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Nabucco: a Point of No Return
Sergey Smirnov

Nabucco pipeline project, intended to transport natural gas from the Caspian region to Europe bypassing Russia, as it was predicted by a number of analysts, proved to be unviable, at least in the form in which it was originally designed. In order to revive the project it was decided to cut nearly threefold the length and capacity of the pipeline, and the pipeline got a new name. However, even in this variantquestion of its filling remains an open-ended.

In the last decade the issues on ensuring energy security for EU and formation of a common energy policy became particularly relevant. This is due to the fact that the EU administration transformed the supply of imported energy resources to European economies from purely foreign trade area into a supranational problem. As a result, the aim of the EU energy policy in the Caspian region was the displacement of large players such as Russia and China, and providing direct supply of energy resources to the European market. Nabucco pipeline project – a new gas transportation system, an alternative to Russian one has been selected as a primary mechanism for the implementation of this plan. It is supposed thatin autumn of 2002 Nabucco was to come into operation in 2014. It was assumed that by this time the gas from Azerbaijan, Kazakhstan and Turkmenistan will start flowing into the EU through 3.3 thousand km pipeline. The implementation of the project was entrusted to the consortium Nabucco Gas Pipeline International, which involved gas companies of participating countries, including the German RWE Supply & Trading GmbH, Austrian OMV Gas & Power GmbH, Bulgarian Bulgargaz, Hungarian MOL, Romanian Transgaz and Turkish Botas.

Despite the fact that the European Commission and the European Parliament under a pressure of influential political groups supported the idea of pipeline construction, declaring it “strategically important to the energy security of the EU”, even at that time independent analysts had called into question the economic efficiency of the project. It was expensive, carried serious political risks, and most importantly, had no guaranteed volumes of gas.

So, later was found out that the cost of Nabucco will be not 8 billion euro, as originally planned, but 15 billion. Furthermore, although the attempts to get guarantees from the Caspian states to fill pipe have been made regularly and consistently, but remained non-effective. Numerous negotiations and international conferences have been “successfully” completed with signing of memoranda, but did not bring real progress. For full operation of Nabucco was necessary to build the Trans-Caspian gas pipeline (TCP), through which the gas had to flow from Turkmenistan and Kazakhstan. However, here the EU came across the lack of proper regulation of legal status of the Caspian Sea. In addition, the capacity of Nabucco was originally planned in the amount of 31 billion m3, but there are not such volumes of “free” gas (at least in the foreseeable future) in the Caspian region. As a result, even conviction is growing among the members of the consortium that in such situation the project cannot justify the costs. Even now, the RWE and MOL are considering the feasibility of their future involvement in it.
Turkmen turns

Lack of guarantees of gas supply to Nabucco does not allow to enter into contracts with consumers, and without that, the banks will not give loan for pipeline construction. Europe cannot negotiate with Iran due to its nuclear program. Moreover, the escalation of this conflict in a military direction will lead to a change in the balance of forces and the deterioration of the geopolitical situation in the Caspian region.

In turn, the government of Turkmenistan, promoting own reserves of natural gas (moreover, according to experts, multiply overstating them), is not in hurry to rush into the Europe’s gas embrace. Declaring every time its intention to provide supplies to Nabucco, Ashkhabad actively increases on the other hand its gas exports to China. In addition, it plans to start exporting to India and Pakistan. For this purpose is planned to construct Trans-Afghan gas pipeline – the TAPI (Turkmenistan, Afghanistan, Pakistan, India), a resource base of which is to be the Galkynysh field in Turkmenistan. Moreover, according to the Turkmen side, if the project of “European” gas pipeline is under “extensive discussion of construction”, the Afghan – is “completing construction preparations”. According to the feasibility study of the project, the TAPI pipeline with length of 1,735 km and a capacity of 30 billion m3 per year will start in eastern Turkmenistan, where are the largest gas fields, and passing through Afghanistan and Pakistan reach the frontier Indian settlement Fazilka.

However, the project proponents not reveal its main problem – security ensuring. The most of the route runs through the territory Afghanistan and Pakistan, loosely controlled by the central authorities of these countries. By 2014, with the withdrawal of most of the NATO troops from Afghanistan, the situation will be even more complicated.

Do not forget that Turkmenistan which produces today about 70 billion m3 of gas per year, do not have capabilities to ramp up rapidly its production. Thus, it has been found that the recoverable reserves of Yolotan-Yashlar group of fields are exaggerated in two or three times. There is also an influence of staff shortages experienced by the country's energy sector. As a result, a persistent failure to comply with the target performance of gas production has become the norm. According to many experts, it will take at least another 20 years to be able to bring its gas capacities to levels sufficient for Turkmenistan to meet the needs of Nabucco.

Kazakhstan’s pie

As for Kazakhstan, whose discovered and estimated gas reserves amount to about 3.3 trillion m3, the situation is ambiguous. On the one hand, the implementation of full-scale Nabucco project is of great importance for the diversification of export routes for Kazakhstan’s energy resources and on the other, Astana is still “riding the pine” and cannot join the European project, as the gas produced in the country is mainly associated and requires refining at the GPP for production of marketable gas. There are three operating GPPs in the country now: Kazakh gas processing plant (KazGPP), Tengiz (TGPP) and Zhanazhol (ZhGPP) with total capacity of 18.9 billion m3 of gas per year, which is clearly not enough to ensure its exports. The more especially as five regions of Kazakhstan are still non-gasified and the government set the task to transfer them to natural gas.

Extraction and production of domestic marketable gas in recent years have a low growth trend. 37.4 billion m3 of raw gas extracted and 21.1 billion m3 of marketable gas produced in 2010. Last year, gas production was 39.5 billion m3, where only 8.1 billion m3 was exported. Unfortunately, the target indicators of Gas industry development program for 2004-2010 have not been achieved, and it is 57.5 billion m3 of raw and 28.14 billion m3 of marketable gas.

It is not necessary to rely on a dramatic increase in the available indicators in relation to the industrial development of the offshore fields (in particular, the Kashagan), as the most part of the associated gas produced there will be reinjected into the reservoir to increase oil recovery and sulphur disposal. As for the plant being built on the coast of the Caspian Sea for processing of Kashagan’s gas its capacity will not exceed 5 billion m3 per year.

However, on January 27, 2012, in his address to the people of Kazakhstan Nursultan Nazarbayev has ordered the government to complete the design and begin construction of the GPP in the Karachaganak field. Although its capacity also will be 5 billion m3, but these volumes will be used for gas supply of the central region, including Astana.

Today, Kazakhstan carries out systematic reconstruction of existing and construction of new main pipelines. As a result, the volume of gas transit, which formed 55 billion m3 in 1998, now almost doubled. The government plans to increase volumes of gas transport to 129.3 billion m3 by 2014 and 163 billion m3 by 2020. But the question here is primarily on transit gas, because the current layout of Kazakhstan’s gas pipelines provides service mainly the transit flows from Central Asia to the European part of Russia.

January 9, 2012 the President of Kazakhstan signed the Law “On gas and gas supply”, the priority of which is to create a unified gas supply system, including all the main gas pipelines and other facilities, as well as providing domestic needs of the country with own gas.

Thus, the participants of Nabucco cannot count on Kazakhstan’s gas “pie”.

Azerbaijan’s Baklava

The only supplier of gas with which the Nabucco shareholders seem to be able to agree, is Azerbaijan with its Shah Deniz gas condensate field. However, Baku has its own plans of energy supplies. So, on June 26, Azerbaijan and Turkey signed an intergovernmental project implementation agreement on TANAP – Transanatolian gas pipeline with initial capacity of 16 billion m3 per year. It will connect Azerbaijan and Turkey, which will allow Azerbaijani gas of second stage of development of Shah Deniz to be exported to the EU. Currently, 80% of the TANAP project belongs to Azerbaijani SOCAR, and 20% fall to the share of Turkish BOTAS. Taking into account growing energy needs of Turkey itself, the question of how much natural gas from the Caspian Sea region, it will be able to supply further up to Europe is still open.

However, there are other alternatives to the Nabucco gas pipeline. In particular, the project AGRI (Azerbaijan-Georgia-Romania Interconnector), providing that natural gas will be transported from Azerbaijan to the Black Sea coast of Georgia, where the gas will be liquefied and shipped by liquid cargo carriers on the sea to the Romanian port of Constanta. Afterwards it will be recovered to a gaseous state and sent from Romania to Hungary and forth – to Western Europe. Declaration on foundation of AGRI was signed in September 2011 by the presidents of Azerbaijan, Georgia, Romania, and Hungary's prime minister. In this case, the transit of liquefied Caspian gas on the Black Sea will be much cheaper than construction of Nabucco gas pipeline.

However, BP and their partners on the development of the Shah Deniz are considering possibility of construction of their own main pipeline - South East European Gas Pipeline (SEEP), which will run from the Turkish border to Hungary and primarily use existing infrastructure.

In turn, the German E.ON Ruhrgas and Swiss EGL offer project of Trans Adriatic Pipeline (TAP), which is planned to lay through Greece and Albania to Italy.
Involuntary cut-off

In the light of harsh realities Nabucco project managers have been forced to give up their ambitious plans and to consider a more economical option. It was decided to cut the pipeline almost in three, and its capacity – in two times. According to the curtailed version the pipe will run to the Austrian city of Baumgarten not from the Caspian Sea region, as originally intended, but from the Turkish-Bulgarian border. Its total length will be about 1,300 km, including in Bulgaria – 412 km, Romania – 469 km, Hungary – 384 km, Austria – 47 km. Thus having reduced the capacity and length, Nabucco transformed from the global project into a local one and got a new name – NabuccoWest. Nevertheless, the consortium Nabucco Gas Pipeline International has little chance of success, even in this situation. The reason for this is not only the existing EU debt problems, but also the fact that curtailed version does not solve the growing European demand for gas. It is expected that the difference between the demand and consumption in Europe will reach 280 billion m3 per year by 2020, where the share of Gazprom will grow from 28% in 2011 to 31.5% in 2020. Furthermore, Europe will have to buy gas at the Turkish-Bulgarian border and fall into a position of dependence on Azerbaijan and Turkey.

Obviously, the negotiations between the European customers and potential gas suppliers will take place in the auction mode. It remains to be seen what political and economic conditions, Baku and Ankara will propose to Europeans. It is clear that the matter is not only the price, but also politics: Turkey seeks for a membership in the European Union, Azerbaijan, at least, a solution to the problem of Nagorno-Karabakh.

Thus, the implementation of Nabucco project faces objective factors, including the problem of gas supplies to the pipeline, the total uncertainty of timing, volumes and sources of investment, as well as dramatic changes in the global gas market. And these factors cannot be cancelled in political forums or in the offices of European officials. Well, the next few months will show whether Nabucco has any chance, or a point of no return has been passed already, and the failure of the project will become a reality soon.

Table of contents
Nabucco: a Point of No Return   Sergey Smirnov 
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· 2008 №1  №2  №3  №4  №5/6
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· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3

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