Nabucco: time to firm up the gas

The 3,300-kilometer-long pipeline, which is expected to cost up to $10 billion, will need 31 billion cubic meters of gas per year. This is equal to one-fourth of Russia's projected natural gas to Europe in 2009. However, where this gas will actually come from still remains to be seen, which is problematic given that investors into the project need to be convinced of its viability and work on building the pipeline can only start once gas has been contracted. So far no gas has been contracted and investment is still pretty thin on the ground. Furthermore, the ongoing economic crisis and reduced levels of gas consumption in the EU are not helping either. Therefore, there is an urgent need to go shopping for gas.

With proven gas reserves of some 850 billion cubic meters, Azerbaijan is top of the shopping list for Nabucco. Azerbaijan's leadership welcomed Monday's developments and has stated that Nabucco would be a priority project for them. Indeed Baku has been extremely patient, waiting some considerable time for the Nabucco Consortium to get its act together and have continued to promise -- but as of yet not committed themselves to specifics on paper -- to supplying gas to the project. Precise volumes remain unclear and it is unlikely that the final volume agreed would be sufficient in the long term to fill Nabucco's capacity, and to make Nabucco financially viable it needs to be operating on high capacity.

Furthermore, there should be no room for complacency with our Azerbaijani friends as Baku has plenty of options on the table and has made it very clear that it is in their own strategic interests to spread their gas around and be involved in as many different projects as possible, whether that be with Russia, Iran or the West. Their loyalty is to themselves and getting the best deals they can get to benefit the transformation of their country which is already under way. The recent deal that Baku signed with Gazprom was extremely profitable and clearly the Russians would like a lot more given that their aim is to hold on to the monopoly they currently have over the EU market. Nevertheless, Azerbaijan may not be keen to give too much more to the Kremlin unless the Russians can give them something much bigger than money in return.

Here I am talking about a deal on Nagorno-Karabakh, starting with the liberation of the seven Azerbaijani territories currently occupied by Armenia. The return of these territories is the number one priority of Azerbaijan and if Russia could deliver something on this, it would be a highly tempting offer for Baku. Therefore, it is vital that no more time is lost and the EU gets Azerbaijan to sign a deal as soon as possible. Indeed, now that the Turkish problem is out of the way, Azerbaijan remains the key to the whole project. Only once Azerbaijan is on board will Nabucco start to look like it is seeing the light of day as in the short term all other gas sources are distant prospects. Turkmenistan may now be keen to sell its gas to the EU market, but that is hardly surprising given that it has been put in an extremely crippling economic situation following the Russian decision to cut its gas contracts that were worth 85 percent of Turkmenistan's income. But at the same time they also have the closer and increasingly lucrative Chinese market. China has intensified efforts to tap into Central Asia and next year a new pipeline between China and Turkmenistan is expected to come into effect.

Iraq, Egypt and Iran are also seen as potential suppliers but at a later stage. While the EU market is attractive due to its stability and price conditions, the flip side is that these countries do not have infrastructure in place for gas export, which will be a lengthy and costly affair that rules them out for the short term. And in the case of Iran -- the only country which could totally fill Nabucco -- the ongoing political situation would also make it difficult at the present time for the EU to do business with Tehran. As for Russia, more than likely the Kremlin may have too much “pride” to declare allegiance (just yet anyway) to a project it has worked so hard to undermine. They are bound to have a few more surprises up their sleeve.