Eurasia Daily Monitor

September 19, 2007 — Volume 4, Issue 173

NABUCCO GAS PIPELINE PROJECT IS BACK ON TRACK

by Vladimir Socor

All players involved in the Nabucco gas pipeline project got their act
together at a conference on September 14-15 in Budapest. The European Union
demonstrated for the first time a hands-on commitment to the project. The
Hungarian government announced its re-commitment after a year’s wavering.
Azerbaijan’s Energy and Industry Minister, Natig Aliyev, confirmed his
country’s willingness to help kick-start Nabucco’s first phase from the
Shah-Deniz gas field’s first and second production phases, pending solutions
to Central Asian gas supplies for Nabucco’s second phase. The United States
had worked quietly with all these parties.

The European Union’s Energy Commissioner, Andris Piebalgs, termed
Nabucco `an embodiment of the existence of a common European energy policy’
in his speech at the conference. He announced the appointment of Jozias van
Aartsen, former minister of foreign affairs of the Netherlands, as EU
coordinator of the Nabucco project, with a four-year mandate. The EU had
included Nabucco among the four top-priority energy projects already last
year, but the Commission took a long time before filling the coordinators’
posts.

The proposed pipeline would originate in eastern Turkey and run for
3,300 kilometers via Bulgaria, Romania, and Hungary to Austria, with a
projected capacity of 30-35 billion cubic meters of gas annually. The
consortium includes Turkey’s pipeline company Botas, Bulgaria’s pipeline
operator Bulgargaz, Romania’s Romgaz, Hungary’s MOL, and Austria’s OMV as
project leader. The initial feasibility study, funded by the EU and
completed in 2004, awaits updating. The cost of building the pipeline is
currently estimated at 5 billion.

The consortium seeks a sixth participant company in Western Europe. At
the Budapest conference, top executives of Germany’s RWE and of Gaz de
France announced the respective companies’ willingness to seriously consider
joining the consortium. RWE, a major energy conglomerate in northwestern
Germany, also announced its availability to invest up to 1 billion in
Caspian upstream operations. Gaz de France — which is now merging with the
other French champion, Suez, into GDF-Suez, to be 35% state-owned — had
earlier begun negotiations to join Nabucco and confirmed its interest at
this conference.

French President Nicolas Sarkozy, on a visit to Hungary that coincided
with the Nabucco conference, encouraged GDF to support the Nabucco project.
Sarkozy, who is the son of a Hungarian post-war refugee to France, addressed
the Hungarian parliament to underscore his support for a common EU policy on
energy and, specifically, for the Nabucco project to reduce dependence on
Russian gas.

Hungarian government leaders did their best to dispel the year-old
perception that they would go for Gazprom’s Blue Stream-Two pipeline
project, which is Nabucco’s rival. Prime Minister Ferenc Gyurcsany and
Economics Minister Janos Koka (Socialist and Free Democrat, respectively)
delivered keynote addresses re-committing the government to Nabucco. The
prime minister pledged `Hungary’s total support,’ as `it would be dumb for a
country or a region to feel content with a single supplier.’ In an
accompanying statement, Koka admitted, `We were mistaken in repeating too
often that the [Nabucco] project was just a dream, and so we actually
contributed to the project’s remaining a dream.’

Left almost unsaid was the opposition Fidesz party’s consistent
political support for Nabucco, leading ultimately to the formation of a
cross-party Hungarian consensus in favor of the project.

The project’s financial picture looks encouraging, on the whole. The
consortium expects to cover 70% of the construction costs through bank
loans, primarily from the European Investment Bank, which clearly shows
interest in the project. The consortium is also in discussions with the
European Bank for Reconstruction and Development and other institutions.
Some of the consortium’s companies or governments are, however, reluctant to
contribute to the remaining 30% portion of the construction costs.

The consortium, Nabucco Gas Pipeline International, hopes to reach
decisions in the coming months with regard to choosing the sixth participant
company, preparing the inter-governmental agreements, front-end engineering
for the pipeline’s construction, and its first-phase financing. The
consortium’s managing director, Reinhard Mitschek, presented a rather
ambitious calendar for these steps, expecting construction work to begin in
2009. In that case, the first gas should flow through the pipeline in 2012.

Azerbaijan is waiting to be approached with specific, binding
contracts on a take-or-pay basis for gas supplies to the Nabucco pipeline’s
first phase. But this can only be a stopgap solution, if the pipeline is to
be used at the projected capacity — that is, if the project looks
commercially viable in order to line up the investment funds. That issue in
turn hinges on opening direct access to Central Asian gas or Iranian gas,
assuming a major U.S. and EU engagement to resolve the political issues
involved.

–Vladimir Socor