Pipeline Dynamics: Competitors Yet Different in Concept and Structure

Nabucco and South Stream are very different in both concept and structure, and this is important for understanding the strengths and weaknesses of each project. Nabucco is a mercantile pipeline. It is not being developed and financed by producers, it is being developed and financed by gas companies with backing from the European Union.

South Stream is a producer-funded pipeline. Мercantile pipelines can be found in North America, but they are unusual in Europe and Eurasia, and this leads to one of the uncertainties about Nabucco. Because of its more commercial and open architecture, all the various components and players have to be in place and coordinated for the pipeline to be viable. This is one concern about Nabucco, and it is felt in both Kazakhstan and Turkmenistan. Both countries – in different ways and for different reasons – have now expressed a definite interest in a trans-Caspian gas pipeline that would connect their gas supplies to Nabucco. But their reservations will remain until it is clear to them that Nabucco is a reality, that construction is beginning, that resources are definitely committed. So it is a chicken-and-egg situation. The gas companies want firm commitments on supplies before making these enormous investments, while the suppliers look for firm commitments on construction before committing their supplies and potentially antagonizing the other partners, principally Russia.

A considerable advantage Nabucco enjoys over South Stream is that Nabucco opens up new suppliers, not just new routes. South Stream does not. Nothing said about South Stream, no answer given to any question, has changed the perception that South Stream is basically about rearranging existing Russian supplies through new routes. This in itself makes it less attractive, not only for the EU consumer, but also, of course, for Central Asia. Since Berdymukhamedov became president at the end of 2006, at least from early 2007, he and the head of Turkmengaz have been clear and consistent that Turkmenistan will diversify its markets. They have put a greater emphasis on Nabucco than in the past and have done this more emphatically than Kazakhstan. But like Kazakhstan, of course, Turkmenistan is thinking about a variety of markets. Nabucco is not the principal one. China is a key priority. Iran is also a priority. And Russia, of course, remains a great priority, although supplies are down some 50% since 2008. Russia absorbs – and will for some time continue to absorb – the majority of Turkmenistan's exports. But Nabucco is now very important, and Berdymukhamedov publicly defied Prime Minister Putin on this point in May, 2007.

Kazakhstan's approach is more shaded and cautious. Nazarbayev has expressed a clear interest in Nabucco on several occasions, but he has ranked it third in priorities behind, first of all, reliance on Russia, and secondly, expanding supplies to China through the two pipeline systems that are being built. These are very elaborate projects. One of them is an oil pipeline, the other a gas pipeline.

There is another factor that must be mentioned here. Is Turkmenistan’s participation essential for Nabucco to be launched and to be viable? Not necessarily. First, the Azeri field, Shah Deniz stage 2, would by itself have the capacity under current projections to supply the Nabucco pipeline for some 30 years, if it were committed to nothing else but Nabucco. The problem with the projected Azeri production is that it is also committed to the  Interconnector Turkey-Greek-Italy  and to the Trans-Adriatic pipeline. And so then the question arises: Can Azerbaijan supply all three of these projects? The answer has to be no. But now there is a new factor in the equation, and that is Iraqi gas. Iraqi reserves are estimated to be over three trillion cubic meters. This is not purely gas generated in the area of Iraq under the authority of the Kurdish Regional Government (KRG). Fields in the territory of the KRG account for half of this gas, some of which is readily available. The other half comes from the field of Akkas on the Syrian border, which is outside Kurdistan, and which already has a highly developed and advanced infrastructure in place. And so, I think one can be guardedly optimistic about Iraq if the security situation there does not seriously deteriorate. Iraqi gas for Nabucco is a very realistic prospect. Now, if you put these two things together and you assume there will be Azeri and Iraqi gas, then as long as Turkmenistan maintains its interest, I think then there will be enough critical mass and traction to be able to make the Nabucco project a reality. I am not persuaded that South Stream can become a reality, but I think that it has the potential – and I believe this is one of its primary purposes – to delay Nabucco and possibly derail it.  Its other purpose, of course, is to bypass Ukraine — and until it is (or is not) built, persuade Ukraine that it will be bypassed.

James Sherr is Senior Fellow, Russia and Eurasia Programme at the Royal Institute of International Affairs, Chatham House. Member of the Valdai Discussion Club.