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Home / Issue Archive / 2010 / July - August #7 / Et Tu Brute? Azerbaijan, Turkmenistan Offer Cheap Gas to EU’s Nabucco As Bulgaria Hints of South Stream Defection

№ 7 (July - August 2010)

Et Tu Brute? Azerbaijan, Turkmenistan Offer Cheap Gas to EU’s Nabucco As Bulgaria Hints of South Stream Defection

   It seems that the Gazprom’s South Stream pipeline to Europe project has been stabbed in the back.  Azerbaijan and Turkmenistan – potential gas suppliers to the competing Nabucco pipeline – have taken steps that could lead to Nabucco getting a lower-priced resource base.

    Furthermore, Bulgaria, a South Stream project participant, is apparently more interested in the Nabucco pipeline. Still, Gazprom has not given up hope and is actively promoting its project in the Black Sea.

By Svetlana Kristalinskaya

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   The Nabucco pipeline is a gas pipeline lobbied by the European Union to reduce European dependence on gas supplied from Russia.  When the Nabucco project was announced, Moscow had no concerns regarding low-cost Central Asian gas going to the rival pipeline. It believed that the resource base was not sufficient to fill the pipeline for several reasons. In addition to gas purchase contracts with Turkmenistan, Gazprom had managed to negotiate the import of Azerbaijan gas starting from 2010. Gazprom has agreed to purchase as much of Azerbaijan’s gas as the country is willing to sell and likely promised a fairly high price. Gas supplies for Nabucco from Iran are doubtful due to  U.S. economic sanctions against Teheran.

   Meanwhile, after lengthy negotiations with prospective Nabucco pipeline gas suppliers, Europe started considering Azerbaijan as a major supplier. In April, EU Commissioner for Energy Günter Oettinger was quoted in the media: “Azerbaijan can supply most of the gas for the Nabucco pipeline, but not all, because of its increasing domestic gas demand, and increasing gas supply contracts with neighboring countries.”

Turkey Opens the Tap

   Julian Lee, an analyst with the Center for Global Energy Studies in London, said the development of the Nabucco pipeline project had been slowed by a deadlock in negotiations between Turkey and Azerbaijan regarding the conditions of Turkey’s participation in the project. Turkey announced its ambition not only to transit gas, but also to resell gas. In turn, Azerbaijan asked for a higher price.
After several years of negotiations, Turkey and Azerbaijan finally inked their gas contract. It was signed on the eve of Russian Prime Minister Vladimir Putin’s visit to Istanbul in June.

   The agreement package was signed by Azerbaijan’s Energy Minister Natik Aliev and Turkey’s Natural Resources and Energy Minister Taner Yildiz. After signing the contract, Yildiz announced that among other things, the contract specifies transit tariffs, gas prices and volumes to be purchased by Turkey from the Shah-Deniz-2 project (which is to come on line in 2016–2017).

   Turkish and Azerbaijani officials said the contract opens up the way for negotiations between Azerbaijan and European countries on purchases of Azeri gas, including possible supplies to the Nabucco pipeline.  At the same time they emphasized that this does not guarantee full loads to any European gas project.
Also in March, Turkey ratified the Nabucco pipeline agreement, though previously Turkish officials themselves voiced the biggest doubts about the viability of the project.

   Russian Prime Minister Vladimir Putin, who arrived in Istanbul with high-level Gazprom officials the day after the contract was signed, said Azerbaijan could not be considered a rival to Russian gas supplies.

   “Turkey’s demand for gas is increasing, and will keep increasing in the future as a result of economic growth of the country. We know that every year Russian gas replaces shortfalls in supplies from Iran (in the winter – OGE).  So if we are talking about a change in gas suppliers, it is not about replacing Russian gas,” Putin said. Putin may say what he likes, but Turkey is now much more likely to cover shortfalls in Iranian gas using Azeri, rather than Russian, gas.

   Commenting on the Nabucco project, Putin told the media: “There is not enough gas to fill the Nabucco pipeline. “If they find the project profitable and feasible, good luck,” he said.

   Shah-Deniz today annually produces 8.6 billion cubic meters of gas, and production could reach 29 billion cubic meters of gas by 2029.  Nabucco’s capacity is estimated at 31 billion cubic meters of gas per year. In addition to possibly supplying gas to Nabucco, Azerbaijan still needs to meet domestic demand and supply contact obligations to other customers.

Turkmenistan Сhooses Сustomers

   Meanwhile Gazprom faces difficulty in maintaining good business relations with Turkmenistan, another prospective Nabucco gas supplier.  Last year the plan was to add capacity to the Caspian gas pipeline running from Turkmenistan through Kazakhstan to Russia, but  problems emerged when Russia cut its purchases of Turkmenistan gas. Citing the financial downturn, Russia also refused to help fund the construction of the Turkmenistan East-West pipeline that was planned to run from major eastern fields to the central and western part of Turkmenistan where the Caspian pipeline starts. Sources reported that Turkmenistan chose not to commit to delivering gas received from the East-West pipeline to the Caspian pipeline, leaving an option of sending it to Nabucco. After a year of negotiations, Turkmenistan decided to finance the $2 billion construction of the East-West pipeline using its own funds.  This will enable the country to chose where to supply the gas.

   “Most importantly, by constructing this pipeline we will create a unified gas pipeline system for the country. This will allow us to transport large volumes of natural gas to any region of the country promptly and in a timely manner,” Turkmenistan President Gurbanguly Berdymukhamedov said during the groundbreaking ceremony.

Bulgaria Bets on Nabucco

   South Stream, Gazprom’s pipeline project to pump gas to Europe, has been facing some difficulties in Europe as well.  Bulgaria, which is a prospective member of both the South Stream and Nabucco projects, seems to be getting more interested in the Nabucco project. Recently, Bulgaria had made statements on possibly withdrawing from two energy projects with Russia: the Belene nuclear power plant construction, and the Burgas–Alexandroupolis pipeline. In the wake of these statements, Deputy Bulgarian Foreign Minister Marin Raikov said publically that the South Stream project “raises many questions” and the rival European project Nabucco was more important to his country.

   Gazprom was not caught off guard and immediately established a partnership with Romania. Though as late as April, Gazprom CEO Alexei Miller said he was not considering pumping gas through Romania and that only a branch of the pipeline might be built in that Balkan nation. But, Romania had already offered access to its territory for South Stream, and Gazprom promised to have an economic evaluation ready by fall.

   Furthermore, Gazprom has decided to build the South Stream pipeline in four lines rather than in two lines (one line capacity of 31.5 billion cubic meters of gas being equal to Nabucco capacity). Miller stressed that the project stages were defined by “technical characteristics rather than by marketing reasons.” He did not rule out that by the fall Gazprom would announce the cost of the South Stream project.

   Stanislav Tsygankov, the head of Gazprom’s Foreign Trade Department, declined to name the dates for commissioning South Stream’s lines. He merely said this would become clear only when a complete feasibility study is in place.
Valery Nesterov, an analyst with Troika Dialog, said it is not yet clear which project is winning – Nabucco or South Stream. He said that if European demand for gas is low, either one line of South Stream or Nabucco could be constructed. Nesterov said that Gazprom recognized that the forecast demand for gas in Europe in 2030 is lower now than it was two years ago. Gazprom today quotes a 210 billion cubic meters of gas annual raise in gas demand; previously this figure ranged between from 250 to 300 billion cubic meters of gas.

Pipeline Merger Not On the Table

   Nesterov said that with high demand for gas, both projects would be feasible. “On one hand, the South Stream project is more advanced, but on the other hand, the economics of the project remain uncertain.”  The estimated total cost of Nabucco is 8 billion Euros; South Stream, 8.6 billion Euros. However, Pavel Oderov, Deputy Head of the Gazprom Foreign Trade Department, recently said South Stream would not cost more than 20 billion Euros.

   Mikhail Korchemkin, Director of East European Gas Analysis, said it might not be necessary to build the South Stream pipeline, if Gazprom bought Ukraine’s gas transportation system.  He said it would be cheaper cheaper to enlarge the Ukrainian system.

   Still, Alexander Medvedev, the head of Gazprom Export, said: “two transit crises in Ukraine have proven the need for long-term plans to diversify transit routes. If the South Stream and North Stream pipelines were in place, there would be no issues with gas supplies to Europe.”

   Such statements are still being made in Russia, despite Vladimir Putin’s proposal to merge Gazprom with Ukraine’s national oil and gas company, Naftogaz.  Currently, the two countries are discussing the possibility of establishing a joint venture to include the Ukrainian transportation system and Russian producing assets, perhaps later to be followed by a merger.
Ukraine only wants to see a merger of Naftogaz and Gazprom (capitalization of Gazprom is several time higher) on equal terms.  Gazprom made the establishment of the joint venture subject a merger.

   Valery Nesterov said Kiev was highly resistant to seeing the South Stream pipeline built, and is requesting Russia guarantee gas transit volumes through Ukraine (in the framework of Naftogaz and Gazprom merger negotiations – OGE). Stanislav Tsygankov admitted that South Stream will carry both “new gas” and volumes from other pipelines.

   Alexei Miller said Gazprom would guarantees the annual transportation of 63 billion cubic meters of gas through South Stream under ship or pay conditions. Meanwhile, the transit contract with Ukraine has no provisions for volumes of transited gas.

   On the positive side of the South Stream project there is the involvement of another foreign partner – France’s EDF. EDF was promised no less than a 10 percent stake in South Stream AG with Eni’s stake being reduced.  South Stream AG, established by Gazprom on an equal basis with Italy’s Eni, is the operator of the offshore segment of South Stream.

   In general, Valery Nesterov does not rule out that the Nabucco and South Stream capacities will be reduced, or the projects will be delayed. Nabucco “has made no progress in negotiations with prospective suppliers, other than Azerbaijan”, and South Stream’s supply base is limited to major Russian fields. Nesterov said he believed South Stream could be completed faster than Nabucco. “But the project’s being viable commercially is more important then the construction schedule,” he said.

   The South Stream pipeline is meant to diversify supplies of Russian gas to Europe and is to run along the bed of the Black Sea to Italy and Austria. This new pipeline is to have a capacity of 63 billion cubic meters of gas a year and is to be launched in 2015. Russia has signed intergovernmental agreements with Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia and Austria on land-based segments of the pipeline. Gazprom and Eni set up South Stream AG to build and operate the marine segment. Each company controls 50 per cent of the project.

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