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Controversial Azeri Pipeline Receives $500M Funding

The European Bank of Reconstruction…

Nabucco is Dealt Another Blow as Azeri Gas to Use TAP Pipeline

Nabucco is Dealt Another Blow as Azeri Gas to Use TAP Pipeline

Ten years ago, hopes were high there would be a major pipeline connecting Europe directly to the gas fields of the Caspian Basin and the Middle East.

The pipeline, called Nabucco, was to run from Austria to Eastern Turkey, where it would receive gas via feeder pipelines from Azerbaijan, Turkmenistan, Kazakhstan, and Uzbekistan, and from Iran, Iraq, and Egypt.

But over the years, the grand ambitions of the Nabucco project have increasingly come to look more like a dream than any imminent reality.

The original scope of the project was cut back dramatically in May 2012 when the consortium backed away from plans to build the Turkey segment of the pipeline and to focus only on the European part.

Similarly, the Nabucco consortium began to talk in terms of a pipeline with an initial capacity of just 10 billion cubic meters (bcm) per year rather than its originally planned 30 bcm.

Those scale-backs suggested Nabucco was in trouble, and now the project is set to receive yet another blow.

TAP Dance

On June 28, the developers of a major gas field in Azerbaijan are expected to announce that they will not choose Nabucco but a shorter pipeline route to southern Europe instead.

The rival Trans Adriatic Pipeline (TAP) runs 900 kilometers from Turkey's western border through Greece and Albania to southern Italy. That is 400 kilometers shorter than Nabucco-West -- the European end of the original Nabucco project -- which runs 1,300 kilometers through Bulgaria, Romania, and Hungary to Austria.

The developers of Azerbaijan's Shah Deniz-2 gas field reportedly plan to begin shipping gas in 2019 through TAP, whose intended initial capacity -- like Nabucco -- is 10 billion bcm per year. TAP's shorter route and smaller number of transit countries are believed to have allowed TAP to underbid Nabucco, although the specifics of the current deal are not yet known.

Julian Lee, an expert at the Center for Global Energy Studies in London, says the expected decision reflects a fundamental problem with Nabucco.

Related article: Nabucco is Rejected in Favour of the TAP by Azeri Gas Developers

"The real problem for the Nabucco pipeline is that it is just so big," Lee says. "It is very difficult to find a single source of supply -- or even a number of sources of supply -- that all become available at the same time in order to be able to fill that line and run it at capacity from day one. And the problem you are then left with, if you can't do that, is that perhaps your early shippers end up being required to pay a transit fee that is far larger than they would perhaps need to pay for a smaller project."

Questions Of Commerciality

The expected choice by the Shah Deniz-2 group -- which includes the Azerbaijani national oil company Socar, Britain's BP, Norway's Statoil, and France's Total -- may not augur well for Nabucco's future.

Nabucco v TAP

It would appear to highlight the warning offered by some experts that Nabucco's appeal as a strategic concept far outstrips its viability as a commercial one.

Nabucco was conceived as a keystone of the EU's plan to diversify its energy supplies away from Russia, which supplies some 150 bcm to Europe yearly. The pipeline's original planned capacity of 30 bcm would have replaced about 20 percent of the Russian imports.

But Lee says the grand scale of the Nabucco project always made questionable business sense.

"Nabucco was born out of a strategic vision of how to diversity European gas supplies. It has had strong political support from Brussels and Washington based on its credentials as a route to bring new gas into Europe," Lee says. "But neither the European Union as an entity nor the U.S. government was going to pay for the construction of Nabucco. And at the end of the day, the costs of that would fall ultimately on the people shipping gas through it, and their decision-making process has to be a commercial one."

Nabucco has run into trouble, too, because it was never the only planned pipeline to bring Caspian gas to Europe. The EU's energy strategy includes multiple pipelines, including Nabucco, TAP, and others as components of a Southern Gas Corridor. The European Commission itself does not favor one over another.

Related article: Russia’s South Stream may have Defeated its Nabucco Rival

Analysts do not rule out that Nabucco may yet prove viable. One possibility is that the pipeline will yet find suppliers among other gas fields in Azerbaijan or on the eastern side of the Caspian Sea when countries there begin moving gas westward via a proposed trans-Caspian pipeline.

But the troubles of Europe's biggest pipeline project may suggest that the early vision of large-capacity pipelines funneling gas westward now requires updating.

Attraction Of LNG

Since Europe conceived its plans for a Southern Gas Corridor in the late 1990s, alternative sources of gas have gained ground.

Jonathan Stern of the Oxford Institute for Energy Studies in Britain says that foremost among them is liquefied natural gas (LNG), delivered to Europe from the Middle East by ship.

"Although people talk about the southern corridor," Stern says, "and it is still correct -- the original concept is still correct that there is a lot of gas at the other end of Europe, in the Caspian and Middle East region -- the complexity of actually getting something going there has been so great, and so long-term, that in the meantime a lot of [European] countries have built, and more are planning to build, LNG terminals."

At the same time, Europe is planning to switch increasingly to renewable fuels. The EU has set a target of 2020 for each of its member states to obtain at least 10 percent of the energy it uses for land transportation from renewable sources, led by biofuels.

That means that Nabucco and other pipeline projects will have to become increasingly competitive if they are to attract the investors' capital they need to be built.

The bad news Nabucco is set to receive June 28 is just one measure of how much so.

By. Charles Recknagel

This article first appeared on rferl.org and is re-published with permission

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