Hurdles Remain For Non-Russian Gas Pipeline


Daily Telegraph/UK
5:30PM BST 30 May 2010

The 3,300-mile Nabucco pipeline faces its toughest test yet when half
its capacity is auctioned to a global market currently suffering a
glut of gas, writes Rowena Mason.

Nabucco, a planned 3,300-mile pipeline stretching across Europe from
gas-rich Azerbaijan and Iraq, is meant to end the annual panic about
Russia’s influence on the market within five years.

And this spring – after a decade of delay – the project received formal
approval from its host countries Turkey Bulgaria, Hungary, Romania and
Austria, promising to bring Europe its first non-Russian pipeline gas
from the east. Six major energy companies, including German giant RWE,
are partners in the Nabucco consortium and construction is meant to
start next year.

Iraq oilfields up for grabs in TV auctionBut despite the apparent
progress, Nabucco faces its first big test next month when the six
energy companies backing the project attempt to auction half its
capacity to a global market currently suffering a glut of gas.

There was no sign of oversupply when Nabucco, named after a Verdi
opera, was first proposed by the European Union in 2002, intent on
challenging the dominance of the single Russian conduit that currently
carries a third of the continent’s supplies.

The situation became critical in winter 2008, when Moscow and Kiev
squabbled over this existing pipeline – with chilling consequences.

For when the Kremlin’s long arm temporarily turned off this pipeline
running through Ukraine, it caused a shortage in Continental Europe
that meant gas flowed out of Britain’s storage facilities across the
Channel. It left us with just three days’ worth of back-up supplies.

It’s a situation that has caused concern for Ofgem, Britain’s energy
regulator, which has warned that Europe is dangerously dependent on
Russian gas.

But according to one expert, the long-awaited Nabucco’s problems can
be summed up as: “No demand, no supply, no money”.

Over the last eight years, no source of gas has officially been
secured. No buyers have been signed. And crucially, as Europe edges
towards a second potential banking crisis, no financing has been

While the Continent is still distracted by the debt problems of Greece,
it seems unlikely much EU financial support will be forthcoming.

As fears grow over the [email protected] (£6.8bn) project’s viability, Reinhardt
Mitschek, managing director, strongly rejects the suggestion that
Nabucco is simply the latest in a very long pipeline of EU white
elephants. “I want to outline that we are absolutely on track to start
building the pipeline next year,” he told The Daily Telegraph. “Over
the next 18 months, we have to set up financing before then and
the first deals will have to be signed between buyers in Europe in
Azerbaijan and Iraq. We also have to prepare procurement. Yes it is a
big job, but we have very experienced experts from the six companies
and I am optimistic we will succeed.”

These challenges are not straightforward. Regional political tensions
in Eurasia are rife. It is just one example that Azerbaijan is unhappy
with Turkey for flirting with Armenia, stalling an agreement about
signing its rich gas supplies up to the project.

Then there is the problem of underdeveloped fields in Iraq and
Azerbaijan, which are hugely rich in gas but only have embryonic
exploration and production capabilities.

Meanwhile, Russia is attempting to derail the fragile project by
proposing to build two other rival pipelines: Nord Stream in northern
Europe and South Stream in southern Europe – following a similar route
to Nabucco and threatening to sign up available sources of gas supply.

Mr Mitschek is not to be deterred. “South Stream is not a competitor
and it is legitimate to ask whether it will be built as some
estimates put its cost as three times that of Nabucco. We are also
in a comfortable position with being able to get gas from either Iraq
or Azerbaijan or both,” he insists.

Given the worldwide glut of gas depressing prices and reduced
industrial output following the recession, will Europe even need
the gas that Nabucco has to offer? The discovery and development of
rich new “shale gas” resources in the US has depressed prices across
the world.

This means Europe may have the pick of shippable liquefied natural gas
(LNG) cargoes from suppliers like Qatar and Trinidad that were once
destined for America.

Katinka Barysch, of the Centre for European Reform, believes the
pipeline is still crucial. In a discussion paper published this month,
she points out “Energy forecasters say that the global gas glut is
temporary.Between 2015 and 2020 global markets will tighten.

“All of Nabucco’s problems – lack of demand, finance and supplies –
have a plausible solution. Even if it is further delayed and not
ready for gas shipments in 2014, it still makes sense to build it,
both commercially and politically.”

Next month’s auction will give an indication of whether the energy
industry agrees – or believes Nabucco is a mere empty vessel destined
to be buried six feet under.

From: A. Papazian

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