Thursday, May 13, 2010

Nabucco, and Baku, filling up on gas

Nabucco, and Baku, filling up on gas

By Robert M Cutler

MONTREAL - Following the recent agreement on principles and prices between Azerbaijan and Turkey for bilateral gas sales, Azerbaijan this week increased again the amount of gas it is willing to provide to the Nabucco pipeline, this time to half its projected capacity.

The Nabucco pipeline, projected capacity 31 billion cubic meters/year (bcm/y) when completed, is planned to take gas from the Caspian Sea basin to
Austria's Baumgarten hub for distribution throughout the European Union, via Azerbaijan, Georgia, Turkey, Bulgaria, Romania, and Hungary.

This is the second time in a few weeks that Azerbaijan has raised
its supply figure. The standard reference figure was 8 bcm/y until late last month, when the official announcement was made in Baku that up to 12 bcm/y could be available. This week's announcement increases that further. Azerbaijan's industry and energy minister, Natiq Aliev, underlined that no formal commitments have been made, while stressing that interest is expressed on the state level with a view towards accelerating the realization of the project.

It is the agreement with Turkey that makes such an expansion of volumes possible, because that agreement sets the necessary conditions for the investment decision in favor of the Shah Deniz Two deposit beneath the Caspian Sea, now projected to cost between US$20 billion and $22 billion. The total reserves of the deposit are estimated at 1.2 trillion cubic meters. Current estimates of Shah Deniz Two total production capacity are in the range of 16 bcm/y to 25 bcm/y, this being in addition to the 8.6-9.0 bcm/y from Shah Deniz One.

Another indicator of the increasing seriousness with which major players are taking Nabucco is the apparent competition for the segments of pipeline that will transit the gas from Turkey to Europe. The above-mentioned route to Europe (through
Bulgaria, Romania, and Hungary) is the one for which the project has long planned. However, also just this past week, a member of the management board at the Swiss energy firm EGL, Markus Brokhof, announced plans for the company to open representation in Baku to lobby for the Trans-Adriatic Pipeline (TAP).

EGL is cooperating with the Norwegian firm StatoilHydro to build the TAP, which would integrate a new overland pipeline in
Greece from Thessaloniki in the northeast to the Albanian border and from there to the Albanian coast, with an undersea pipeline project (thus "trans-Adriatic") from the Albanian coast to southern Italy near Brindisi.

The TAP's first-stage capacity is projected at 10 bcm/y with a maximum double that quantity. It bills itself as the shortest route to Europe, but the gas from Turkey would then not transit East Central Europe as now planned. It is doubtful, all other things being equal, that the Nabucco consortium, having as shareholders major companies from Bulgaria, Romania, Hungary, and Austria, would choose an alternate route.

More likely, this move by EGL is in search of participation in the conveyance of future quantities to Europe, beyond those now intended for Nabucco. Azerbaijan has expressed interest in the TAP, but without mentioning Nabucco in particular. Indeed, EGL had earlier signed an agreement with Iran to supply gas to the TAP, independent of Nabucco, so Brokhof's announcement is likewise yet another indication that Iranian gas will not flow through Nabucco. The establishment of EGL representation in Baku is a clear sign that the company has turned its sights elsewhere.

First gas from Shah Deniz Two is now projected to be available in 2016, according to Rovnag Abdullaev, president of Azerbaijan's state oil and natural gas company, SOCAR, who also announced that partners in Shah Deniz had already approved six months ago the launching of working plans for it, thus avoiding delay. This will be in time to meet the 2014 projected date by which Nabucco's first phase should be finished, and also it allows for minor delays.

Meanwhile, chief of the department for investment regulation of SOCAR, Vagif Aliev, explained that the project's budget has been prepared during the ratification of the working plan, so that regardless of anything, the project operator could continue works on the second phase of the project.

The planned 8 bcm/y from Iraq remains problematic because of continuing disagreement between the Baghdad central government and the Kurdistan Regional Government over division of revenues and allocation of resources. These matters should, according to the Iraqi Constitution (which has only provisional features in this regard), have been decided some time ago, but details have yet to be nailed down.

That is certainly a reason why the Azerbaijan government has lately been increasing in public statements the amounts that it is prepared to furnish. Probably this has been the case all along, but Baku plays its cards close to its chest and, like the energy companies themselves, regards hard details as an industrial secret.

In the background is the question of how soon Turkmenistan may join the Nabucco project, given the longstanding obstacles that have yet to be overcome (see
New chance for Trans-Caspian pipeline, Asia Times Online, February 28, 2007).

Dr Robert M Cutler (, educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada.

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