Despite denials, the EU’s flagship pipeline project Nabucco, as it is currently known, aimed at bringing Caspian and Middle East gas to European consumers to reduce EU dependence on Russian gas, has met a humiliating defeat. The coup de grace was delivered recently by the duo BP-SOCAR with Turkey’s blessing....
Conceived in 2002, Nabucco was a Southern Corridor project for the EU entailing the building and operation of a gas pipeline extending from Turkey to Bulgaria, Romania and Hungary, terminating at Baumgarten in Austria (Fig. 1). It was developed by a consortium of six shareholders each holding an equal share (Fig. 2). The pipeline had a design capacity of 31 bcm/year over a length of 3,900 km, with entry points at the eastern borders of Turkey.
The Vienna-seated NIC (Nabucco International Company) represented the consortium. “National Nabucco Companies”, established as subsidiaries of the NIC, would build the pipeline in their home countries, and own and operate them.
From the outset Nabucco was stymied by lack of throughput gas. Over time, the construction of the pipeline was repeatedly delayed, the cost increased sharply to as much as EUR 14-15 billion ($20 billion), the potential creditors held back their credit guarantees, and competing projects emerged, ITGI (Italy-Greece Interconnector) and TAP (Trans-Adriatic Pipeline), both designed to reach Italy (Fig. 1). The construction start-up date was last set at 2013, with the Azeri Shah Deniz II gas, at 10 bcm/year, as the start-up gas beginning 2017-2018.
The competing projects had design capacities of 10 bcm/year (TAP being expandable), and they also targeted Shah Deniz II gas beginning 2017-2018. The newly constructed pipelines would connect with the existing Turkish pipeline near Thessalonica in northern Greece, making the projects less costly. All three projects were vying for the same gas source.
There were also projects that would use the Black Sea route: White Stream (a subsea pipeline), CNG, and AGRI (an LNG project), from Georgia to Bulgaria, Romania or Ukraine (Fig. 1). But these projects were not credible alternatives to Nabucco, flagged by Azerbaijan in part as fallback export options and in part to maximize its bargaining power with the third parties, mainly Turkey.
Russia had its own Black Sea project, South Stream, spearheaded by Gazprom, designed to supply gas to south and central European countries (destination recently changed to Italy).
Despite the difficulties, Nabucco had a fighting chance. It was the most comprehensive, most mature Southern Corridor project designed to tap not only Azeri gas, but at a later stage, also Turkmen, and possibly Kazakh, Iraqi and Egyptian gas. In the eyes of the EU, plans to tap Azeri as well as non-Azeri gas gave the project a strategic advantage.
The project enjoyed a well-publicized intergovernmental agreement signed (some would say with much hype) in Istanbul in July 2009, had the full backing of the EU, and had won some exemptions from EU energy regulators and host-country governments. The EU Parliament had earmarked EUR 200 million funding for Nabucco.
The NIC planned to generate income by trading pipeline capacity through a tender process (Fig. 3). Fifty per cent of the capacity would be offered to the shareholders, the rest to third parties. The shareholders would compete among themselves for capacity offered in each host country. In June 2011 “Project Support Agreements” were signed in Kayseri, Turkey, that laid the legal framework between the Nabucco companies and the host countries.
The end to Nabucco came swiftly, with almost no warning. Until late September, Nabucco was still up and running, and by the 1 October deadline, the consortium had submitted a comprehensive transportation proposal to the Shah Deniz consortium. The ITGI and TAP consortia also submitted their own proposals. The Shah Deniz consortium would evaluate these offers and chose the winning project.
And as late as mid-November, the European Bank for Reconstruction and Development (EBRD) had declared its readiness to finance Nabucco once it got under way.
As the Shah Deniz consortium was to begin deliberations, partner BP deftly came up with a totally new alternative: SEEP (South-East Europe Pipeline). BP tabled its proposal just in time for the 1 October deadline.
SEEP was not much of a project as a concept, as neither a feasibility study had been carried out nor was a cost estimate available. Details were sketchy.
Like ITGI and TAP, SEEP would have a design capacity of 10 bcm/year targeting Shah Deniz II gas; but unlike these two projects, gas would be earmarked for Austria, following more or less the same route as Nabucco, and in addition with a branch to Croatia.
And unlike Nabucco, SEEP would use BOTAS’ existing pipeline network in Turkey and some of the interconnectors in southeast Europe, and entail the building of only 1,300 km of new pipeline beyond Turkey. The cost, therefore, would be much less than that of Nabucco. BP has also suggested the pipeline capacity could later be expanded, if need be.
Being a major shareholder (25.5%) of the Shah Deniz consortium as well as its operator, BP had a strong voice in the consortium, giving its proposal an edge in the winner-take-all pipeline contest. It did not take too long for SOCAR or the consortium to warm to SEEP.
In fact, SEEP was a game-changer, and set the stage for the demise of Nabucco.
As the Shah Deniz consortium deliberated, on 25 October Azerbaijan and Turkey signed an agreement in Izmir in western Turkey. The presidents of SOCAR and BOTAS were present. Among other accords, it was agreed that starting in 2017 or 2018, Azerbaijan would supply 6 bcm/year gas to Turkey for its own consumption (with Turkey having re-export rights), and another 10 bcm/year for transit to Europe.
Initially BOTAS’ existing pipeline network (with upgrades) in Turkey would be used, but later, a new pipeline across Turkish territory would be built to accommodate growing Azeri gas exports.
The 6 bcm import volume for Turkey had long been planned, but the provision to build a new pipeline across Turkish territory, and SOCAR being the direct seller of gas to Europe, was new ground.
There was also a groundbreaking ceremony for a refinery at Aliaga, Izmir, to be built by SOCAR and its Turkish partner Turcas.
During the signing ceremony and in the accompanying press release, no mention was made of Nabucco, or for that matter, of ITGI, TAP and SEEP. But the agreement clearly had the footprints of SEEP.
This was all against the background of the Shah Deniz PSA (Production Sharing Agreement) signed on 4 June 1996, in which the signatories agreed that Turkey would be the export market of first choice for Shah Deniz gas. Whether this provision of the PSA ever entered the negotiations in Izmir was not apparent.
The more definitive, and in a sense official, blow to Nabucco was delivered on 17 November during the Third Black Sea Energy and Economic Forum held in Istanbul. At the meeting SOCAR President Rovnag Abdullayev announced that a new gas pipeline, which he named “Trans-Anatolia”, would be built in Turkey from east to west under the leadership of SOCAR. (The same term is also used for the Samsun-Ceyhan oil pipeline.) The new pipeline would deliver Shah Deniz II gas to Europe.
Azerbaijan and Turkey had already started working on the pipeline project, he said, and others could possibly join later. The cost was estimated at $5-6 billion. The planned capacity was at least 16 bcm/year – most likely big enough to absorb all future Azeri exports to Europe.
The announcement was an offtake from the Izmir agreement, and it signaled a surprising 180-degree turn on the part of Turkey on Nabucco – a key player in the project all along.
It was also notable that the announcement was made not by BOTAS, but by SOCAR.
An unnamed source indicated that Turkish officials had not been informed in advance, and were taken aback by Abdullayev’s announcement.
Damage control was quick to follow. After Abdullayev’s announcement, Turkish Energy Minister Taner Yildiz claimed during the Istanbul meeting that the new pipeline would “complement” Nabucco. Separately, the NIC chief Reinhard Mitschek expressed his “confidence” in Nabucco.
Just recently, Abdullayev maintained Nabucco was still in the race, and questioned the basis of assertions about the demise of Nabucco. The NIC has also started the pre-qualification process for procurement contractors.
For all these business-as-usual pronouncements, however, there was little doubt that Nabucco – a project already under duress – had received a fatal blow. With Trans-Anatolia in place, and dedicated to Shah Deniz II gas, Nabucco had lost its start-up feed gas, and along with that the justification to build new infrastructure across Turkey and beyond. (See also an article in the Oil and Gas Journal.)
Deprived of its economic and operational synergy with Azeri gas exports, a Nabucco project dedicated solely to Turkmen gas also has a slim chance.
Through Trans-Anatolia, Azerbaijan will no doubt want to export additional gas volumes to Europe when offshore fields Absheron, Umid, and possibly Shafag-Asiman come onstream.
Aftermath – winners and losers...
While Nabucco has fallen, ITGI and TAP may well survive. Unlike Nabucco, these projects did not envision the construction of a new pipeline across Turkish territory, and they may well link with Trans-Anatolia.
Depending on the Shah Deniz consortium’s decision, Shah Deniz II gas may still go to Austria, but it will not be through the Nabucco project as it is officially known. A “truncated,” much modified “Nabucco”, starting at the Turkey-Bulgaria border and heading to Austria, may well emerge, however. Gazprom’s recent decision to shift South Stream’s destination from Austria to Italy could boost the prospect of a modified Nabucco for an alternate destination.
The biggest winner in all these developments is Azerbaijan, which not only will have the major voice on Trans-Anatolia, but will be able to sell gas directly to Europe, bypassing Turkey as an intermediary. Selling gas directly to Europe has long been an objective for Azerbaijan.
Long forsaken as a gas trading and distribution hub in the region, Turkey will settle to serve as a mere transit country for gas heading to Europe – notwithstanding the 1996 Shah Deniz PSA.
The biggest loser will be Turkmenistan which, over the past year, expressed earnest interest in supplying gas to the West, reducing its dependence on Russia for export. With its gas reserves upgraded as a result of Gaffney, Cline & Associates’ recent review, Turkmenistan has shown growing eagerness to export gas to the West. Since January, the EU has conducted serious negotiations with Turkmen officials to revive – against Russia’s objections –TCGP (Trans-Caspian Gas Pipeline) project, dormant since 1996.
To justify TCGP commercially, Azerbaijan’s cooperation is essential. While Azerbaijani President Ilham Aliyev has expressed willingness to cooperate on the implementation of TCGP, his actions have not matched his words.
Cynics will remember Aliyev’s snub of the Nabucco intergovernmental agreement in Istanbul when the president chose to attend a meeting in London.
Aliyev apparently believes the Azeri-Turkmen gas issue is a zero-sum contest – which it is not. Both Azerbaijan and Turkmenistan could benefit from a TCGP connecting with the Azeri export network.
Russia has objected to TCGP on grounds that the territorial boundaries in the Caspian Sea have not been established. It has also raised environmental concerns. The EU has challenged Russian claims.
For their own reasons, Turkish officials have preferred to stay on the sidelines while the EU representatives approached Ashgabat on Turkmen gas. Following the straining of Ankara-Baku relations in summer 2008 in connection with the pricing of Shah Deniz I gas imports to Turkey, and exacerbated by Ankara signing the “normalization protocols” with Armenia in October 2009, the Turks have been overly eager to patch up relations with their Azeri brethren, while ignoring their Turkmen brethren further to the east.
For Turkey, not taking part in negotiations with Ashgabat was a strategic mistake. To diversify its gas supply sources and enhance its energy security, Turkey should have lobbied along with the EU for Turkmen gas. In 1999 Turkey signed a 16 bcm/year gas-purchase agreement with Turkmenistan, but the accord remained on paper.
Russia no doubt will be pleased. Gazprom’s failed attempts to route Shah Deniz II gas to Russia in 2009 and 2010 notwithstanding, Russia must be satisfied that TCGP will continue gathering dust.
The EU cannot be too pleased, as the prospect of prized Turkmen gas reaching Europe has for all practical purposes been lost. The Turkmen gas component, in fact, was what had made the Nabucco project “special” to the EU.
With Nabucco frozen in its tracks, and considering shale-gas potential, Nord Stream, Iraq LNG, new gas discoveries in the eastern Mediterranean, and the EU’s 20/20/20 plan, the chances of Turkmen (and Kazakh) gas ever reaching Europe are now virtually nil. By 2025 the EU’s gas market may well be oversupplied, with no need for gas from across the Caspian Sea.
As for the US, against its best interests it had long lost interest in Turkmen gas. Before the announcement of Trans-Anatolia in Istanbul, the US special envoy for Eurasian energy issues, Richard Morningstar, told reporters in Baku that Azerbaijan should favour the smaller ITGI or TAP projects over Nabucco. That was not the “endorsement” Nabucco needed.
On their part, the Nabucco partners will realize, belatedly, their fatal mistake: designing an elaborate gas infrastructure project without first ensuring gas supply. The mistake could have been avoided e.g. by including a gas supplier such as SOCAR as a partner.
Giuseppe Verdi no doubt would have approved....