Comparative Advantages of Nabucco-West Offset By Lack of Financing

Comparative Advantages of Nabucco-West Offset By Lack of Financing

Publication: Eurasia Daily Monitor Volume: 10 Issue: 102
May 30, 2013 03:41 PM
By: Vladimir Socor


The Nabucco Committee’s meeting (see accompanying article) on May 21
in Bucharest has provided perhaps the final opportunity for
comprehensively assessing the Nabucco-West project’s comparative
advantages as a route for Azerbaijani gas to Europe. Prior even to the
Committee meeting, the Nabucco participant governments had appealed in
a joint letter to the European Union to show more visible signs of
support for this project (see EDM, April 26). The May 21 Committee
meeting entered the end game of the final pipeline selection decision
in Baku.

Although still unfunded by international financial institutions, the
Nabucco-West pipeline project holds significant comparative advantages
from the perspective of the European Commission and of Caspian gas
producing states. This project:

– Offers the shortest route to lucrative European gas markets for
Caspian gas. Nabucco participant countries should enable Caspian gas
producers to earn higher netback prices, thanks to the shorter
distance from the production site to market, compared with rival
Trans-Adriatic Pipeline’s (TAP) more remotely located markets in Italy
and Switzerland.

– Targets those markets where supply diversification is a pressing
requirement, yet liquefied natural gas (LNG) will not be available to
compete against pipeline-delivered gas. Such is the case with the
Nabucco participant countries. Meanwhile, Italy’s plans to increase
LNG imports are likely to depress the price of pipeline gas in that
already saturated market.

– Interconnects Central and Southeast European countries’ gas
networks and integrates their gas markets. In effect, Nabucco-West is
designed to function as a backbone-interconnector of the countries
along that route. The Nabucco countries, moreover, are linked with
their neighbors through bilateral connections: Austria-Slovenia,
Hungary-Croatia (recently completed), Hungary-Slovakia (soon to be
built), Romania-Ukraine, Bulgaria-Serbia and Bulgaria-Macedonia, thus
multiplying the market options for Caspian gas
(, accessed May 29).

– Capitalizes on gas storage sites available along the Nabucco-West
route, with capacities ranging from 0.5 billion cubic meter (bcm) in
Bulgaria and 2.7 bcm in Romania, to 6.1 bcm in Hungary and 7.1 bcm in
Austria (, accessed May 29). For its part,
rival TAP intermittently proposes to build a `strategic’ storage site
in the peripherally located Albania.

The TAP project holds a different set of comparative advantages. Its
shareholders’ (led by Norway’s Statoil) superior financial resources,
compared with those of Nabucco, can prove decisive. Within the Shah
Deniz consortium, certain West European shareholders claim that the
Nabucco consortium has proposed a far lower purchase price for gas,
compared with that proposed by the TAP consortium in the initial
bidding at the end of March. Further bidding rounds are possible, and
the Shah Deniz producers have until late June to announce their

Shah Deniz producers such as BP prefer TAP mainly because of this
pipeline’s limited capacity at 10 bcm per year, correspondingly
limiting the investment into the pipeline. BP is narrowly interested
in exporting its share from the 10 bcm per year of Shah Deniz Phase
Two of production, with a commensurate pipeline solution. BP is
aligned with TAP’s lead company, Statoil, in this respect. A pipeline
capacity with strategic impact would, however, involve a larger
diameter and/or additional parallel strings, necessitating higher

Nabucco-West’s capacity is designed to be scaled up from 10 bcm to as
much as 30 bcm per year, in step with anticipated gas production
growth from Azerbaijan and Turkmenistan. For its part, Azerbaijan
plans to build the Trans-Anatolia Pipeline (TANAP) in Turkey with an
ultimate capacity of at least 30 bcm, potentially up to 50 bcm per
year. Baku also proposes expanding the capacity of the transit
pipeline in Georgia (connecting Azerbaijan with Turkey) at least to
equal TANAP’s capacity. These pipeline plans are vital to Azerbaijan’s
future as a gas-exporting country from projects beyond Shah Deniz, as
well as a transit country for gas from Turkmenistan. In this
perspective, Azerbaijan’s interests would seem to be aligned with the
Nabucco-West project.

TAP’s proposed capacity of 10 bcm per year and its market destinations
are non-strategic. They also seem barely relevant to supply security
through diversification in the destination countries. TAP’s main
market, Italy, is highly diversified already, with Gazprom’s market
share currently at 27 percent () and set to
diminish thanks to Italy’s LNG imports. Switzerland, another TAP
market (to be reached presumably via Italian pipelines), uses little
natural gas in its overall energy mix, and it purchases that gas
already via Germany from E.On Ruhrgas (a TAP minority shareholder).

TAP would drop off a small portion of the gas in Greece, en route to
Italy; and it proposes to create natural gas markets from scratch in
Albania, Kosovo, and Montenegro. These three states, meanwhile, do not
use natural gas and are not connected to any pipeline grid. It has yet
to be explained how could any of those destinations be more lucrative
than the Nabucco countries for Caspian gas.

Nabucco’s design capacity, scalable ultimately to 30 bcm per year,
could accommodate Azerbaijani gas from projects other than Shah Deniz
after 2020, combined with gas from Turkmenistan, which can come on
stream earlier, and which the European Commission regards as pivotal
to the Southern Corridor to Europe.

Nevertheless, EU political support for Nabucco-West seems to be
diminishing, and the European Commission has not been able to mobilize
financing for this project in these times of austerity. As Elshad
Nassirov, vice-president of Azerbaijan’s State Oil Company, ruefully
noted to the Southern Corridor forum just held in Baku, Europeans and
Americans could easily have financed the Nabucco project a few years
ago, at a cost equivalent to that of a few weeks of military
operations in Iraq for example (Trend, May 29).

Lacking EU-backed public financing, the Nabucco consortium now
suggests `working with’ the EU and the TAP participant countries Italy
and Greece toward a `win-win,’ `comprehensive’ or `inclusive’ outcome
of this rivalry (Nabucco Committee Declaration,
, accessed May 29). What this would entail is
not publicly specified yet. It might perhaps envisage some commitment
to sharing gas volumes from the Caspian basin between these two
pipeline projects at some point in time.

The Obama administration endorses `both options’ in principle, as does
the EU with its `project-neutrality’ between Nabucco-West and TAP. But
Brussels and Washington know that the Shah Deniz producers’ consortium
will select only one of the two routes in the coming weeks. The final
selection decision might be presented as sequencing the two pipeline
projects in a certain order. In that case, the project passed over in
June would not officially be eliminated outright, but postponed for
some years, awaiting the further growth of gas production in the
Caspian basin. In that case, Nabucco-West could only remain on the
drawing boards in expectation of gas from Turkmenistan and the
EU-backed trans-Caspian pipeline materializing.


From: A. Papazian

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