Is it Time to Bury Nabucco?

May 21, 2009

Latest developments during last weeks related the EU’s policy of diversifying Europes’s energy supplies give a clear indication that EU’s pipedream – Nabucco – is vanishing while the rival Russia’s South Stream gets a boost both on the ground and updated aims. European Commission has tried enhance Nabucco already some nine year with modest or even backward success. Now is maybe the right time to reconsider EU’s energy plans in new context.

Russia will propose including the South Stream gas pipeline to pump natural gas from Russia to the Balkans and onto Europe in a list of EU priority projects, a Gazprom deputy CEO said Tuesday. “We are drafting an application for inclusion of the South Stream project into the list of EU priority projects, and we see no grounds why this application should be rejected,” Alexander Medvedev told journalists during a break at an international energy conference in Berlin.

Earlier Nabucco got its priority status in EU as the aim was to diversify supplies away from Russia.  Now Gazprom is to make a presentation to the European Parliament to promote South Stream later in 2009. The EU Energy Commission says Gazprom would have to prove South Stream represents “added value” for Europe to become a priority, earlier the EU has already accepted Gazprom’s Nord Stream as a priority project.

Boost to South Stream

On May 15 South Stream project got a boost two step closer to reality. As I mentioned in my previous article in addition to Italy’s ENI, Gazprom signed memoranda of understanding with Greek natural gas transmission company DESFA, Serbia’s Srbijagas and Bulgarian Energy Holding.  What I didn’t knew then was that at a meeting in Sochi, attended by Russian Prime Minister Vladimir Putin and Italian Prime Minister Silvio Berlusconi, Russia’s Gazprom and Italy’s ENI agreed to double the planned pipeline’s capacity to 63 billion cubic meters from previous plan 31 bcm/y.  So at same day the establishment of joint ventures for the construction of South Stream pipeline was finally provided with a formal basis and the project doubled estimated gas flow. This Gazprom’s move strengthens their competitive advantage over Nabucco and at the same time affirm its dominance in the field.

The pipeline would cross the Black Sea at 2.000m depth and from there to the city of Barna, in Bulgaria and from there its north part will reach Austria after crossing Serbia while its south part will extend to Greece and Italy.

Signed contracts are boosting also regional economy. The Greek section of South Stream will cost between 700 to 1000 Mln Euros, the section in Serbia is estimated cost some  700 Mln Euro, costs in Bulgaria  depend if gas is going existing or totally new pipeline. Further investments related to final route(s) of pipes are possible also in Croatia and Slovenia.  After the gas flows the transit fees can be remarkable in transit countries.

Desperate search for gas by Nabucco

The economic viability of the Nabucco project has long been questinable. EU has only committed a small fraction of the €7.9 billion ($10.6 billion) needed to build the pipeline. The basic question is where the gas for Nabucco (ultimately targeted at 31 billion cubic meters per annum) will come from. If there is no good answer coming soon the today’s and tomorrow’s potential investors are looking better alternatives.

But despite the recent progress on Nabucco, it all still looks to many analysts like a case of too little, too late. “I believe Nabucco still looks very problematic,” says Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. “It might work, or it might not, but I don’t think it’s going to work quickly.” He argues that the pipeline probably won’t be viable until around 2020—much later than the 2014 starting date currently being advanced.

Nabucco’s supply base has been vanishing with latest developments.  Original idea was to get gas from Azerbaijan, Turkmenistan and Kazakhstan.  Gazprom’s newfound willingness to offer cash on the barrelhead for Turkmen and Kazakh gas led to Kazakhstan’s permission to construct a new pipeline that will feed gas from Central Asia into Russia’s export network.  The United States Senate offers verbal support, but Washington is no closer to brokering the tradeoffs that would be necessary for Nabucco to get off the ground.  Same time Gazprom is ready to buy all the gas from the second stage of an offshore Azeri development and Azerbaijan stll lacks a direct gas link to Europe and has been unable to agree with Turkey on terms for the transit of larger planned volumes.

Ongoing sanctions against Iran made an extension line from Turkmenistan to Turkey a non-starter.  They also meant that no Western government could countenance even an informal arrangement where Iranian gas might compensate Turkey so that more gas flowing through Nabucco would reach other European markets.

Nabucco tinkering with Middle East dreams while South Stream works on the ground in Europe

A couple of days after Sochi meeting four UAE and European companies told an oil and gas contracts between them and the Kurdish Regional Government (KRG) to supply gas from Iraq’s Kurdistan region to kick-start the Nabucco pipeline project to supply Europe.

The Iraqi government on Monday 18th 2009 rejected an $8 billion Kurdish plan calling new contracts illegal.  The KRG, which has clashed with Baghdad over draft oil legislation, has countered that the deals are legal and comply with Iraq’s constitution. In Iraq gas normally has been a side-product in oilfields so increasing gas production has been related increasing oil production.  Whatever the legal output will be a strong estimation is that gas starts flow for export after 2020.

Schroeder’s view

Speaking at a business meeting in Russia’s Kaliningrad on Monday, Schroeder, who chairs the Nord Stream shareholders’ committee, said that Russia cannot be blamed for recent gas shortages at the EU.

“When we get Russian gas, the problem is not the supplier, but the fact that 80 percent of the pipeline is located in the Ukraine. We should look for independence not from Russia, but from such transit schemes,” he was quoted by RIA Novosti as saying. “Both Nord Stream and South Stream allow to avoid unstable transit countries,” Schroeder added.

My view

As Nabucco’s supply base has vanished and its economical reliability is going same way while South Stream is gaining distance on the ground it is time to revise European Commission’s pipedreams. Does EU want be dependent on Russia’s gas (South and Nord Stream), Ukraine’s transit (today’s lines), Turkey’s blackmail combined middle-East as supplier (Nabucco)?

Power play has many aspects – I have touched only gas.  Searching and increasing use of renewable energy sources, increasing nuclear energy, decreasing consumption etc are all as part of a whole.  However from my point of view need of gas will be the at least the same if not bigger than today in EU and Europe for next two-three decades.

I would like to see EU to change priority status from Nabucco to South Stream.  Nabucco could still be kept alive in case to wait stabilisation in middle-East.  Besides whole the time there is improvements in liquefaction plants and tankers to increase the share Liquefied natural gas/LNG compared to gas supplied via pipes.  Selecting South Stream now could secure its smooth implementation before 2015; help EU focus other aspects of its energy sources and policy and improve EU-Russia relationship with its geopolitical consequences.

Sources and more about topic:


Serbia’s European Perspective developing – energy deal with Russia signed

December 25, 2008

On Spring 2008 Serbia signed two strategic agreement. The one was a Stabilization and Association Agreement (SAA) with European Union and the second one was a preliminary energy deal with Russia. The first is since then suspended but the second one got some flesh on the bones on Xmas-week. Both deals are implementing Serbia’s European perspective although from different angels.

Pipes are comingSAA paperwork

SAA could be described as a roadmap guiding Serbia’s way into EU. When implementation really starts it means starting long negotiations where some 80.000 pages of EU regulations are applied to Serbia’s legislation. During the process and especially afterwards with membership the carrots include e.g. access to EU’s structural funds and different (~500) development programmes. With these promises or visions EU is using its sc. “soft power” to integrate the key player of West Balkans under the influence of EU.

More about SAA & Serbia e.g. my articles “Montenegro and Serbia on the way to EU – maybe”  and “Two approaches from Balkans towards Europe”  and my Serbia’s NPI & SAA documents in my Document library

Serbia will come to an energy hub of West Balkans

Xmas eve Russian and Serbian Presidents and related companies from both sides signed an umbrella agreement including three parts:

  • Under the contract for the sale of NIS, Gazprom will purchase a 51 percent stake in the company for EUR 400mn, and invest a further EUR 547mn in restructuring. The contract, adopted during a government conference call, states that the buyer will secure a loan of EUR 500mn, repayable over 14 years, in order to implement the investment.
  • Second part includes construction the underground gas storage facility in Banatski Dvor that would be able to hold 300 to 800 million cubic metres of gas.
  • Thirdly the Presidents signed an umbrella agreement providing political guarantees that Serbia will receive a stretch of the €10 billion South Stream gas pipeline project is planned to distribute gas from Russia through Serbia and Bulgaria, branching out finally to Western European countries.

Sure NIS was sold under today’s market prices.  However if the two other parts of deal will be implemented the deal will be win-win both to Russia and Serbia.

NIS would also provide Gazprom’s first refineries outside of Serbia. With a network of about 500 gas stations allocated in Serbia (including Kosovo), as well as in Bosnia and Herzegovina and Montenegro, Serbia’s oil monopoly is strategically significant in the supply of neighbouring regions as well. Also when South Stream is completed and fully operational (est. 2015), the pipeline would make Serbia an energy hub in the region.

More over global energy game in my article “Powerplay behind the new Cold War”.

Conclusion

While EU has used its “soft power” and promises to Serbia Russia has used hard currency. In regards of Serbia’s European Perspective this does not necessary mean any swift from pro-Western to pro-Eastern side. From my point of view the situation and its prospected development will allow to Serbia a more balanced approach to its future. While energy will be on the top of EU’s priorities Serbia will have same time more leverage with its negotiations over SAA and other relations with the EU.