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Russia Profile
November 17, 2009
The Pied Piper
Much Delayed and With Political Problems Still Unresolved, Nabucco Looks Like an Increasingly Untenable Project
By Tom Balmforth

Europe’s stalling Nabucco gas pipeline project took another blow on November 14, as Slovenia’s economy minister signed a deal in Moscow confirming Slovenia’s participation in the rival South Stream pipeline. The Russian-led project, which will deliver Russian gas to Europe, now has all the European signatory countries it needs to be completed, Prime Minister Vladimir Putin said at his Novo-Ogaryovo residence after the deal was signed. This latest development for South Stream, however, presents Nabucco’s lobby with some familiar questions. Does Nabucco make commercial sense as a project? And how much does the EU want energy diversification?

Russian Energy Minister Sergei Shmatko and Slovenian Economy Minster Matej Lahovnik signed the deal on November 14 in front of Prime Minister Vladimir Putin and his Slovenian counterpart Borut Pahor. “We have signed the deal with all the European partners needed for this project to be completed,” Putin told reporters after the deal was signed. Slovenia is now the fifth European country to add its signature to the project, with Bulgaria, Greece, Hungary and Serbia having already approved similar deals. “Each successive country which yields to it and signs the project makes it more likely,” said Chirvani Abdoullaev, Alfa Bank’s senior analyst for gas and oil. “Step by step the project is advancing. There is determination by the [Russian] state to make it happen behind it: it’s not a purely commercial venture,” he added.

The Russia-backed project, scheduled to be operational in 2015, will pass under the Black Sea to the Balkans before splitting into two branches: one headed north and one south. The pipeline, which could pump 63 billion cubic meters of gas per year to Europe, will be built by Russia’s state-owned gas monopoly Gazprom and Italian oil and gas company ENI, who must still raise the estimated $28 to $36 billion for its construction. With consensus now apparently established amongst countries hosting the South Stream pipeline, “a major hurdle to the deal has certainly now been removed,” said Valery Nesterov, an analyst at Troika Dialogue.

Currently, 80 percent of Russian gas destined for Europe passes through Ukraine, and Russia’s rationale for South Stream is to find an alternative route while maintaining control of any new transit pipelines. Russia’s credibility as a reliable energy provider was gravely damaged during the infamous “gas wars” between Ukraine and Russia that resulted in disruptions of supplies to Europe in 2006 and 2009. Russia has always maintained that it was forced to “turn off the taps” because Ukraine was siphoning off gas destined for Europe, and it sees South Stream and its sister project North Stream, a pipeline under the Baltic Sea from Russia to Germany, as the answer.

Meanwhile, Nabucco was conceived in 2002 as a way of freeing Europe from its energy dependency on Russia by importing Turkmen gas. Europe depends on Russia for some 40 percent of its imported energy, which leaves it vulnerable to what has been referred to as Russia’s “gas weapon.” Europe’s desire to escape dependency on Russian energy escalated further when several gas spats between Gazprom and Ukraine caused shortfalls in Europe in the middle of winter. The Nabucco pipeline would greatly reduce this dependency, and it received strong support from the George Bush administration in the United States for that reason. But, with South Stream now making substantial progress, it is becoming ever more evident that Nabucco lacks commercial logic, said Abdoullaev.

“If you look at the larger context - a land-locked Turkmenistan, which is the major potential source of Nabucco’s gas reserves, and Russia’s determination to keep Turkmenistan within its sphere of influence by providing Turkmenistan with access to Russia’s transit network, along with South Stream and North Stream - it means that for at least the next three to five years Europe will actually be oversupplied with natural gas,” said Abdoullaev, “so that really makes Nabucco a non-starter.”

True, in the short term another gas conflict between Russia and Ukraine is a possibility, especially with the potential instability of the approaching Ukrainian presidential elections in January. But in the long run, the situation could well settle down. “If there is a stable, pragmatic government in Ukraine, then we might end up with North Stream and South Stream plus the gas supply capacity from Ukraine still there. So you don’t need any more in terms of transportation routes to Europe. Europe will be oversupplied with gas for several more years, for many more years,” said Abdoullaev.

And Abdoullaev had doubts about Nabucco’s feasibility even before South Stream’s recent strides forward. “Even if South Stream does not succeed, then still the issue remains: how commercial is Nabucco? If it is a purely political project and money does not matter, it could potentially be built eventually - but then, where do you get the gas for it?” he asked. Meanwhile, even getting the thing built is looking doubtful. The much delayed project is now estimated to be completed between 2014 and 2016, but several stumbling blocks still remain. “There are still a number of problems with Nabucco, such as the disagreements between Azerbaijan and Turkmenistan over ownership of the Caspian reserves, which still need to be resolved. The current instability in Iran is also a factor that complicates things,” said Nesterov.

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