Indeed, the signing of the Memorandum of Understanding between Azerbaijan and Turkey in December for the establishment of a consortium to build the Trans-Anadolu Gas Pipeline (TANAP), which would transport gas from the SD2 gas field to Europe through Turkey, has led to speculation that this could be the end of Nabucco, which has been under discussion since 2002.
From Baku’s point of view, TANAP, as a bilateral initiative between Turkey and Azerbaijan, could stabilize and improve bilateral relations with Ankara. With regard to the economic motivation, Baku demonstrated through its commitment to TANAP that it is much more interested in the ownership of a strategic pipeline, beyond the diversification of its export routes and that it would prefer to concentrate on strategic, future-oriented pipeline projects, which could be more profitable. Under the TANAP proposal, Azerbaijan will be the majority shareholder and pay less in transportation fees. Moreover, it does not want to carry the financial burden of Nabucco alone. The general strategy of the State Oil Company of Azerbaijan (SOCAR) also played a role in Baku’s preference for TANAP. SOCAR is investing in the downstream market in Turkey and some Eastern European countries (mainly refineries, petrochemicals, petrol and stations).
At present, the signing of the final agreement of TANAP has been postponed, although it is likely to be concluded within the next month. Until then, both sides will try to resolve the remaining questions. In the final agreement it will be clear that Azerbaijan will keep its 80 percent stake, and more than 50 percent ownership; the final version will also address other minor issues that have not yet been publicized.
Meanwhile, increasing dependence on Russian energy resources has led European policy-makers to develop several proposals for alternative energy supply and routes. Of the three planned pipeline projects in the Southern Corridor (ITGI, TAP and Nabucco), the European Commission pledged its support for Nabucco and argued that this initiative is the only one that will truly enable the diversification of Europe’s gas supply. Despite this argument, BP has announced a plan for its own South East Europe Pipeline (SEEP), which would transport gas from SD2 to Europe.
In support of Nabucco, the European Commission was actively involved in negotiations between the Nabucco consortium and the supplier countries, and did its best to present a unified voice. But at the same time, Germany was conducting talks with Moscow over the rival Russian South Stream proposal, and since June 2007, there have been ongoing negotiations with the countries through which the pipeline will pass. Moscow sought Germany’s help on this project, and interestingly, German energy company RWE announced a few days ago that it might abandon the Nabucco gas pipeline project, a signal of the direction Germany is leaning. Russia seems comfortably assured of Berlin’s support, its partner in the existing Nord Stream pipeline across the Baltic Sea.
Beyond the legal and technical issues, the newly launched proposal for the shorter Nabucco West pipeline clearly demonstrates the importance of TANAP. Nabucco XL, which would have run from the Caspian coast, and Nabucco Classic, which would start from the Georgian Turkish border, were both replaced by the TANAP proposal. Even Nabucco West seems under threat, as it does not seem to be compatible with BP’s SEEP project. There is uncertainty about the available reserves of Turkmen gas, and there is no pipeline connecting Turkmen gas to Baku’s fields. Furthermore, both Russia and Iran oppose this project from a geopolitical point of view. To this end, both countries have raised obstacles to its realization -- the disputed legal status of Caspian Sea and various environmental concerns have led to proclamations from Tehran and Moscow that any Caspian basin projects must gain unanimous consent from all the littoral states.
The problems described above, along with the lack of a clear strategy, rendered Nabucco less commercially attractive for private investors; in contrast, BP’s SEEP sought to present a more narrowly fixed and cheaper route. There is an additional factor that fits Azerbaijan’s interests more: the South East European market is strategically relevant for Azerbaijan because gas prices there are 25 percent higher and the regional countries buy nearly all their gas from a single supplier, Gazprom, which enables the supplier the power to set the price through long-term contracts. In this regard, Azerbaijan could challenge the status quo and provide more favorable terms. There is another factor at play: Azerbaijan prefers the small, more clearly defined, cheaper and less politicized option over the more elaborate, expensive and politically sensitive one, and thus TANAP’s profile is rising. It is the first Azerbaijani route for which the country will have majority ownership. Finally, SEEP proposes building a new pipeline, which would be the continuation of TANAP starting from the Turkish Bulgarian border and stretching to Bulgaria, Romania and Hungary. The infrastructure would be financed half by private energy companies and half by the national operators of those countries -- Baku will be happy to see some of the financial burden shared with regard to project investment.
Taking into account these various possibilities, Nabucco West may have a better chance of winning if it undergoes changes to its commercial structure, although by all accounts SEEP will likely prevail. And although Nabucco West is an improvement over previous versions, and while it has never been truer that “oil is money, gas is politics,” it seems that Turkey and Azerbaijan are seeking a less politicized future for the energy sector, one that prioritizes stable support and guaranteed profits.