Nabucco: At a Deal-Defining Impasse.

Building Nabucco without Nabucco

by Alexandros Petersen

The struggle to break European dependence on Russian natural gas is at a deal-defining impasse.

The main alternative producer of gas in Europe’s neighborhood, Azerbaijan, cannot come to an agreement with Turkey, the primary transit country along the so-called Southern Energy Corridor The problem is that both Ankara and Baku have put the cart before the horse. It makes little sense to negotiate transit when neither side has a clear idea of exactly how much gas will be flowing through the Southern Corridor, in what sort of pipeline and at what time. In fact, despite conventional wisdom on this topic, it is unlikely that the two Turkic countries will come to agreement before a Southern Corridor pipeline project is chosen by the Shah Deniz consortium in Azerbaijan, that is, by the holders of the gas.

At the moment, three competing Western-oriented pipeline projects are waiting on Azerbaijani and Turkish decision-makers. The best known of these, the Nabucco pipeline, is most dependent on a transit agreement because its mammoth plans call for it to snake across mostly Turkish territory. The two smaller alternatives, Interconnector Greece-Italy (IGI) and the Trans-Adriatic Pipeline (TAP), will eventually require Azerbaijan and Turkey to see eye-to-eye but could move forward in parallel with those negotiations if either is given the nod from Shah Deniz.

In any case, both are more likely to be built than Nabucco. While strategically important in directly linking Austria’s Baumgarten natural gas hub with eastern Turkey and maybe the Caspian itself, Nabucco’s annual capacity of around 30 billion cubic meters (bcm) would be three times the size of the gas available to fill it. Its price tag of 15 billion euros also sounds unrealistic in a difficult investment climate.

IGI’s 8 bcm capacity is more like it. The most modest of the three, it would rely on existing linkages across Turkey and just connect Greece and Italy for sale to the Italian market. TAP is also realistic in its capacity of 10 bcm, but the project will have the option of being expanded to 20 bcm should more gas become available. It also routes from Greece to Italy through Albania, with plans to reach markets in the Western Balkans and Central Europe, in addition to the Mediterranean.

All this said, the competition between Western-oriented projects is counterproductive and unnecessary. The European Commission, several EU member states and the US Departments of State and Energy are actively pushing for progress on the Southern Energy Corridor. The priority should be beginning construction on the corridor as soon as possible. And, there is a way to realize Nabucco without actually building Nabucco.

This would require seeing the Southern Energy Corridor as a multi-phased project, not an either/or prospect. Phase One would be an immediate approval of one of the smaller projects, probably TAP, due to its stronger shareholders (Statoil, E.ON Ruhrgas, EGL). This would achieve the crucial steps of getting some pipe laid, getting some gas flowing and achieving some diversification of sources and routes for European consumers.

Phase Two would expand the capacity of one of the smaller projects as production increases in Azerbaijan. Crucially, this means expansion will only occur if there is gas to fill the pipe. Phase Three would see an expansion of capacity to complement expansion of the route, potentially across the Caspian to gas-rich Turkmenistan or south to Iraq and other points in the Middle East. With this phased approach, the ambitious vision of Nabucco is probably more likely to be achieved.

In any case, Phase One is the most likely outcome of a post-Azerbaijani-Turkish transit agreement decision by the Shah Deniz consortium. Shah Deniz has been meticulous in its consideration of the technical and commercial aspects of the three proposed pipeline projects, consciously eschewing interest in the political or strategic arguments behind a project. On pure technical and commercial grounds, TAP wins out. It also does not hurt that Statoil is both a TAP shareholder and a member of the Shah Deniz consortium.

The point is, however, that this decision could be made immediately -- without having to wait for Ankara and Baku -- and would not sacrifice the strategic gains of a larger Nabucco-style project. Despite its geopolitical, as well as commercial, aims Southern Energy Corridor construction should be led by private sector stakeholders. Governments will follow.

Alexandros Petersen is advisor to the European Energy Security Initiative at the Woodrow Wilson Center for Scholars in Washington, D.C