Delusions of Politically Convenient Pipelines

A great new energy blog called The Crude View has been launched by our friends Derek Brower and Tom Nicholls.  Below is an excerpt of a recent piece they did about a speech at Chatham House by a fundraiser for the Nabucco pipeline – the European Commission’s pet project to break Gazprom’s iron grip on supply flows from Central Asia.

Nothing Nabucco’s supporters say — including grandiose plans to proclaim a “Budapest declaration” at a meeting in Hungary in January — now makes the project any more likely to happen in the near future.

Nabucco is hamstrung by four different problems.

1. Supply. It isn’t making any real progress on finding the gas to fill the pipeline. Forget the other three problems below, this one is seminal, and it isn’t going away — whatever Nabucco’s supporters think. The partners say gas from the Shah Deniz field in Azerbaijan will supply a bulk of the gas. But, privately, Nabucco supporters admit that output from the first phase of that field will only supply a maximum of 10bn cm/y to the pipeline. Even that figure is doubtful, because Turkey’s economy and gas demand are also growing and the country could soak up Shah Deniz phase 1 gas alone, importing it through the South Caucasus Pipeline. A second phase of Shah Deniz could be more promising — but let’s wait to see how the credit crunch affects the developers’ expansion plans in Azerbaijan.

OMV and other Nabucco supporters say additional gas could come fromTurkmenistan and Kazakhstan. Not without a pipeline under the CaspianSea, it can’t. And Russia, which wants Central Asian gas for itself,can prevent sub-sea infrastructure from being built in the Caspian.Moreover, Gazprom is now paying European prices for that gas, so thereis little incentive for Turkmenistan or Kazakhstan to build anexpensive new link to Azerbaijan. Oh, and if Russia doesn’t take all ofCentral Asia’s gas, China is willing to.

Other suppliers, say the Nabucco partners, will be Iraq (5bn cm/y),Egypt (2bn cm/y) and, potentially, Iran. But that is pure fantasy. Iraqis the most likely supplier of the three — but remains a long shot forreasons too embarrassing to mention in Western capitals. Egypt hasn’tmade a significant gas discovery in several years — and its energyminister, Sameh Fahmy, says any new gas the country finds must go threeways: a third for domestic consumtion, a third “for our children” (ie,for future domestic needs ) and a third for export. Even if Egypt foundenough gas to support more exports, its priority is adding more trainsto its LNG plants. As for Iran… It can’t even break ground on an LNGplant; the oil majors that were there are leaving; and the prospect ofTehran sanctioning a new pipeline to Turkey, to help bail out the EU,is political dreamland.

2. Turkey. The EU can’t come up with anintergovernmental agreement that Turkey is happy with. Ankara wants totake at least 15% of the gas that would pass through its country tohelp it meet rising domestic needs. The EU wants Turkey to accept a gastransmission fee. It’s an impasse that doesn’t look promising forNabucco.

3. Russia. Gazprom, which suffers none ofthe Nabucco partners’ self-doubt, is building a rival pipeline, SouthStream, to deliver the same volume of gas to the same markets. TheNabucco partners say the lines aren’t rivals and that Europe needs bothof them. True, up to a point. Yes, the EU needs all the gas it can get.But Gazprom has successfully turned the heads of governments that oncesupported Nabucco, persuading them — with the benefit of facts — thatSouth Stream has sufficient gas to make it work. Even Austria and OMVnow endorse the Gazprom plan. I have my doubts that South Stream willever come on stream either. But it has things going for it that Nabuccodoesn’t: energy molecules and unified political backing. By contrast,Nabucco, for all its support from Brussels, doesn’t even have theItalians behind it — Eni is Gazprom’s partner in South Stream.

4. Financing. Banks want to see the marketand the supply chain before they pull the trigger on financing anenergy project. Nabucco has the first, but not, in adequate volumes,the second. The credit crunch exacerbates this problem. So does theunrealistic financing estimate. The partners say Nabucco will cost€7.9bn. Some analysts say it could be double. No-one really knows,because no-one has any idea when, if ever, the project will ever get toa “final investment decision” stage.

Those are formidable obstacles. The kind that not even all the wellwishes of Brussels can overcome. No wonder the Russians scorn theproject. Gazprom’s deputy chairman Alexander Medvedev once memorablydescribed Nabucco to me as “a virtual pipeline”.