Don’t Give Up on Nabucco

Katinka Barysch of the Centre for European Reform has always produced of the highest quality research on EU-Russia energy relations, and her latest article on the continuing need to push forward with the Nabucco pipeline project is no exception.

The pet project of EU energy security, as always, is in deep trouble, with financing unsecured (and probably disappearing into Greece), gas demand temporarily down, and Russia surging forward with South Stream pipeline proposal despite the electoral victory of Viktor Yanukovych in Ukraine, Barysch notes.  The project still offers numerous important advantages, and is central to the EU’s foreign policy to develop closer ties with critical countries to the East such as Turkey while fostering greater cohesion in energy negotiations with Russia.  But the problem, Barysch admits, is that the companies which Europe is relying on to build the pipeline are unlikely to see short-term profitability, so the project is in dire need state support and recognition of its political and strategic urgency.

In this excerpt below, Barysch explains why Europe should wait before falling for the South Stream bluff.

The fact that South Stream makes little commercial sense may not deter Gazprom. The state-controlled behemoth may be able to find both the gas and the money for South Stream, but the opportunity costs would be enormous. In March 2010, Paolo Scaroni, chief executive of ENI which is Gazprom’s main partner in South Stream, suggested that South Stream and Nabucco should be merged. Some energy analysts interpreted his suggestion as a sign that ENI is getting cold feet about becoming involved in such an expensive and politically divisive project. Russian officials quickly rebuffed the idea.

Some European officials and energy executives have also talked about making Gazprom a partner in the Nabucco consortium. Such a move would be politically controversial and the ensuing brouhaha would delay Nabucco further. But the EU should be careful not to present Nabucco as an ‘anti-Russian’ pipeline. On the contrary, the EU may want to call Russia’s bluff by pointing out that if Gazprom wishes to sell more gas to South Eastern Europe it may one day use the Nabucco pipeline to do so – like any other energy company, Gazprom (or affiliated companies) will be free to take part in the tenders for booking capacity in the new pipeline.

Until and unless it becomes clear that Russia is prepared to throw real money and resources at South Stream, the Europeans should stop worrying about it and focus on the question of which southern corridor projects make the most sense for them and in which order.