Nabucco Pipeline

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Nabucco – An Energy Security Pipedream?

Nicholas Newman 11 July 2007

THE CURRENT SITUATION

The European Union currently imports 44% of its natural gas, with Russia, Norway and North Africa as its main suppliers. Europe is linked by natural gas pipelines to gas fields in neighbouring non EU states, though some gas is transported by Liquid Natural Gas tankers from the Middle East, West Africa and the Caribbean. At present, Russia is the most important supplier of gas to Europe, supplying 41% of EU’s natural gas imports, representing 19% of Europe’s total gas consumption, and this is expected to increase. Gas imports are expected to gradually grow, due to a gradual decline in EU domestic gas production and ever growing European gas demand.

FUTURE TRENDS AND PROBLEMS

Current EU natural gas consumption is some 492.5 Bcm (billion cubic meters) per year. Wolfgang Ruttenstorfer, head of the Austrian energy company OMV estimates that the EU's demand for natural gas will increase between 100 billion and 200 bcm per year.

The demand for gas to generate electricity is expected to double over the next decade in the European Union, with Russia’s state owned Gazprom maintaining its dominant position. Demand for gas in Europe is likely to continue to grow, in part due to continuing EU economic prosperity and the relative low cost of natural gas as compared to other fuels. In addition, due to political hesitancy to break the nuclear taboo, and reluctance of countries like Germany and Austria to follow the lead of Finland and France to undertake a programme of constructing nuclear power stations, the EU will be increasingly be dependent on imported natural gas for the generation of its electricity. Concerns have been raised over Gazprom tactics of making deals with individual member states; which have weakened Europe’s ability to protect its security of supplies from disruption.

This huge dependence on non EU gas sourced production is causing concern in Brussels, in particular the increasing Russian market share of EU gas imports, especially given the political fallout that occurred in 2006 when Russia cut off supplies to the Ukraine. Present EU policy is to not permit European imports from Russia to exceed 200 BCM per year, a level expected to be reached in the 2010’s. Russia itself is also increasingly concerned that it is becoming too dependent on its energy exports to Europe. This proposed EU limit suits Russian owned energy giant Gazprom, due to its predicted lack of surplus export capacity in the 2010s, and the decreasing commercial attractiveness of European sales as compared with Russian domestic sales.

Nabbucco Pipeline – A Solution?

From Europe's point of view, one solution would be to obtain new sources of gas supplies from outside Russia. Amongst the solutions being supported by the European Commission is to build a new natural gas pipeline called Nabucco to link Europe to the gas fields in Central Asia and the Middle East via Turkey. The main advantage of this pipeline is that it would be free from Russian influence. It would not only supply Western Europe but also the economically depressed countries of South Eastern Europe. This 3,300 kilometre pipeline is expected to cost €4.6 billion euros and construction is due to start in 2008, with the first gas flowing in 2011. The European Commission, together with Nabucco Consortium partners Austria’s OMV, Hungary’s Mol, Rumania’s Transgaz and Turkey’s Botas see several advantages in this scheme.

It would eventually transport to Europe some 30 bcm of gas a year, about a fifth of the extra gas supplies Europe requires and, in addition,. Nabucco would help to meet Europe’s policy of aims of diversifying its sources of supply.

The pipeline would be built avoiding Russian territory and would provide access to new supplies to Western Europe, the South East European (SEE) states and Turkey. Since there would be a variety of countries supplying gas to Europe via the pipeline, it is believed that potential disruption to the pipeline would be reduced. The increased competition in the market would mean Russia’s Gazprom would have less power to determine European gas prices.

As for the SEE countries, half the gas would be for Balkan customers. Currently, these economically depressed regions have an energy infrastructure three times older than the rest of EU and their inadequate energy networks are hampering efforts for economic development. It is believed such projects as Nabucco would spur economic development investment in these economically depressed states.

Problems Facing Nabucco Construction

Unfortunately for Nabucco, there are many problems facing its realisation. For a start none of the gas supplying countries have shown any inclination to commit substantial volumes to the European market? It is also uncertain whether these states could be considered secure suppliers. Take Iran, its leadership is an anti western theocracy, while the others are more akin to military dictatorships. The question is, are such states more reliable than Russia as suppliers?

Other problems facing the Nabucco consortium project are that it appears to have lost momentum, the projects partners have still not agreed on financing or even in funding an additional partner. In fact, approaches by Gaz de France are expected to delay matters further, given the poor relations between Ankara and Paris over Turkey’s proposed entry to the EU.

In addition factors affecting Nabucco’s feasibility include increased steel prices, Gazprom’s deals with individual member states, construction of rival pipelines, and the time necessary for these former communist Balkan countries to modernise their energy infrastructure and economies.

A Solution?

Clearly Nabucco poses considerable problems which only a coordinated EU approach can resolve. Only a central EU agency could provide a single European voice that is so necessary for tackling Europe’s energy challenges?

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