries and companies buy Toward the end of 2009, the Turkish government energy producers
Turkey and Azerbaijan. Even if Baku and Ankara Russia is still buying a lot less than the 30 bcm that
additional capacity in the expanding pipeline. changed its stance on the Armenia protocols and it signed their gas purchasing and transit agreements it has signed up for and plans for an additional of Central Asia.
now insists that ratification will have to wait until tomorrow, Shah Deniz II is unlikely to produce pipeline between the two countries have been put
Most experts say that the only readily available gas
there is some progress on Nagorno-Karabakh. significant volumes of gas much before 2017. on ice.
for Nabucco comes from Azerbaijan’s Shah Deniz
However, Azerbaijan President Ilham Aliyev still Then it could easily supply the 8 bcm that experts
field. The first stage of Shah Deniz is operational
did not give Socar the go-ahead to start negotiating say are needed for the first phase of Nabucco. But President Berdimuhamedov and his officials have
and delivers around 6 bcm a year to Turkey though
the sale of Shah Deniz II gas (whether to Nabucco where would the other volumes come from for the repeatedly said that they would like also to forge
the SCP. Contracts for the second stage have been
or another potential buyer) and trust between pipeline to reach its full capacity? an energy relationship with Europe, and that
signed with a consortium containing Socar, the
Ankara and Baku remains low. Azerbaijan and Turkmen gas should go to the Nabucco pipeline
Azerbaijani state oil company, as well as Britain’s BP
Turkey should be able to patch things up eventually, The promise of Turkmen gas under the right conditions. One of the Nabucco
and Norway’s Statoil. However, the oil companies
but it is not clear when. consortium members, Germany’s RWE, has signed
have warned that they will stop drilling and send Turkmenistan has enormous amounts of gas: at a deal for exploring a field off Turkmenistan’s
their engineers on leave unless Baku and Ankara Turkey knows that it needs to restore relations with least 8 trillion cubic meters, according to the first Caspian shoreline. RWE, together with Austria’s
resolve a bilateral dispute that is—ostensibly— Azerbaijan if its objective of becoming an energy independent survey of its reserves, released in OMV, another consortium member, launched
about gas prices, volumes and transit fees but has a hub is to be realized. But it also knows that if it 2008. That is more than all proven gas reserves an initiative in 2008 to figure out how to bring
deeper and more intractable political background. makes the restoration of relations with Armenia of Western Europe taken together. Traditionally, Turkmen gas across the Caspian and into Western
strictly dependent on a resolution of the Nagorno- Turkmenistan has sold its gas cheaply to Russia markets (this initiative is called the Caspian
By March 2010, people close to the negotiations
Karabakh conflict, the normalization process—one (typically 60–70 bcm a year), which sold it on via Energy Company, not to be confused with the
said that Turkey and Azerbaijan had more or less
of the Erdoğan government’s most courageous Ukraine to Western markets at a much higher price. EU’s idea for a Caspian Development Corporation,
agreed on a renegotiation of existing contracts
initiatives—may well falter. see below). When Energy Commissioner
and the terms of future gas sales. But the tense But since the death of Saparmurat Niyazov,
political atmosphere between the two countries has Oettinger met Berdimuhamedov in April 2010,
Azerbaijan’s strategic interest should be to build Turkmenistan’s long-time dictator, in 2006,
prevented them from officially concluding a deal. the two sides agreed to set up a working group
a gas link to the lucrative European market and the country’s new president, Gurbanguly
to explore a possible legal regime for shipping
to become a gateway between Europe and the Berdimuhamedov, has pushed a strategy of
In October 2009, Turkey and Armenia signed Turkmen gas to Europe.
energy producers of Central Asia. Azerbaijan diversifying export routes and opening up some
two protocols that would, if ratified, re-establish
opportunities for international oil companies to However, while Turkmenistan has plenty of
help explore, produce and sell Turkmen gas. Since potential as a gas supplier, there are doubts whether

10 Transatlantic Academy Should the Nabucco Pipeline Project be Shelved? 11


it could be the country that makes Nabucco viable. European energy companies are interested in been surveyed. Iraqi gas would be relatively easy proven oil reserves and has already signed a series
First, Turkmenistan has signed export contracts the country, there is no overarching strategy that and cheap to get out of the ground and could be of large deals with international oil majors). Gas
for a lot more gas than it actually produces. For could replicate China’s muscular approach. The shipped directly into Turkey and into Nabucco may be used for oil production or to satisfy fast-
now, there is no gas available for shipments to European Union has been exploring a mechanism (there is already an oil pipeline connecting Iraq growing domestic needs. How much would be
Europe, and energy experts disagree over how through which it could aggregate the demand and Turkey). available for export and when remains uncertain.
quickly additional volumes may become available. from individual European companies and so offer Nevertheless, Iraq has potential as a gas exporter to
Turkmenistan has very ambitious plans for its the Turkmens a big contract that would get them However, as with Turkmenistan, there are number Europe in the medium term, once internal issues
A big contract energy sector, and in 2009 it signed a number excited. A study on how to make this mechanism of big issues that first need to be resolved before have been resolved. Some energy
would be needed of new contracts for companies to help with the (called the Caspian Development Corporation) Iraqi gas can flow to Europe. The most intractable
watchers believe
development of the giant Yolotan field. But these work has not been made public, let alone acted is the question of how to share power over, and Iranian gas is not an option
for Turkmenistan that the Kurdish
investment commitments are well below the $10 upon, partly perhaps because Western companies allocate revenue from, future energy sales between
to make the effort Turkey is one of the few countries in the world authorities in
billion a year that experts say Turkmenistan would are wary of the European Commission assuming a the central government in Baghdad and the regions,
to sort out transit that maintains friendly relations with Iran. So it Erbil could start
have to invest to meet its output targets. role in procuring gas supplies. in particular the oil and gas rich Kurdish province
issues across the in the north. There are also disagreements between is perhaps not surprising that Turkish politicians exporting gas
Caspian Sea. Second, Turkmenistan allows international oil Fourth, a big contract would be needed for nationalist parties and others over how much of a sometimes claim that Iranian gas could help without waiting
companies to own reserves only in offshore Turkmenistan to make the effort to sort out transit role international energy companies should play in to fill Nabucco. Iran is Turkey’s second biggest for an agreement
fields—and these have yet to be fully explored and issues across the Caspian Sea. Some experts claim the restoration and further development of the oil gas supplier after Russia so the Turks claim with Baghdad.
may take more time to develop. Turkmenistan that for a trans-Caspian pipeline to be built, all and gas sector. that they could build on an established energy
insists that it can develop its vast onshore reserves the littoral states would first have to agree on a relationship. When Turkish Prime Minister
itself. International oil companies are invited to division of the sea bed. Russia has no interest in A long-awaited hydrocarbon law was adopted Recep Tayyip Erdoğan met Iranian President
provide technical help but most seem to hold out such an agreement, which could hasten the end by the Iraqi cabinet in February 2009 but then Mahmoud Ahmadinejad in Tehran in October
in the hope of one day being allowed to assume a of its Eurasian gas transit monopoly, and Iran promptly shelved until after the parliamentary 2009, the two leaders rekindled a long-delayed
more comprehensive role in the exploration and also wants to expand its share of the seabed. Most election that finally took place in March 2010. Once $3.5 billion investment deal in Iran’s gas sector
development of these reserves. experts say that all that is needed for a pipeline is an a new coalition is in place (which could easily take that could, if realized, produce additional gas
agreement between Turkmenistan and Azerbaijan. until the summer of 2010) the law will come back for westward exports.
Third, unlike Russia, Turkmenistan does not like to But a feud over a contested offshore oil field makes onto the agenda. All parties involved the coalition
get involved in pipeline politics. It sells its gas at the talks say that they want to see energy exports It looks highly unlikely, however, that Iranian
such an agreement very unlikely for the time being.
border and leaves it to the buyer to figure out a way rise soon. However, given the importance of a gas—whether produced with the help of Turkish
And Turkmenistan is unlikely to risk Russian ire
of getting it to the market (although the Turkmen sustainable energy regime to Iraq’s economic future or other foreign investors—could flow to Europe
unless and until it is convinced that the Europeans
positions on this could be softening). The reason and the political relationship between different any time soon. The U.S. and EU countries strongly
are serious about establishing a long-term and
why China was able to get access to Turkmen gas groups and regions, a quick agreement looks discourage big investments in the Iranian energy
lucrative gas relationship. There is a good chance
in just a few years is that it offered Turkmenistan somewhat unlikely. Some energy watchers believe sector as long as the regime there continues its
that Turkmen gas will eventually find its way into
not only to buy a lot of gas for years to come, but that the Kurdish authorities in Erbil could start nuclear enrichment program. Turkey may decide
Europe, but it will take time to remove the various
also to build the pipeline, sort out the transit issues exporting gas without waiting for an agreement not to support the tougher sanctions that the
obstacles before this gas relationship can develop.
through Kazakhstan and Uzbekistan, help with with Baghdad. However, the European Union and United States and the European Union are now
the development of the gas within Turkmenistan, the United States would probably discourage such contemplating. But any large energy project in Iran
Iraq’s hydrocarbon law
and provide the money needed for all this (which a move. And Turkey might be reluctant to ship would struggle to get the required international
Turkmenistan will repay through the gas it ships to Another potential supplier of Nabucco gas is such gas, given its own fears about any move of the finance and modern equipment. Other Nabucco
China over the years). Iraq, where two of the Nabucco companies, MOL Kurdish region toward greater autonomy. consortium members have said loud and clear that
of Hungary and Austria’s OMV, have joined an they do not want Iranian gas in their pipeline.
The Turkmens sometimes drop hints that they exploration project. Estimates of proven reserves Even if the hydrocarbon law was agreed and ratified
would welcome a similar package deal from Europe of around 3 trillion cubic meters may be revised soon, the main focus of Iraq’s energy policy would Even in the absence of these political obstacles,
to get gas flowing westward. But while various upward once more of the country has actually continue to be oil (Iraq has the world’s third biggest the potential of Iran as a gas exporter would be

12 Transatlantic Academy Should the Nabucco Pipeline Project be Shelved? 13


doubtful. The Turkey-Iran energy relationship could sell gas from the Shah Deniz II field (in the developed first, insisting that the ultimate decision The South Stream threat
is littered with broken supply contracts, overdue development of which it is involved) to TAP. TAP’s will be a commercial one. After the ratification of
The most widely discussed alternative to Nabucco
bills, mounting fines, and unfulfilled investment final capacity could be 20 bcm but its prospects the Nabucco IGA, EU officials say they may be able
is not TAP or ITGI but Russia’s South Stream.
promises. Iran’s investment regime is formidable remain uncertain, especially while the development to back the Nabucco pipeline more explicitly since
The pipeline would probably run under the Black
and the regime prioritizes oil sales while using gas of Shah Deniz II is on hold. it is the only one that has contractually guaranteed
Sea and then fork into two lines, one going to
to meet subsidized domestic demand. Although transit rights through Turkey.
White Stream: A third alternative would be the South Eastern Europe and Austria and the other
sitting on what are widely believed to be the world’s
White Stream pipeline to transport Azerbaijani gas Some energy executives warn that a narrow EU to Greece and Italy. The initial plan of Gazprom
The Turkey- second biggest gas reserves, Iran is currently a net Some argue that
from the Georgian coast under the Black Sea to focus on Nabucco would bar the way for developing and its Italian partner, ENI, was for a 30 bcm
Iran energy importer of gas. it would be better
either Romania or Ukraine. White Stream would be one (or more) of the other, more doable projects. pipeline but they have since doubled the planned
relationship is capacity to 63 bcm. The price tag is an estimated to start shipping
Alternatives to Nabucco ambitious (aiming at a 30 bcm capacity) and, as a They argue that it would be better to start shipping
littered with $30 billion, which would make South Stream Azerbaijani gas
sub-sea pipeline, expensive to build. Although the Azerbaijani gas through a smaller and possibly
broken supply Since it remains unclear where the 31 bcm to fill the most expensive energy infrastructure project through a smaller
European Union has agreed to pay for a feasibility cheaper pipeline than to wait for the politicized and
contracts, Nabucco will ultimately come from, some say that study, it is currently unclear where the money commercially dubious Nabucco pipeline to make ever undertaken. Which route the pipeline will and possibly
overdue bills, the European Union may be better off to focus on for the pipeline would come from. The White headway. Starting with a smaller project may in fact take is not yet clear since Gazprom has promised cheaper pipeline
mounting fines, one of the smaller pipeline projects that also form Stream consortium lacks a big, cash-rich energy make Nabucco more likely. Gas analysts like John numerous countries that the pipeline would either than to wait for
and unfulfilled part of the “southern corridor” blueprint. company. White Stream suffers from many of the Roberts predict that once a direct link—however go through their territory or at least have a spur the politicized
investment same uncertainties over gas supplies and demand small—between the Caspian and the EU market to their local markets. Gazprom has signed initial and commercially
ITGI: The project that has developed furthest is an agreements with Turkey, Bulgaria, Hungary, Greece,
promises. as Nabucco. has been established, investor interest in Caspian dubious Nabucco
interconnector between Turkey, Greece, and Italy, Serbia, Croatia, Slovenia, and Austria and in the
gas will increase massively while Caspian producer pipeline to make
known as ITGI. One section of the project—a link CNG and LNG: In late 2009 and early 2010, spring of 2010 it was working on Romania. These
countries will start taking the idea of selling gas to headway.
from Turkey to Greece—was inaugurated in late Azerbaijan signed memorandums with Bulgaria agreements do not commit the partner countries
Europe more seriously. With prospects of bigger
2007 and is now used to ship gas from Shah Deniz and Romania about shipping gas across the to much more than helping with a yet to be written
and more secure supplies, building an ambitious
I into Greece. The plan is to extend this pipeline to Black Sea in the form of compressed natural feasibility study. And the Hungarian and Bulgarian
pipeline like Nabucco might become easier at a
Greek’s western coast and then under the Adriatic gas (CNG). CNG is used as a fuel substitute in governments insist that Nabucco remains their
later stage.
Sea to Italy. The project would be cheaper (maybe a growing number of places and it may become priority. But the fact that Gazprom has managed
another €1–1.5 billion, plus the cost of expanding more common as a means of transporting gas Other energy watchers say the opposite. ITGI, to sign up almost all the Nabucco members has led
transit capacity through Turkey) and smaller (a without pipelines. The gas would be compressed TAP, or the use of CNG/LNG would swallow up many analysts to conclude that Russia is winning
total of 12 bcm) than Nabucco. ITGI is driven and transported in containers loaded onto ships. Azerbaijan’s initial gas output and increase doubts the “pipeline war.”
by Depa, Greece’s gas monopoly, and Edison, an Shipping gas as CNG may require less upfront over Nabucco’s viability at a critical time. Small-
Italian energy company. The European Union has investment than LNG (which needs expensive scale pipeline projects would not give Caspian South Stream is clearly a political project, with two
promised some money under its trans-European liquefaction and re-gasification terminals and producers confidence that the EuropeanUnion main purposes: to cut out transit countries such as
network program. special LNG tankers). And unlike in the case of a is serious about developing a durable gas Ukraine and Belarus, and to prevent Nabucco—a
pipeline, transport through CNG could be scaled relationship. From a European energy security threat to Gazprom’s Eurasian energy transport
TAP: The trans-Adriatic pipeline (TAP) is another monopoly—from being built. The first objective
up in accordance with actual demand. However, the perspective, ITGI and TAP look less appealing:
possible gas link between Turkey, Greece, and may look less urgent to Moscow since a new
technology is as yet unproven and in April 2010, the gas would be shipped to Greece and Italy
Italy, this one crossing Albania before it continues government in Kyiv has started exploring the option
Azerbaijan signed another memorandum with so these pipelines would do little to address the
under the Adriatic Sea. It was originally designed of giving Russia a stake in the Ukrainian pipeline
Georgia and Romania about exploring the options issue of Eastern and South-Eastern Europe’s
to ship Iranian gas westward since one of TAP’s system. That leaves the objective of foiling Nabucco.
of shipping gas across the black sea in the form of risky dependence on Russian gas (although
partners, EGL from Switzerland, signed a gas South Stream would feed into the same markets as
LNG instead. Bulgaria and Greece are now planning to build an
deal with Tehran in 2007. Since that contract is Nabucco and, given that Russia’s own gas output is
interconnector that would allow Bulgaria to buy
unlikely to deliver any time soon, TAP’s other The European Commission has in the past adopted stagnating, may have to be filled with Azerbaijani or
gas coming from ITGI or TAP).
partner, Norway’s Statoil, has suggested that Socar a neutral stance on which of these options should be

14 Transatlantic Academy Should the Nabucco Pipeline Project be Shelved? 15


Turkmen gas that could otherwise go to Nabucco or gas to South Eastern Europe it may one day use the There are, however, significant uncertainties should, in theory, allow the European Union
another “southern corridor” pipeline. Nabucco pipeline to do so—like any other energy surrounding European gas demand at present. to better integrate foreign policy, development
company, Gazprom will be free to take part in the One stems from the EU’s ambitious climate change assistance, and energy security objectives. Such
Whether South Stream will ever get built is an tenders for booking capacity in the new pipeline. targets: it is not clear how policies for raising energy an integrated approach would be welcome by
open question. Experts say that no sub-sea pipeline efficiency, cutting CO2 emissions and shifting from energy producing countries like Turkmenistan
of this magnitude has ever been constructed. Until and unless it becomes clear that Russia is fossil fuels to renewable sources of energy will affect that get confused and annoyed when various
They also think that a project of this scale and prepared to throw real money and resources at gas demand. Another wild card is the development EU representatives turn up with uncoordinated
The fact that complexity needs a unified legal and transit South Stream, Europeans should stop worrying of unconventional gas in Europe. There is little agendas. The governments of the big EU countries The EU’s new
South Stream regime along its entire route (like the one created about it and focus on the question of which doubt that Europe, like the United States, has should back the EU’s fledgling attempts to build Lisbon Treaty
by the Nabucco IGA) and cannot be managed on “southern corridor” project makes the most sense very large reserves of such gas. But will European an energy foreign policy rather than relying on
makes little should, in
the basis of bilateral agreements. Gazprom has for them and in which order. countries—with their higher population densities their own cozy relationships with Russia. It is
commercial theory, allow the
never explained where the 64 bcm would come and stricter licensing rules—be able to replicate good that energy is one of the platforms on which
sense may not European Union
from or whom it would sell them to (its current Nabucco needs patience America’s shale gas boom? And if so, when? Within the European Union is planning to build the
deter Gazprom. gas pipeline to Turkey, the 16 bcm Blue Stream and public support to better integrate
a year or two, the outlook for Europe’s demand for Eastern Partnership and that it is a core ingredient
pipeline under the Black Sea, usually runs half gas may become a bit clearer. Planning pipelines of the EU’s evolving Central Asia strategy. These
foreign policy,
All of Nabucco’s current problems—lack of
empty). The huge costs may have to be financed would then be easier. eastern policies also need a strong focus on development
demand, finance, and supplies—have a plausible
at the expense of Gazprom’s other investment regional integration and mediation since some assistance, and
solution. But it looks rather unlikely that these
priorities, in particular developing giant new gas On the supply side, the challenges involved in of the biggest obstacles to developing Caspian energy security
solutions will all fall into place in 2010. Nabucco is
fields in Shtokman and Yamal. getting Caspian (and maybe Iraqi) gas to Europe energy exports are disputes between the countries objectives.
unlikely to be ready in 2014, as its backers claim,
look formidable at the moment. But there are also of the region. It is also critical that the European
The fact that South Stream makes little commercial but it will still make sense, both commercially and
plenty of encouraging developments, ranging from Union and Turkey keep moving forward in their
sense may not deter Gazprom. The state-controlled politically, to build it a little later.
Turkmenistan’s evolving investment environment membership talks. An angry and disappointed
behemoth may be able to find both the gas and the to a possible Turkey-Azerbaijan rapprochement
The European Union and the consortium Turkey would be a tricky partner for building the
money for South Stream, but the opportunity costs and greater political stability in Iraq. In the medium
companies should acknowledge that the immediate southern corridor.
would be enormous. In March 2010, Paolo Scaroni, term, it still makes sense to connect this gas-rich
outlook for Nabucco is uncertain and that the
chief executive of ENI, Gazprom’s main partner region with the European Union, the world’s biggest Nabucco should remain the flagship project of the
reasons for this uncertainty—doubts over European
in South Stream, suggested that South Stream gas importer. EU’s emerging energy policy. It would add to the
demand and the availability of Caspian and Iraqi
and Nabucco should be merged. Some energy energy security not only of the Central and East
gas—are largely outside their control.
analysts interpreted his suggestion as a sign that EU officials and the Nabucco consortium European countries but the European Union as a
ENI is getting cold feet about becoming involved in Most forecasters say that the global gas glut will representatives should avoid setting artificial whole. It could enable the European Union to have
such an expensive and politically divisive project. only last until about 2020, after which the market deadlines for Nabucco and the “southern corridor.” more solid relations with its eastern neighbors than
Russian officials quickly rebuffed the idea. will tighten once more. European demand for gas is Instead, the European Union should use the it would otherwise have. It might even help the
expected to pick up again in a few years’ time, while breathing space provided by the current global European Union to develop a more coherent policy
Some European officials and energy executives gas glut to define more clearly the objectives of its
output from the North Sea and other European toward Russia. While Nabucco looks ambitious in
have also talked about making Gazprom a partner energy diversification strategy and strengthen the
fields will decline sharply. The International Energy the current environment, it is too early to declare
in the Nabucco consortium. Such a move would be tools it has available.
Agency predicts that Europe’s net gas imports will the project a failure. It warrants the support of the
politically controversial and the ensuing brouhaha
rise by at least 100 bcm a year by 2030. Energy European Union and its governments.
would delay Nabucco further. But the European There are things that the EU could do to
companies even foresee additional import demand
Union should be careful not to present Nabucco increase the chances of a European-Caspian gas
of up to 250 bcm by that date. If such forecasts
as an “anti-Russian” pipeline. On the contrary, the relationship developing, beyond asking the EIB
turn out to be correct, the EU will need Nord
European Union may want to call Russia’s bluff by and the EBRD to help with the financing the
Stream, South Stream and all the southern corridor
pointing out that if Gazprom wishes to sell more pipeline. For example, the EU’s new Lisbon Treaty
pipelines to satisfy its additional demand.

16 Transatlantic Academy Should the Nabucco Pipeline Project be Shelved? 17


18 Transatlantic Academy Should the Nabucco Pipeline Project be Shelved? 19
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