The further delay of final investment decisions on the Nabucco and South Stream natural gas pipeline projects does not diminish the significance of the current calendar year for them or for associated projects in southeastern Europe. The prolongation of the timeframe only creates the need for the pipelines’ respective proponents to organize further tactical moves while elaborating auxiliary strategies. The competition between Nabucco and South Stream is raised to a higher level even as the European Union declares that the two projects’ relative commercial merit is as important as their contrasting geopolitical implications. Each project consortium and its members individually seek to adapt to, and simultaneously to shape, the evolving geo-economic environment.

BACKGROUND: In the late 1990s, Russia persuaded Turkey to build the Blue Stream pipeline under the Black Sea between them. This maneuver succeeded in blocking erstwhile plans to construct a Trans-Caspian Gas Pipeline (TCGP) from Turkmenistan under the Caspian Sea to Azerbaijan, whence Central Asian gas would have entered Turkey through Georgia and found its way to Europe. It is natural that the Russian-sponsored South Stream pipeline project, under the Black Sea to either Bulgaria or Romania, has been seen in the same way, as a blocking move against the EU-sponsored Nabucco project, which would take Caspian Sea basin gas to Europe. Yet South Stream has still not completed a feasibility study and is only now starting to submit environmental and other documentation to the Turkish government, whose permission it requires since South Stream would pass through Ankara’s exclusive economic zone in the Black Sea. South Stream’s own final investment decision has thus also been delayed.

The year 2009 saw several conditions for Nabucco fall into place. First, the European Commission (EC) adopted the Southern Gas Corridor program for diversifying energy sources and routes, including the trans-Caspian connection, at its Prague Summit held in May. Second, the Turkish parliament approved the Nabucco Intergovernmental Agreement (NIA) and its government signed the document together with Austria, Bulgaria, Hungary, and Romania in mid-July the same year. Third, the European Bank for Reconstruction and Development, the European Investment Bank, and the International Financial Corporation (a member of the World Bank Group) signed a mandate letter with the Nabucco consortium, launching the appraisal process for financing. A final investment decision was foreseen for 2010, but tough Azerbaijani-Turkish negotiations together with the need to harmonize sourcing the gas with pipeline construction led to its postponement to the first half of 2011 and then to the second half.

Recently the British firm BP publicly mentioned the figure of 10 billion cubic meters per year (bcm/y) of natural gas from Shah Deniz Two for non-Nabucco transit to Turkey and Europe. BP and the Norwegian firm Statoil together own equal parts of a 51 percent majority stake in the Shah Deniz development, which has been slated to contribute production to Nabucco. Statoil also owns 42.5 percent of the Trans-Adriatic Pipeline (TAP) project, a planned pipeline across Greece and Albania, then under the Adriatic Sea to Italy. For its part, the EU has also been trying to encourage Nabucco to work together with the Interconnector Italy-Turkey-Greece (ITGI) project, a scheme for taking gas from Azerbaijan’s offshore deposits into southern and southeastern Europe, but ITGI’s participants have been hesitant.

IMPLICATIONS: It is hardly a coincidence that TAP’s first-stage volume is projected at 10 bcm/y. This is the quantity mentioned by BP for non-Nabucco transit, presumably by doubling or later trebling the number of strings for gas in the South Caucasus Pipeline. While incorporating a link to TAP would maintain if not increase Statoil’s market share in northern and eastern Europe, last month South Stream sought to complicate matters by bruiting the idea of supplying the Italian market through a Balkan spur into Greece, across the Peloponnesus, under the Ionian Sea to the heel of Italy’s boot. The EU has finessed against both these new gambits by persuading the Nabucco consortium to formally decide that the Nabucco pipeline will begin at Sangachal, the gas processing and oil production complex near Baku that already hosts the gas plant for Shah Deniz and which the Nabucco consortium decided already last year to expand.

South Stream’s proposed new spur to Italy follows precisely the planned route of the Greece-Italy segment of the ITGI – the Turkey-Greece segment is already operating. And this was proposed even as Russia’s president Vladimir Putin was announcing that the South Stream pipeline project itself could be cancelled in whole or in part, in favor of compressed natural gas (CNG) technology for surface transportation across the Black Sea; even though he was unable to say for certain where the gas for this would come from. It is difficult to see in this pronouncement anything more than another attempt to forestall Nabucco, this time by piggybacking on ideas already being examined under the AGRI project for export of Azerbaijan’s gas via CNG technology from Georgia to Romania, and separately for its export to Bulgaria via liquefied natural gas (LNG) technology from the Georgian Black Sea cost. Feasibility studies for both these projects have been under way since the international Batumi energy conference a year ago.

Meanwhile, Turkmenistan and Azerbaijan continue preparatory work for a framework for constructing the TCGP with occasional assistance from the EU. Relations between the two countries have been improving for the last five years. At the Baku summit of the five Caspian littoral states last November, they publicly agreed that only the mutual consent of states intending to construct an undersea pipeline in the Caspian Sea (and not all five littoral states) is required for construction to proceed. Devices exist in international law for that to occur even in the absence of definitive settlement of the territorial differences between the two countries in the middle of the Caspian Sea. In addition, Turkmenistan’s decision last year to use only its own resources to reconstruct the East-West Pipeline across the south of the country prefigures a readiness to dedicate 30 bcm/y from the Douletabad gas field to a new TCGP. Since that amount would overfill the Nabucco pipeline, taking other suppliers into account, Ashgabat would appear ready to commit to the White Stream project if it could be insulated from Russia’s displeasure.

CONCLUSIONS: The EC’s director-general for energy, Philip Lowe, has countered the idea that Europe’s demand for natural gas will be limited in the medium-term future by suggesting that gas should replace coal in the EU’s energy mix. He has also emphasized the key role of gas as a benchmark for market pricing, refuting Russia’s criticism of EU internal directives for the unbundling of European energy conglomerates. That criticism does not prevent Russia from adopting domestic unbundling strategies for its energy “champions” while justifying this policy internally on the grounds of economic efficiency. What this means for Central Asia and the South Caucasus is that Europe may yet stand fast against the bombardment of its Third Energy Program by Russian private, secret, and public diplomacy.

Last year it was announced that the French firm EDF would join the South Stream consortium by taking over a part of the half of shares currently owned by the Italian firm Eni. Gazprom owns the other half. This has been unaccountably delayed, but just this week it was announced that the German firm Wintershall would join South Stream. In fact, such a decision bolsters the case for Nabucco, as well as for White Stream, since it is clear that Wintershall’s decision could be taken only on economic grounds, producing the conclusion that pipeline projects in the region are indeed commercially viable.

If Azerbaijan succeeds in its quest not only to supply but also to sell its own gas, and to sell it in southeast and east-central Europe to countries along Nabucco’s route, then this would create energy security in the region by allowing a gas ring to be constructed via a series of binational interconnectors while allowing Statoil to keep its own market share further to the north. All the most recent developments only serve to underline the critical role of Azerbaijan and its increasingly autonomous energy development policy.

AUTHOR’S BIO: Dr Robert M Cutler (http://www.robertcutler.org [0]), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.