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Problems of Europe’s Nabucco gas pipeline project give Russia good chance

May 15, 2012, 15:11 UTC+3 Alexandrova Lyudmila

The Western pipeline project Nabucco, conceived as an alternative gas carrier to South Stream that would be delivering Caspian gas to the European Union along a route bypassing Russia’s territory is suffering one setback after another. Germany has warned it may follow in Hungary’s footsteps to walk out of the project. Experts believe Russia has very good chances of intercepting initiative. If the idea of Nabucco is dropped for good, South Stream’s future will look far brighter.

Also, the throughput of Nord Stream – a gas pipeline under the Baltic Sea carrying gas from Russia to Europe – may be increased.

Europe’s second largest energy company – Germany’s RWE – said the other day it was reconsidering the strategic requirements regarding its participation in Nabucco. Earlier, German media said the concern might quit the European project altogether. In part, there have been reports the RWE management is in talks with the political leaders of Germany and the European Union over the gas pipeline problem.

Budapest was the first to deal a powerful punch on the project. Back on April 23 Hungary’s Prime Minister Viktor Orban said the country’s largest oil and gas company, MOL was leaving Nabucco. Orban said the project faced financial constraints and that was the main reason why Hungary had decided to curtail its participation.

The Nabucco pipeline 4,000 kilometers long and having a throughput of up to 31 billion cubic meters a year was expected to ease the dependence of European consumers on the old-time providers, in the first place, Russia. The other shareholders of Nabucco are Austria’s OMV, Hungary’s MOL, Turkey’s Botas, Bulgaria’s BEH and Romania’s Transgaz. Each stakeholder owns approximately 16.67% of shares, but the RWE’s stake is the largest.

Many in the political and economic quarters of the EU were saying outright that Nabucco’s main aim was to reduce the share of gas supplies from Russia. However, no fundamental progress in implementing the project has been achieved yet. The project’s critics say that it is too costly: officials have mentioned 9.7 billion euros, but the real costs are estimated at 15 billion euros.

According to the original plan the gas pipeline was to cross Azerbaijan, Georgia, Turkey, Bulgaria, Hungary and Romania to end in Austria. In that shape Nabucco might offer strong competition to South Stream. The beginning of its construction was scheduled for 2013. However, several months ago it became clear that its throughput will have to be cut by half, as there were no guarantees there would be enough gas.

Russian experts are practically certain that Germany’s walkout from the project is bound to happen sooner or later. For instance, the director of the National Energy Institute, Sergei Pravosudov, is quoted by the daily Nezavisimaya Gazeta as saying that such problems had been in sight from the outset.

“There is no gas from Azerbaijan. As for Turkmen gas, its supplies will be very problematic as long as the status of the Caspian Sea remains unsettled,” he said. “That the German shareholder will leave the project is quite predictable. The question is when this may happen.”

In the meantime the remaining shareholders may try to breathe a new life in the project somehow, but only on the regional scale, by laying a pipeline with a throughput of up to 10 billion cubic meters of gas a year – to meet their own needs, Pravosudov believes.

One of the most likely scenarios is this: the pipeline will be laid after all, but the throughput will be cut proportionately to the demands and capabilities of the remaining participants in the project, says BKS Express analyst Bogdan Zykov. If the project is dropped altogether, Russia will gain a number of reasonable advantages, in the first place, the possibility of advancing its own projects more effectively and to better influence prices on the market, the analyst said.

“The lack of clarity as to who would be filling the pipeline with gas and how was Nabucco’s innate problem,” the daily Rossiiskaya Gazeta quotes the director of the energy development fund, Sergei Pikin, as saying. There had been talks over supplies with the Asian republics of the former Soviet Union, but no contracts have been signed. Soaring costs were another argument on the debit side for the investors.

When the project existed only on paper, in the form of pictures on the tables of European Commission bureaucrats who were lobbying for the project, the estimated costs looked different. As soon as detailed research into the project began, it turned out that all is far more complicated than it had looked at first sight. In the end the costs doubled, the expert recalled.

“Generally speaking, Nabucco is not so much an economic project as a political one. The European Commission had hoped to use it to ease the influence of Russia as the main source of fuel for Europe. But the euro area is in crisis and the companies there are reluctant to take unreasonable risks by investing into long-term projects. So the chances it may be implemented are slim.”

Russia, said Pikin, will stand to gain from this. The companies that are leaving Nabucco may well join the more realistic and more promising South Stream project.

The Europeans will hardly succeed in their efforts to weaken dependence on Russian gas in the near future. Nabucco is falling apart, and this may give Russia a good chance to intercept initiative. Vladimir Putin just recently issued an instruction to speed up work on South Stream and to start construction work on the Black Sea’s bed as early as December 2012. Commercial gas supplies are to begin in 2015.

Alongside this the South Stream shareholders made a decision to first lay a northern branch of the surface part of the gas pipeline to Austria, and then the southern arm, to the south of Italy.

Also, Nord Stream shareholders the other day declared the intention to consider the possibility of increasing natural gas traffic to Europe under the Baltic Sea.

Over eight months to come the company’s experts will be looking into the possibility of laying one or two extra pipes. In that case the aggregate export of gas through this pipeline might be built up to 110 billion cubic meters of gas a year, Gazprom’s CEO Alexei Miller said.

MOSCOW, May 15