Victory for Russia As the EU’s Nabucco Gas Project Collapses


TIKHVIN, RUSSIAN FEDERATION:  A special lifting crane installs a segment of the North European Gas pipeline (NEGP) near the town of Tikhvin in the Leningrad region, 04 February 2006. Russia plans to finish building the first section of a pipeline to take natural gas direct to Europe across the Baltic Sea floor in June, Ria-novosti news agency reported. Construction under the 4.7-billion euro project, which is managed by Russian energy giant Gazprom, began last year. The pipeline, which is to include two parallel legs measuring 750 miles each, will connect the Baltic seashore near the Russian city of Vyborg with the Greifswald region on the German coast. AFP PHOTO / SERGEY KULIKOV  (Photo credit should read SERGEY KULIKOV/AFP/Getty Images)

TIKHVIN, RUSSIAN FEDERATION: A special lifting crane installs a segment of the North European Gas pipeline (NEGP) near the town of Tikhvin in the Leningrad region, 04 February 2006. Russia plans to finish building the first section of a pipeline to take natural gas direct to Europe across the Baltic Sea floor in June, Ria-novosti news agency reported. Construction under the 4.7-billion euro project, which is managed by Russian energy giant Gazprom, began last year. The pipeline, which is to include two parallel legs measuring 750 miles each, will connect the Baltic seashore near the Russian city of Vyborg with the Greifswald region on the German coast. AFP PHOTO / SERGEY KULIKOV (Photo credit should read SERGEY KULIKOV/AFP/Getty Images)

rss_header2012         Posted by: Judy Dempsey

Monday, July 1, 2013

The competition of who will deliver Azerbaijan’s gas to Europe is over. The EU’s Nabucco gas pipeline consortium has lost out. The winner is Russia.

The Nabucco project, established nearly a decade ago, was at the heart of Europe’s grand strategy to diversify its energy sources and reduce its dependence on Russia, which supplies a quarter of Europe’s energy needs.

Now that the EU has lost out, it is time for Brussels to speed ahead in connecting Eastern Europe to the electricity and other energy grids of Western Europe. There is no time to lose if Europe wants Russia’s political interference in its energy and domestic politics to end, once and for all.

The idea behind Nabucco was that the 1,326-kilometer (824-mile) pipeline would tap into gas from the Caspian Sea, which is bounded by Iran and Azerbaijan, among others. Originally, it was hoped that the gas would come from Iran. But Western sanctions on Tehran forced the Nabucco consortium to opt for Azerbaijan. From there, gas would be sent through Turkey and then up to Central Europe, ending in Austria.But last week, that plan collapsed when Azerbaijan chose instead to send its gas into the Trans Adriatic Pipeline consortium. The shareholders of that pipeline are Switzerland’s Axpo (42.5 percent), Norway’s Statoil (42.5 percent), and Germany’s E.ON (15 percent).Through new pipelines and connectors, Azeri gas will now run through Greece and Albania to Italy, serving primarily Europe’s southern markets. This is a blow for Bulgaria and Hungary: Nabucco gas would have alleviated their heavy dependence on Gazprom, Russia’s powerful state-owned energy company.

The Azeri government—no amateur in haggling—had kept the Nabucco consortium dangling for many, many months. And the companies involved in developing Azerbaijan’s vast, untapped Shah Deniz gas field—including the state-run Azeri energy giant Socar, Britain’s BP, and Statoil—had doubts about the viability of supplying Nabucco with Azeri gas.

First, there was the issue of costs. Nabucco’s construction bill had spiraled, reaching well over €10 billion ($13 billion), compared with the Trans Adriatic Pipeline’s modest €1.5 billion ($2 billion).

Furthermore, the consortium of Austrian, Bulgarian, Romanian, and Turkish energy companies were stuck in a Catch 22 situation. Banks and customers were unwilling to commit themselves to Nabucco before it could guarantee gas supplies. Yet, at the same time, Azerbaijan would not sign any delivery contract before being certain of Nabucco’s viability.

Gerhard Roiss, the chief executive of OMV, the Austrian energy company leading the consortium, was bitterly disappointed by Azerbaijan’s decision. “The Nabucco project is over for us,” he said last week.

Roiss speculated whether Greece and Italy, two countries in the grip of tough austerity measures, would be able to buy enough of the gas to make the venture profitable. “The question of whether that is a fig leaf for a political decision I leave to you to judge,” he told reporters.

Indeed, ever since the Nabucco project was unveiled, Russia had tried to prevent any competition to Gazprom.

If the Europeans had gained access to Caspian gas through a major pipeline, countries in Eastern and Southeastern Europe could have reduced their dependence on Russian gas considerably. Moscow would not have been able to use energy as a political instrument in the region anymore.

To try and prevent Nabucco from even being built, Russia decided to construct the South Stream pipeline. That would allow Gazprom to send its gas to Southern and Central Europe via a pipeline under the Black Sea. Despite the enormous costs and difficulties in building such a pipeline, Gazprom repeatedly said it was committed to the project. South Stream was all about undermining Nabucco’s ambitions and Moscow’s efforts to find suppliers to fill its own pipeline.

In this play for its resources, Azerbaijan had to make some strategic decisions. It had to balance its relations with Russia with its wish to improve its ties to the EU. Opting for the Trans Atlantic Pipeline was, in part, a favorable gesture by Baku toward Moscow. That was Russia’s first victory.

Russia’s second victory was how its bluffing paid off.

Many energy analysts believed that Gazprom would never actually have built South Stream. But the very fact that Russia kept this card on the table was enough for investors to question the viability of two big pipeline projects—Nabucco and South Stream—both competing for similar routes.

Now that Nabucco is dead, Russia can either abandon its costly plans to build the South Stream pipeline, or build it and pocket the markets.

European Commission President José Manuel Barroso played down the demise of Europe’s efforts to have its own pipeline. “This is a shared success for Europe and a milestone in strengthening the energy security of our union,” he said last week.

Perhaps Barroso just didn’t want to admit how much of a personal defeat this is. In 2011, the Commission president thought that he personally had finally succeeded in convincing Azerbaijan’s President Ilham Aliyev to opt for Nabucco.

Azeri gas will begin flowing through the Trans Adriatic Pipeline in 2019. A lot can happen in the meantime, from falling demand across Europe to shale gas becoming a player on the market. But for now, Gazprom’s bosses can clink the champagne glasses.

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