South Stream, Nabucco competition escalates

01/06/2009

New steps to advance the realisation of the South Stream and Nabucco gas pipelines were taken in May, unleashing a new phase in the already tough competition between the two projects.

(Various sources -- 30/04/09 - 26/05/09)

The interruption of the Russian gas supply to Europe sparked the EU to step up is efforts to diversify the sources and routes of gas imports. [Getty Images]

The competition between the South Stream and Nabucco pipeline projects, both designed to pump natural gas into Europe, escalated sharply as new deals, both announced in a single week in May, gave each a boost.

Speeding up Nabucco

Top EU officials, the presidents of Azerbaijan, Georgia and Turkey, and Egypt's minister of petroleum signed a declaration in support of the EU's Southern Corridor energy initiative, including the Nabucco project, during a mini-summit on May 8th in Prague. Under the deal, the construction of the pipeline will be accelerated, helping to reduce the 27-nation bloc's dependence on Russian gas.

According to plans, the 3,300km Nabucco pipeline would run through Turkey, Bulgaria, Romania and Hungary to Austria, carrying 30 billion cubic metres of Caspian natural gas to Europe annually, once it becomes fully operational. The project, which has faced numerous delays since its inception in 2002, is now expected to be completed by 2014.

The consortium that will build and run the 9-billion-euro pipeline includes six companies -- Austria's OMV, Bulgaria's Bulgargaz, Hungary's MOL, Romania's Transgaz, Turkey's Botas and Germany's RWE.

Various obstacles -- including quarrels among the partners and uncertainty as to whether the project can mobilise the needed supplies to make it financially viable -- are blamed for the long delay in the pipeline's implementation. Another major hurdle was removed at the Prague meeting, after Turkey agreed to drop its demand to use 15% of the Nabucco gas for its domestic needs. It has also been insisting on collecting a "tax" on the gas entering the pipeline at the country's eastern border.

"We've agreed on cost-based transit. We're very close to a conclusion," EU Energy Commissioner Andris Piebalgs told British daily Guardian.

According to the Prague declaration, Turkey and the EU agreed to wrap up talks on an inter-governmental agreement on Nabucco "as quickly as possible" and sign it by the end of June in Ankara.

South Stream under Russia's influence

Kazakhstan, Turkmenistan and Uzbekistan representatives refused to sign the final declaration. The BBC quoted diplomatic sources as saying their move was due to pressure from Russia, which backs the South Stream pipeline project.

Europe currently imports about 150 billion cubic metres of gas annually from Russia, which covers about a quarter of its needs. Eighty percent of this is transported through Soviet-era pipelines in Ukraine.

European Commission President Jose Manuel Barroso (left) shows Turkish President Abdullah Gul (right) and Azebaijan President Ilham Aliyev documents after the signing of the Nabucco pipeline agreement plan on May 8th. [Getty Images]

A pricing dispute between Kiev and Moscow in January led to severe disruptions in gas deliveries, which came to a complete halt in some of the 20 European countries affected by the crisis.

Frustrated by the interruption of supplies, the EU stepped up its efforts to diversify the sources and routes of gas imports to curb its reliance on Russia. Nabucco and two other gas pipelines included in the Southern Corridor initiative -- both bypassing Russia and Ukraine -- were included in the bloc's list of priority projects.

Moscow wants the Kremlin-backed South Stream pipeline -- a new route for Russian natural gas exports to Europe -- also included in the EU diversification strategy.

During a meeting on May 15th in the Black Sea resort of Sochi, Russian gas giant Gazprom signed agreements with the main energy companies of four partner countries in order to speed up the implementation of the project. Under the deal reached with Italy's Eni, the other co-shareholder in a joint venture to build the pipeline, South Stream's capacity was increased from the initially planned 31 billion cubic metres of gas a year to 63 billion cubic metres.

The move fuelled more concerns about the EU's dependence on Russian supplies.

The separate agreements signed with the heads of the Bulgarian Energy Holding, Greece's natural gas company DESFA and Serbia's Srbijagas envision the creation of joint ventures to conduct feasibility studies on the construction of the pipeline's sections on their countries' territories.

South Stream includes a 900km section under the Black Sea to Bulgaria, where it will split into two branches -- a southern one via Greece to Italy and a northern through Serbia and Hungary, which would likely end in Austria, if it agrees to join the project.

Talks on Slovenia's inclusion are in their final stage and a deal is expected to be signed in June, according to reports.

The fight for gas

The day the agreements were signed in Sochi, Gazprom Deputy CEO Alexander Medvedev said his company was ready to buy the whole volume of gas from the Shah Deniz-2 field in Azerbaijan, which is slated for Nabucco.

"We believe that Gazprom would buy this gas with the main aim of providing trouble-free gas supply to Europe," Russian daily Moscow News quoted Natalya Milchakova, senior oil and gas analyst at financial company Otkritie, as saying. "Nevertheless, we do not rule out that the government, as Gazprom's controlling shareholder, could force the company to adopt such a decision in order to offset the potentially competing Nabucco project."

Gazprom Deputy CEO Alexander Medvedev said his company was ready to buy the whole volume of gas from the Shah Deniz-2 field in Azerbaijan, which is slated for Nabucco. [Getty Images]

On May 17th, OMV and MOL announced a 5.9-billion-euro project with United Arab Emirates' (UAE) Dana Gas and Crescent Petroleum that would allow them to pump natural gas from two fields in Iraq's Kurdish region and fill the Nabucco pipeline.

According to OMV, production from both sites could reach 3 billion cubic feet of natural gas per day within the next six years.

"These volumes will initially satisfy the requirements of local industry with substantial quantities available for export to destinations, primarily Turkey and Europe, via the planned Nabucco pipeline," the Austrian company was quoted as saying in a statement.

But the optimism proved short-lived, as Baghdad immediately rejected the scheme.

"We will not allow any side to export gas from the region without the approval of the central government and the Iraqi oil ministry," Iraqi Oil Minister Hussain al-Shahristani said on May 18th.

As a result of the deal, the two-based UAE companies now each hold a 3% stake in MOL, Hungarian media reports said.

But it is another move that has sparked greater concerns about Russia's attempts to sneak into the European energy market through the back door.

Recent reports showed that oil and gas producer Surgutneftgas, Russia's fifth-largest company, became MOL's biggest shareholder in a quick move in the end of March. It acquired OMV's entire 21.2% stake in the Hungarian firm -- the second largest on the energy market in Central Europe -- for a record 1.4 billion euros.

Another Hungarian energy company changed hands in an equally non-transparent fashion. Ukrainian businessman Dmytro Firtash, the owner of gas distributor Emfesz, which controls at least 20% of the Hungarian gas market, found out on April 28th that his company was transferred to RosGas AG.

RosGas will be controlled by gas distributor Overgas Inc., a Bulgarian middleman company, Russian daily Vedomosti's energy expert, Irina Reznik, wrote in a report on May 7th. Gazprom holds only 0.49% of the Bulgarian gas trader's shares, while its exporting arm, Gazprom Export owns 49.51% of the company. Gazprom Deputy CEO and Gazprom Export CEO Alexander Medvedev chairs Overgas Inc.'s board.

"Everything is murky in this part of Europe where Russia continues to expand its grip over energy sector," a New York Times report on May 13th quoted Agata Loskot-Strachota of the Center for Eastern Studies in Warsaw as saying. "It is doubtful if the EU can ever have an effective energy security policy as long as the sector lacks transparency."