Nabucco: How the pipeline can get enough gas

The signing in Ankara today of the inter-governmental agreement for Nabucco, the proposed gas pipeline from the Caspian to the EU, is a historic moment, but only the first step in its journey from the drawing-board to reality.

With the five transit countries on the 3,300km route – Turkey, Bulgaria, Romania, Hungary and Austria – finally in agreement, the pipeline consortium can begin signing up gas trading companies for contracts to use Nabucco’s capacity, and complete its detailed design and engineering work to submit for environmental approvals.

The biggest question over Nabucco is whether the gas can be found to fill it. There are huge gas reserves around the Caspian region, but for one reason or another those sources are difficult to tap.

The key for Nabucco is the Field of Dreams principle: “if you build it, the gas will come”.

The prime source of gas for Nabucco is meant to be Azerbaijan, and specifically the Shah Deniz 2 development, the BP-led project that could produce an estimated 13bn-14bn cubic metres of gas per year.

The problem is that Azerbaijan has many potential takers for that gas, including Russia, which wooed Baku with a visit by president Medvedev in June, and a rival EU project, the ITGI pipeline to Italy, which is a cheaper and faster option than Nabucco.

The US energy envoy Richard Morningstar has described securing a sizeable share of gas from Shah Deniz 2 as a “necessary condition” for Nabucco. If he is right, the project’s future looks dicy.

However, the presence of those enormous gas reserves around the Caspian Sea suggests it must be possible to fill Nabucco’s 31 bcm / year capacity, and the signs are that other countries in the region are becoming much more interested in supplying Europe.

One is Iraq. Nouri al-Maliki, the country’s prime minister, said on Monday the country would at some point be able to supply 15 bcm / year of gas to Europe.

Another is Turkmenistan, which has fallen out badly with Russia over its gas supplies, and is looking for alternative export routes. On Friday Gurbanguly Berdymukhammedov, Turkmenistan’s president, said the country was ready to supply Nabucco.

Both of those countries have their problems: the obvious security concerns and the political disputes over energy in Iraq, and the barrier presented by the Caspian Sea for Turkmenistan. But solutions are possible. The interest shown by international oil companies in Iraq shows that in spite of the country’s problems, there are enough potential partners prepared to come in and help develop its resources. And while a pipeline from Turkmenistan across the Caspian to Azerbaijan is likely to remain blocked indefinitely by objections from Iran and Russia, which have Caspian coasts and hence rights over the use of the sea, gas in compressed form could be carried across in tankers.

One day even Iran, which has the world’s second-largest gas reserves, after Russia, could be a supplier.

So while none of those alternative sources of gas are likely to be available for a while, they provide a compelling case for thinking that Nabucco will eventually be used. The important thing is to build it first, to show those potential supply countries that they will be able to get their gas to market in Europe.

It is a well-established phenomenon in the energy business: if the infrastructure is in place, the supply will emerge to use it.

A Nabucco that is built “on spec”, without having signed up contracts to use all of its planned capacity, will be hard to finance. Pipeline project finance typically relies on guaranteed revenue streams from contracted volumes of gas deliveries paying a set fee, which Nabucco may not have.

However, given the project’s strategic – and also symbolic – importance, it deserves some extra help from the EU.

As Dick Lugar, the US senator from Indiana who has taken a great interest in European energy security and the Caspian region, put it:

The significance of the Nabucco agreement we are celebrating today is far greater than the natural gas it will carry. Agreement on Nabucco is a bold demonstration that governments representing diverse peoples and geographies can overcome division. It is a signal to the rest of the world that partner governments will not acquiesce to manipulation of energy supplies for political ends. Today, the European Union demonstrates unity of purpose on energy security and stands strongly with Turkey, Georgia and Azerbaijan. The United States is proud to stand with you.

If Europe is to demonstrate that unity, it will have to pay for it, but the price is probably worth it.

Incidentally, there is also a great quote in Jose Manuel Barroso’s speech welcoming the agreement:

Nabucco has been agreed, if I may say, in the European way: through long and detailed discussion and an accommodation of everyone’s concerns. That is the way Europe works, resolving differences, finding solutions to everyone’s concerns

He can say that again…

Related links:

Leaders push ahead with Nabucco pipeline (FT, 13/07/09)
Turkey’s Nabucco stance: Satisfying energy needs, or ambitions
(FT Energy Source, 09/06/09)
Another Nabucco agreement, but where were Kazakhstan and Turkmenistan? (FT Energy Source, 11/05/09)

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