MONTREAL - The signing this week of a transit agreement to govern the Nabucco
natural gas pipeline marks an important staging post in bringing to reality the
long-touted energy route, which is projected to run 3,300 kilometers from the
Caspian Sea region to Europe. Yet it is important to understand what such a
transit agreement is intended to do - and what it is not intended to do.
The agreement, signed in Ankara on July 13 by government representatives of
Austria, Bulgaria, Hungary, Romania and Turkey, is best understood by
comparison with the contract structure that made the Baku-Tbilisi-Ceyhan (BTC)
pipeline possible. Four formally bilateral series of inter-governmental
contracts were initialed by Turkey, Georgia and Azerbaijan at a summit of the
Organization for Security and Cooperation in
Europe in Istanbul in November 1999. Only one of these was a transit agreement.
The others included a cost guarantee agreement, the pipeline agreement itself,
and the construction contract.
These are naturally interrelated in a complex and inseparable ways. Formally
speaking, they were a series of bilateral inter-governmental agreements with
side agreements involving energy-industrial concerns. The transit agreement
basically concerned the responsibilities of governments and investors; the cost
guarantee, those of governments; the pipeline agreement, those of governments,
investors and the pipeline management and operating authority to be created;
and the construction contract, last three plus the contractors.
Today the skepticism about Nabucco echoes almost point-for-point the skepticism
surrounding the BTC a decade ago. To observe this is not to ordain that Nabucco
must be built but rather to establish proper perspective. For example, although
it is said that there are no committed supplies, nevertheless in June 2008
Bulgaria agreed to buy one billion cubic meters per year (bcm/y) of gas from
Azerbaijan, equivalent to one-eight of the pipeline's first-phase capacity, and
over one-sixth of Bulgaria's requirements. Yet throughput volume for the BTC
pipeline had not been guaranteed at the time of the 1999 Istanbul agreements
either.
The potential sources of natural gas for the Nabucco pipeline are many, some
more realistic than others. Although Azerbaijan agreed to sell Russia 0.5 bcm/y
of gas from the first stage of its Shah-Deniz development beginning next year,
and coupled with what according to Gazprom chief Alexei Miller is a guaranteed
price that other buyers would have to beat for access to the deposit's second
stage, nevertheless it is likely that some gas from Shah Deniz Two will flow
through Nabucco. How much gas from Shah Deniz eventually goes to Russia will
also depend in some degree upon how well Russia is able to leverage its
influence over Armenia for a resolution of the Nagorno-Karabakh conflict in a
manner consonant with Azerbaijan's interests.
Azerbaijan has not officially confirmed its participation beyond the quantities
promised to Bulgaria but already last year turned down, explicitly for
"non-commercial" (read geopolitical) reasons, an offer from Moscow to purchase
the whole of its gas production indefinitely into the future (see
Euro-Caspian energy plans inch forward, Asia Times Online, November 27,
2008, and Azerbaijan
can look the other way, Asia Times Online, May 8, 2009).
In July last year, Azerbaijan's President Ilham Aliev reported new estimates
reserves at Shah-Deniz that doubling the original figures from 600 bcm to 1,200
bcm. At that time, potential finds in five new fields were separately reported
by industry figures. Azerbaijan's gas reserves exceed a century of the
country's consumption at current rates, and these reserves are set for upward
revision.
Egypt, Iraq, and Syria have declared a readiness to supply gas, but these are
unlikely in the near and quite possibly also the distant term. Turkmenistan
recently declared that it was also ready to do supply gas, and indeed
Turkmenistan already supplies gas through interconnections with Azerbaijani
rigs in the Caspian sea that flow on into an international network reaching
Europe ( see New
chance for Trans-Caspian pipeline, Asia Times Online, February 28,
2007).
Other possible modalities for Ashgabat's gas to enter Nabucco are through the
long-discussed Trans-Caspian Gas Pipeline and via liquefaction in Turkmenistan
and re-gasification in Azerbaijan. The route through Iran is unlikely anytime
soon, despite the strong representations in favor of this option by Turkish
Prime Minister Recep Tayyip Erdogan. Turkmenistan's announcement that it is
increasing its exports to Iran from 8bcm/y to 14 bcm/y represents only the fact
that consumers in northern Iran desperately need the gas and not the
inevitability of Iran's becoming a transit state.
Indeed, Turkey's past experience with Iran, from which it has imported gas for
some time, has not been propitious, as planned volumes have rarely been
attained and Tehran has shown itself to be unreliable in matters of respecting
agreed price and quality contracts.
These are among the very same reasons why India chose not to participate in the
once-touted Iran-Pakistan-India natural gas pipeline. Moreover, even before the
recent accusations of fraud in Iran's presidential elections and the brutal
suppression of unarmed demonstrators in the streets, Iran was unable to offer
the predictable sort of business environment and workable legal framework that
the recently signed agreements in Ankara offer to the Nabucco partners. This
politically directed economic irrationality accounts, more than anything else,
for the conditions of the Iran's energy infrastructure and its difficulties in
finding foreign partners.
Moreover, Europe has endorsed the principle of holding Iran to account for its
nuclear development program in light of Tehran's repeated malfeasance as
reported by the International Atomic Energy Agency and to fulfill its
obligations under multiple UN Security Council resolutions related to the
matter. Regardless what one thinks of this, the fact is that Iran's various
acts of commission on the one hand and omission on the other have alarmed the
European Union and its members to the point where any energy trade is highly
unlikely for the foreseeable future.
Three months ago, Turkmenistan signed a long-term agreement permitting the
Nabucco participating firm RWE, a German energy colossus, to engage in
development of offshore gas fields and also, notably, gas deliveries. In
November last year, following Turkmenistan President Gurbanguly
Berdimuhamedow's visit to Germany, RWE created with the Austrian company OMV,
another Nabucco principal, the joint-venture Caspian Energy Company for the
specific purpose of designing ways to take Central Asian gas across or under
the Caspian Sea for destination in European markets.
Beyond this, gas from Kazakhstan's massive offshore Kashagan deposit will need
to find somewhere to go (it is illegal to flare it into the atmosphere) when
the crude oil under it begins to be pumped out. The pressure under the salt
dome makes it unnecessary to pump that gas back in, although it could
conceivably go to Tengiz onshore for such a purpose. More economical and
sensible, however, would be to consider the Nabucco option for it when the time
comes.
Thus the transit agreement is as much a political declaration as an economic
document, perhaps even more so. A pipeline that goes through more than two
countries always raises questions about how to split up financing.
Consequently, the objection that financing has not been found (which was voiced
following the BTC signings), while not irrelevant today, is not quite to the
point either. With the transit agreement, a major and necessary piece that
establishes important certainties about the business environment is in place.
Indeed, it should be no surprise that European banks are now ready to talk
about financing.
In particular, at the Budapest summit of the European Commission at the end of
January this year, the European Investment Bank (EIB) and European Bank for
Reconstruction and Development (EBRD) declared their readiness to back the
Nabucco pipeline financially. Also at the summit, the European Commission
directed that 250 million euros (US$351 million) of its anti-crisis Economic
Recovery Plan should be channeled into the Nabucco pipeline through the EIB.
The European Council ratified this decision two months later, overcoming strong
contrary representations by Germany, which favors instead its own bilateral
cooperation with Russia in the projected North Stream pipeline (see
Europe keeps Nabucco on life-support, Asia Times Online, March 27,
2009).
Indeed, a consortium such as Nabucco's, having multiple members, naturally
finds it hard to act on a financing strategy. This is one of the reasons why
clarifying the legal framework and applicable tax law in Turkey has been a sine
qua non. These were major sticking points between Turkey and the EU
that were overcome in the breakthrough Prague summit just two months ago.
According to reports in Turkish media, Turkey's insistence on taking 15% of the
Nabucco gas at concessionary rates for internal consumption has been finessed
by the agreement of the Nabucco consortium's partners to return to Turkey
between 50% and 60% of their share of the project's tax revenues (worth up to
$650 million).
This makes sense prima facie, as one of the last stumbling blocks for
the BTC was overcome by an analogous gesture by Azerbaijan's then-president
Heydar Aliev, who magnanimously offered in March 2000 to give over to Georgia
all of Azerbaijan's pipeline tariffs.
Finally, it is said in criticism that there is no map of how the Nabucco
pipeline would run. Given this, it is hardly surprising that financing is not
agreed, since cost estimates until now have been approximate and not linked to
particular agreed construction tasks. But a map is not to be expected yet. The
analogy of building a house is instructive.
There are three stages to both building a house and building a pipeline. The
first is to survey the land, draw some sketches, and estimate approximate
expenditures. This stage is largely complete and is the basis for numbers cited
in the press as to length, costs and throughput.
The second stage is detailed engineering. In the analogy to a house, it is like
bringing in the architects and deciding how and where to install the power
lines, drainage and so forth. If Nabucco reaches this stage, then it is a very
fair bet that it will in fact be built: for this stage is reached only if the
financiers really think the house (or pipeline) is going to happen.
It is that second stage that the multi-party transit agreement is designed to
help prepare. Indeed, at least preliminary work on the crucial second stage
seems to have been under way for some time, as the authoritative industry
publication Upstream reported in January 2008 that the pipeline partners had
named the UK-based consultancy Penspen to "assist [them] in setting up and
managing local front-end engineering and design contractors" in all five
countries (Austria, Bulgaria, Hungary, Romania, and Turkey), including the
preparation of packages for tendering subsequent stages up to and probably
including the actual construction. As in the house-building analogy, the third
stage of a pipeline project then becomes the actual construction.
It is worth concluding on the point that Nabucco received an additional boost
in Bulgaria this month that was not much noticed. This was the victory of
political party Citizens for European Development of Bulgaria (GERB in
Bulgarian, usually qualified in the foreign press as "center-right") in the
July 5 parliamentary elections, where it gained nearly half the seats (116 out
of 240) and named Boyko Borisov as its candidate for prime minister.
This development is significant because Bulgaria is the landfall country for
the South Stream natural gas pipeline project touted by Russia as a complement
to the aforementioned North Stream. Despite disclaimers on all sides, South
Stream is intended as a Nabucco-breaker, just as the Russo-Turkish Blue Stream
natural gas pipeline in the late 1990s was intended to break momentum for the
Trans-Caspian Gas Pipeline from Turkmenistan to Azerbaijan and the natural gas
South Caucasus Pipeline (also called BTE for Baku-Tbilisi-Erzurum), which now
takes gas only from the Shah Deniz's first stage into Turkey.
A decision by Borisov's government to remove Bulgaria from participation in the
South Stream project could kill it. At a minimum, the South Stream project has
now entered a limbo of indefinite duration, and it has done so just at a time
when Nabucco is looking more real than ever.
Dr Robert M Cutler(http://www.robertcutler.org), educated at the
Massachusetts Institute of Technology and The University of Michigan, has
researched and taught at universities in the United States, Canada, France,
Switzerland, and Russia. Now senior research fellow in the Institute of
European, Russian and Eurasian Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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