Pilot flame flickers on gas pipeline project

The consortium behind one of Europe’s most ambitious infrastructure projects – the Nabucco gas pipeline – is considering ways of scaling back the venture after recent moves by Turkey and Azerbaijan raised questions about its viability.

The reassessment of the project comes as a BP-led consortium prepares to choose a transport route to bring gas from Azerbaijan to European markets, with Nabucco as one of the candidates.

Named after the Verdi opera, Nabucco was first mooted 10 years ago as a means of reducing the European Union’s dependence on Russian energy imports by bringing gas from the Caspian Basin into the heart of Europe via a new southern corridor.

But its €8bn price tag is high, and its investors, which include Austria’s OMV and German utility RWE, have so far failed to sign any supply contracts. Some critics wonder if they will ever have enough gas to fill the pipeline.

“You can’t build a business plan based on wishful thinking,” says Elio Ruggeri, chief executive of a rival project – the Interconnector-Turkey-Greece-Italy (ITGI). “Lenders want to see a contract where the Azerbaijanis, Iraqis and Turkmen commit to supplying gas.”

Nabucco’s fate is wrapped up in a big gas field in Azerbaijan’s sector of the Caspian Sea called Shah Deniz. A consortium of oil producers that includes BP, Statoil, Total and the Azeri state energy company SOCAR is spending up to $22bn to develop the second phase of the field, which will produce 16 billion cubic meters of gas a year from 2017.

Some 6bcm a year of that will go to Turkey and the rest will go to Europe. Nabucco would have initial overcapacity of 31bcm.

Possible hefty blow

If the Nabucco project is rejected, it could deal a hefty blow to the European Union’s energy plans according to analysts, writes Guy Chazan.

The EU originally backed Nabucco because it proposed a “superhighway” to deliver large volumes of gas from Azerbaijan, the wider Caspian region and the Middle East, including Turkmenistan and Iraq. If the Shah Deniz consortium opts for a small-scale pipeline, that could close off the more ambitious option.

Günther Oettinger, the EU’s energy commissioner, has stressed that whichever pipeline is chosen, there must be mechanisms to allow gas from Turkmenistan to enter Europe. Nabucco’s rivals – ITGI and TAP – insist they can be “scaled up” to take in extra volumes from Turkmenistan and elsewhere.

But some analysts say only Nabucco is large enough to handle the vast quantities of Caspian and Middle Eastern gas.

There are also concerns that choosing an option other than Nabucco or the BP South-East Europe Pipeline could undermine the EU’s priority of finding new sources of gas for the Balkans and eastern Europe – the area worst affected by the Russia-Ukraine dispute in 2009 that led to interruptions of Russian gas supply in the middle of winter.

In a report Wood Mackenzie, the oil consultancy, says Nabucco offers the potential to redraw the energy landscape of south-east Europe. “The reality is that if a large capacity Nabucco-type pipeline does not proceed, then European security of supply will be the loser,” the analysis says.

Last year, the Shah Deniz partners launched a tendering process to select a transport option for moving their gas to Europe. Three pipeline projects submitted their final tariff offers – Nabucco, ITGI, and the Trans-Adriatic Pipeline (TAP). BP and its partners were supposed to choose a winner by the end of 2011, but the decision was put off until the first quarter of this year.

In recent months, the outcome of the tender has become more unpredictable. Late last year, Turkey and Azerbaijan injected a new variable into the equation by launching the Trans-Anatolian gas pipeline project (Tanap), which would run from Turkey’s eastern border with Azerbaijan to its western border with Bulgaria – effectively copying the Turkish section of Nabucco.

Tanap, which is backed by the US, will be able to take volumes from Shah Deniz 2 and could be expanded to take additional Azeri production in the future.

BP has also put forward its own solution – the South-East Europe Pipeline – which would start in western Turkey and cross Bulgaria and Romania to reach Hungary’s eastern frontier.

Nabucco’s shareholders insist they are still in with a chance. “We think Nabucco is realistic,” says Stefan Judisch, chief executive of RWE Supply and Trading, the utility’s pipeline arm. “The mere fact that we’ve not had a decision in favour of any other pipeline shows this.” He says Nabucco offers “the best basis for a compromise, one which could bring all interests under one hat”.

Mr Judisch insists that RWE has no intention of withdrawing from Nabucco but acknowledges that the announcement on Tanap has “created a new situation”.

A person close to the Nabucco consortium says the partners could pitch a slimmed-down version of the pipeline, provisionally called “Nabucco West”, which would form an extension to Tanap and would cost 60 per cent less than the full project.

That would suit RWE, which is burdened by the cost of Germany’s exit from nuclear power and has been divesting assets to reduce its debt and protect its credit ratings.

The company has hinted as much. Mr Judisch has said that RWE appreciates the opportunity that Tanap creates to “substantially lower our capital commitment”.

However, many analysts think the Shah Deniz partners could ultimately eschew Nabucco altogether and instead choose a combination of Tanap and ITGI, TAP or the BP South-East Europe Pipeline.

TAP, backed by Norway’s Statoil, Germany’s Eon Ruhrgas and Switzerland’s EGL says its advantage is that its capacity can be expanded to take in more gas from other sources as and when it becomes available.

“TAP would allow Azerbaijan to transport all of Shah Deniz phase 2 gas to market, but can also be scaled up to allow for additional volumes from Azerbaijan, or Iraq and Turkmenistan in the future,” says Michael Hoffmann, head of external affairs at TAP. “And it can do that more economically than Nabucco.”

ITGI, backed by Edison of Italy and the Greek gas company DESFA, also thinks its smaller scale is a selling point. “Between now and 2020, Europe doesn’t need that much additional gas, so a medium-sized project that serves southern Europe and the Balkans is a good pitch,” says Mr. Ruggeri.

Additional reporting by Joshua Chaffin