Saturday, September 25, 2010

Despite Progress, Nabucco Still Faces Lack of Suppliers

Andrea Bonzanni | Sep 2010

On Sep. 6, the European Investment Bank, the European Bank for Reconstruction and Development, and the International Financial Corporation (a branch of the World Bank Group) signed a mandate letter with the consortium behind the Nabucco natural gas pipeline, marking the start of an appraisal process that will eventually secure a €4 billion financing package for the project. The three international financial institutions committed €2 billion, €1.2 billion and €800 million, respectively. Along with the more modest €200 million grant provided by the European Commission last March, the contributions will certainly boost confidence in the project among private investors, who must finance 70 percent of the estimated €7.9 billion necessary to complete the pipeline.

A few days after the signing, the consortium's managing director, Reinhard Mitschek, confirmed that the pipeline will be supplied by two feeder lines linking the Turkish terminal of Eruzum to Georgia and Iraq, adding that deliveries should start in late 2015. However, despite the progress in financing the project and the optimistic pronouncements, filling Nabucco with gas still represents a major challenge. A third feeder line from Iran, contemplated when the project was first proposed in 2002, has been ruled out for geopolitical reasons. And notwithstanding Mitschek's assurances, no binding agreement has yet been signed for the remaining two.

The Iraqi route is the most problematic, given the many unknowns surrounding the country's future. The Nabucco consortium and its members are currently working on two separate tracks in the country, receiving repeated reassurances from Iraqi Prime Minister Nouri al-Maliki while also working closely with the Kurdistan Regional Government (KRG) in northern Iraq. Maliki went so far as to promise to supply 15 billion cubic meters of gas at the signing of the intergovernmental agreement in Ankara in July 2009. And on Aug. 27, Germany's RWE, a partner in the consortium, signed a cooperation agreement with the KRG that includes the sale of up to 20 bcm to Turkey.

However, in addition to the problems posed by the fragile security situation and the activities of the Kurdish Workers' Party (PKK) in the Kurdish region, the deal has been challenged by Baghdad's central government, which does not recognize the rights of regional entities to negotiate oil and gas contracts. As for the reserves in the western Anbar province, though more tightly under Baghdad's control, they are not any more easily marketable due to the absence of feasible transit routes. The proposed extension of the Arab Gas Pipeline, now running from Egypt to Syria, has stalled, also blocking access to gas from Egypt's off-shore fields, which are progressively being contracted for liquefaction rather than for transportation by pipeline.

The situation facing the feeder line to Georgia, connecting Nabucco to Central Asia's reserves, is only slightly more promising. Turkmenistan, until recently considered a probable supplier, seems to have distanced itself from the project. The long-discussed Trans-Caspian pipeline, which would have connected Turkmen fields to Baku, has not materialized. As a result, Turkmenistan has quietly looked elsewhere for customers, signing profitable agreements with China and Iran, as well as ironing out its commercial disputes with Russia. Ashgabat has even revived the TAPI project, a 1,040-mile pipeline to Pakistan and India through Afghanistan, leaving little room for westward exports. A proposal put forward in July by Italy's ENI to transport compressed natural gas from Turkmenistan to Azerbaijan was greeted with little enthusiasm, not surprising in light of a decade-long dispute between the latter two countries over the production from three shared off-shore oil fields. Similarly, recent attempts to interest Kazakhstan in participating in the project, culminating with German Chancellor Angela Merkel's official trip to Astana, have not led to any breakthroughs.

Meanwhile, Azerbaijan, always seen as Nabucco's only secure supplier, is losing confidence in the project and exploring alternatives. At the beginning of September, during Russian President Dmitry Medvedev's visit to Baku, Gazprom and Azerbaijan's national oil company SOCAR upgraded their gas relations, signing a contract doubling the sale of Azerbaijani gas to Russia, from the current 1 bcm to 2 bcm. Two weeks later, the AGRI project, which plans to transport 2 bcm to 8 bcm of gas from Azerbaijan to Romania and Hungary via Georgia and the Black Sea, was approved by the four governments concerned. Furthermore, Azerbaijan has also intensified cooperation with Iran and is envisaging gas sales to China.

These moves do not yet mean that Azerbaijan has abandoned Nabucco. The country's production will peak at more than 45 bcm in 2016-2017, when the field at Shah Deniz Phase II comes on-stream, and Nabucco still represents the best solution to marketing the bulk of the added output. Nonetheless, they surely signal that doubts are mounting in Baku about Nabucco's feasibility, leading the country's leadership to keep the door open to second-best solutions.

Taken together, these developments suggest that the sheer size of international funding and institutional support that Nabucco has gained may not make up for the absence of available gas to contract for the pipeline. According to the consortium, the contract-signing phase, dubbed "Nabucco Open Season," is likely to begin in late-2010 or early 2011. But at present, it looks like it will be very hard to secure the 18 bcm to 20 bcm necessary for the planned first phase of construction, let alone the 31 bcm forecasted at maximum capacity.

Surely, Nabucco has already overcome significant obstacles as well as the deep skepticism greeting the project since its inception. However, each stage of the project so far has been pushed ahead in the hopes that suppliers would be found at a later point. Now, the moment of truth has come, and any further delays in coming up with the gas to fill the pipeline may well doom the entire project.

Andrea Bonzanni is an international affairs and energy policy analyst based in Geneva.

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