Eurasia Daily Monitor

February 8, 2008 — Volume 5, Issue 25

NABUCCO PROJECT APPROACHING A REAL START

by Vladimir Socor

Germany’s Rheinisch-Westfaelische Elektrizitaetswerk (RWE) has joined
the EU- and US-supported Nabucco pipeline project for Caspian gas to Europe.
RWE is Germany’s largest energy company overall and second-largest gas
distributor. On February 5 in Vienna, the Nabucco consortium’s five founding
companies — Austria’s OMV as project leader, Hungary’s MOL, Romania’s
Transgaz, Bulgaria’s Bulgargaz, and Turkey’s Botas — signed with RWE the
agreement on the latter’s accession to the consortium. From this point on,
each partner shall own a one-sixth stake (16.67%) in the pipeline project
>From Turkey to Austria. New top management at RWE in recent months
negotiated its entry into the consortium to diversify import options.

The Essen-based RWE delivers some 40 billion cubic meters of gas
annually from various import sources to German municipalities, households,
industrial consumers, and electricity-generating plants. RWE expects to
receive 2 billion cubic meters of Caspian gas annually through Nabucco’s
first phase and 5 billion cubic meters per year through the project’s second
phase. RWE also intends to supply gas to Central European countries,
expanding there from the small market positions it currently holds in the
Czech Republic, Hungary, and Poland.

RWE’s competitor (also Essen-based) E.ON Ruhrgas is Germany’s largest
gas transport and distribution company. A historic partner with Russia,
Ruhrgas is a 6% shareholder in Gazprom and a participant in the Nord Stream
pipeline project on the Baltic seabed from Russia to Germany (Handelsblatt,
Financial Times Deutschland, February 6).

Gaz de France (GDF), the largest gas distributor in that country, also
seeks to enter the Nabucco consortium. On February 4 Romanian President
Traian Basescu announced in a joint press conference with French President
Nicolas Sarkozy in Bucharest that Romania would support GDF’s accession to
the Nabucco project in addition to RWE and on the same parity basis. On the
following day, Romanian Minister of Foreign Affairs Adrian Cioroianu
announced that the government would offer the French company a stake in the
Romanian section of the planned Nabucco pipeline. At present, GDF is the
majority shareholder in the gas distribution network for southern Romania
(including Bucharest) and in two gas storage sites to be further developed
in Transylvania (Rompres, Mediafax, February 4, 5).

Hungary’s MOL immediately welcomed Basescu’s initiative and the
potential contribution of Gaz de France to the Nabucco project’s
implementation. However, immediate reactions from the Austrian and Bulgarian
sides evidenced some surprise and misgivings at this move.

Turkey opposes GDF’s participation. Ankara had in 2006-2007 suspended
its negotiations with GDF in view of France’s receptiveness to Armenian
genocide claims. Following the election of Sarkozy as president, Ankara is
also increasingly displeased with French insistence that Turkey be kept out
of the European Union. Moreover, Turkey would favor a strong gas-extracting
company, with field operations in the region, for joining the Nabucco
consortium. Turkey also wants the consortium’s pipeline to start from Ankara
westward, so that Turkey would itself build and own the pipeline section
>From the country’s eastern borders to Ankara.

The absence of a major Western or Western-friendly producer company,
with gas resources of its own, has long been noted as a weakness in the
Nabucco project. Its six member companies, as well as GDF, are primarily
transmission and distribution companies, with relatively small-scale
extraction operations. Azerbaijan’s State Oil Company, a partner in the
BP-led Shah Deniz project for gas extraction, is now being mentioned as a
possible entrant to the Nabucco consortium.

Also on February 5, the Nabucco consortium appointed Penspen Onshore
and Offshore Pipeline Consultants to coordinate and supervise detailed
planning of the pipeline that would run from eastern Turkey to Vienna. The
London-based Penspen is involved in engineering projects in nearly 20
countries worldwide.

The consortium, Nabucco Gas Pipeline International, was founded in
2002 by the five transit countries at Austrian initiative. Since then,
Russia’s monopolization of eastern Caspian gas and U.S. prohibitions on
development of Iranian gas delayed the project’s start year after year. The
latest planning adjustments, made public during the signing event in Vienna,
envisage the following sequence: Investment from banks and supply contracts
with consumers to be secured during 2008; start of construction work in
2009; completion of the pipeline’s first phase in 2013, to carry 10 billion
cubic meters of Caspian gas annually; and completion of the second phase by
2018, boosting the capacity to 31 billion cubic meters per year.

Construction costs are now estimated at 6 billion (up from the 2007
estimate of 5 billion). According to the project’s general director,
Reinhard Mitschek, the consortium expects its stakeholders to cover 30-40%
of those costs, the remainder to be raised from private investors or
institutional ones, such as the European Investment Bank or even the World
Bank (Die Presse, February 5).

Nabucco and the Kremlin-backed South Stream project are racing each
other for gas supplies in Central Asia and markets in Central Europe. While
the EU and some of the Nabucco partners are loath to acknowledge the
political-strategic implications of this contest, the Kremlin and Gazprom
pursue South Stream largely in that vein. Although both projects are still
in the planning stage, Russia is already offering long-term supply,
pipeline, and storage deals to Nabucco countries and their neighbors. The
Nabucco consortium is not yet in a position to make such offers without
access to Central Asian or Iranian gas for its second phase. At last, the
project is now approaching a real start of its first phase relying on
Azerbaijani gas via Georgia.

(Wirtschaftsblatt, MTI, Turkish Daily News, Dow Jones, February 5-7)

–Vladimir Socor

From: Emil Lazarian | Ararat NewsPress