Curtains for Nabucco, or Only Intermissions?
Energy Brief
16th January 2012

With the Trans Anatolian Gas Pipeline (TANAP) and the South East Europe Pipeline (SEEP) now on the table as proposals through which to convey Azerbaijan’s Shah Deniz Stage 2 (SD2) gas across Turkey to Europe, the question has to be: is there, could there be a chance for the Nabucco gas pipeline to remain as the core of the Southern Corridor?

Complicating the situation further is the agreement between Turkey and Russia that allows the latter to build the uber-expensive South Stream gas pipeline across the Black Sea. For concessions on prices and the take-or-pay factor, Ankara gave Moscow the go-ahead on a right- of-way through Turkey’s offshore territory. The jury is still out as to whether Ankara’s decision will prove to be to its benefit in its quest to be the prime conveyor of gas to Southern Europe.

While it has seemed like a good idea all along, Nabucco faces a bigger challenge now from TANAP and SEEP than it ever did from South Stream, which with a planned capacity of 63 billion cubic meters/year (bcm/y) was designed to supersede Nabucco at every opportunity. With a design capacity of 31 bcm/y, Nabucco was deemed too large for viability with only 10 bcm/y of SD2 gas available for transport to Europe. With sanctions putting Iran out of the picture as a source of gas supply to Europe, Nabucco consortium members OMV, MOL and RWE turned to Iraqi Kurdistan as another source to fill the pipeline.

To make the pipeline more attractive, Nabucco partners proposed extending the pipeline as far east as Baku and further west into Central Europe. The extension to Baku was mindful of Nabucco’s real goal – gas supplies from Turkmenistan. But without a deal to build the long-elusive Trans-Caspian Gas Pipeline, which is strongly opposed by Russia and Iran on both political grounds and for reasons of gas market competition, shipments of Turkmen gas through Nabucco will not happen.

At this point it appears that only a China-like deal that would send 30 bcm/y of Turkmen gas through Nabucco to Europe would put the project back on its feet. The European Union last September sanctioned the effort to negotiate a “legally binding treaty” between it, Azerbaijan and Turkmenistan for the construction of the TCGP, but there has been no report of progress.

Throughout its existence, Nabucco has sought to cross all the ‘t’s and dot all the ‘i’s. It has all its intergovernmental agreements in place, and while the cost of the project now probably goes well beyond the original €7.9 billion, it is still probably a bargain compared to South Stream, which is being estimated by the media at €25-30 billion. Russia must be asking itself just how much gas it is going to have to sell in order to cover the cost of maintaining a firm hand on the European market with its Black Sea pipeline adventure.

Now with TANAP, an 80%-20% joint venture between Azerbaijan’s Socar and Turkey’s Botas, on the scene, it is unlikely that Nabucco can hope to be awarded the contracts to carry SD2 gas. TANAP is carry the full 16 bcm/y that SD2 will produce, with 6 bcm/y promised to Turkey’s domestic market.

Furthermore, the fact that SEEP–proposed by Shah Deniz operator BP–will essentially follow the planned Nabucco route through Eastern Europe and that its shareholding will essentially be open to Shah Deniz partners must be discouraging to the Nabucco partners. Perhaps the only bright note for them would be if they – after having spent millions on developing Nabucco as a project – would be given the option to buy into TANAP and into SEEP, which has an initial design to carry 10 bcm/y.

TANAP and SEEP combined hold little promise for the Greek-Italian Interconnector-Greece-Italy (IGI) Poseidon gas pipeline or the Trans Adriatic Pipeline (TAP). While both have been included in the Southern Corridor scenario, both have been on the periphery and both planned to carry gas to Italy, not disperse it more widely into Eastern and Central Europe.

Should SEEP not be built in conjunction with TANAP, which is expected to cost $5 billion or more and come into operation in 2017 when SD2 comes on – stream, then either IGI Poseidon or TAP will likely be awarded the gas contracts awaited from Azerbaijan.

There is little doubt now that Azerbaijan will decide in favor of its own project as the pipeline through which it will chose to carry SD2 gas across Turkey. Nabucco, IGI Poseidon (part of the Interconnector-Turkey-Greece-Italy project) were made to jump through a number of hoops prior to their submission of bids for gas contracts last October. In the end it appears that Baku has decided to do for itself what it doubted that others could do for it. And for Ankara, TANAP is a message to the EU that it too can take an independent course.

Even as more gas supplies come on-stream in Azerbaijan in the future, there are questions as to whether there will ever be enough Azeri gas in the future. The country’s energy minister, Natiq Aliyev, has said TANAP’s initial capacity of 16 bcm/y can be expanded to 24 bcm/y.

Meanwhile, the political situation in Iraq is deteriorating and spreading to the autonomous Kurdistan Regional Government (KRG), making, at this time, the future of gas exports from northern Iraq more questionable than ever–another star in the wrong place for Nabucco.

It is not quite clear if this is the finale for Nabucco or just an intermission. The project has indeed been like a long, melodramatic opera. There have been moments of enduring love and times of harrowing melancholy. It has at times been panned by the critics and applauded by the crowd, and the cast has put in a strong performance throughout its tour of Europe and the Caucasus. Without a doubt, Nabucco set the stage.