The Nabucco Project

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The Nabucco Project

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Title: The Nabucco Project

1
The Nabucco Project
TURKISH COMPETITION AUTHORITY

Mustafa Oguzcan Bulbul
Senior Competition Specialist
Turkish Competition Authority
5th Emerging Europe Energy Summit
October 21th 2009, Prague

2
Agenda
TURKISH COMPETITION AUTHORITY

What is the Nabucco Project?
Technical Details of the Nabucco Project
The SWOT Analyses of the Nabucco Project
Conclusion

3
What is the Nabucco Project?
TURKISH COMPETITION AUTHORITY

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TURKISH COMPETITION AUTHORITY

A project which all, including the European
Commission and politicians, seem to accord
priority to, but which never seems to acquire
enough momentum
A project which is much more than just about gas
A project which might be the glue that keeps
both Europes energy policy and Europes
engagement with the states around the Caspian Sea
together

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TECHNICAL DETAILS OF THE NABUCCO PROJECT
TURKISH COMPETITION AUTHORITY

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TURKISH COMPETITION AUTHORITY

The Nabucco project represents 3,300 km gas
pipeline connecting the Caspian region, Middle
East and Egypt via Turkey, Bulgaria, Austria,
Romania, and Hungary with the Central and Western
European gas markets
According to market studies the pipeline has been
designed to transport a maximum amount of 31
bcm/y
Estimated investment 7.9 billion Euro

Opening a new gas supply corridor for Europe
Enhance the transit role of the participating
countries along the route
Contributing to the security of supply for all
partner countries, and also for Europe as a
whole.
Strengthening the role of the gas pipeline grids
of all Nabucco partners in connection with the
European gas network

STRATEGIC GOALS OF THE PROJECT

Nabucco Gas Pipeline International GmbH, was
established on June 24, 2004
Headquarter of the Company is in Vienna.
The company is directly owned by the Nabucco
Partners and is responsible for the marketing of
the pipeline capacity

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THE SWOT ANALYSES OF THE PROJECT
TURKISH COMPETITION AUTHORITY

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TURKISH COMPETITION AUTHORITY

Strengths
Weaknesses

Political support from the European Union (EU)
and the United States (US)
Russian-Ukraine dispute
High demand growth potential
Declining production Russian gas fields

Lack of finance
Lack of coherent strategy of the US and EU
Ambiguity about the sources of gas to feed the
pipeline

Opportunities
Threats

Alternative Pipeline projects
Divergence of interests and different priorities
of the European decision-makers
Absence of reliable agreement between the EU and
Russia

Major incentive to solve the problems between
Turkmenistan and Azerbaijan
Reconfigure the Eurasia continent which is
neither controlled by OPEC nor Russia

9
STRENGTHS
TURKISH COMPETITION AUTHORITY

(1) Political support from the EU and the US
Despite historical positions, the US and EU must
accept the necessity of using their political
and economic influence to prevent or ameliorate
threats to the supply security of the EU the
market alone will not address energy security
concerns.
In this regard, the US has demonstrated its
commitment in supporting the Nabucco Project
politically like they did for Baku-Tiflis-Ceyhan
(BTC) oil pipeline project in the past in order
to create and alternative route to Russian
pipelines
While the US has demonstrated dedication to the
further development of the Nabucco Project, the
EU has been indecisive and demonstrated little
political willingness to realize the Nabucco
Project up until the Russian-Ukraine crisis in
2006 and 2009

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TURKISH COMPETITION AUTHORITY

After these crisis, the EU Energy Commissioner
discussed the Nabucco project during his
successful visit to Turkey in November 2008
Turkey and the European Commission jointly
developed an initiative to set up a joint venture
to be known as the Caspian Development
Corporation
The first Intergovernmental Conference to discuss
Intergovernmental Agreement was held in Brussels
on January 22-23, 2009
The Nabucco Summit held in Budapest on the 27th
of January 2009.
Following up with these strategic steps, another
meeting about the Nabucco project took place in
Vienna on 5-6 February, 2009
The EU then signed an agreement in early May,
2009 with Azerbaijan, Georgia, Turkey and Egypt
to revive the pipeline talks
Finally, the leaders of five partner nations of
the project signed a breakthrough
intergovernmental agreement about the Nabucco
project on July 13 2009 in Ankara

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TURKISH COMPETITION AUTHORITY

(2) Russian-Ukraine Dispute
The 23rd EU-Russia summit on May 22, 2009, held
in the Russian Far East city of Khabarovsk,
brought no solution to the transit problem as
Russia refused to give any assurance to the
Europeans, while President Dmitry Medvedevs idea
that the EU provide more credit to Ukraine to
help with the transit costs met rejection from
the Europeans
Meantime, Gazproms Alexey Miller noted that if
Ukraines Naftogaz was unable to make gas
prepayments in full, it would get as much gas as
it pays for and there was no question of cutoffs
However, since Ukraine and Russia have not
developed a mutually-agreeable payment solution
for gas purchases, and none of the three parties
have made a bona fide effort to resolve the
transit problem, future gas cutoffs are
inevitable.
Thus, the Nabucco project has recently become
more valuable than ever from the EUs supply
security point of view

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TURKISH COMPETITION AUTHORITY

(3) High Demand Growth Potential

The EU, with a population of 500 million and
enlarging economy, has had one of the largest gas
markets in the world in the past decade.
The EU will become more dependent on imported
energy over the next 25 years as it grows, and
the burden of meeting its growing energy needs is
likely to fall on natural gas.
According to Stratfor, Europes projected
increase in natural gas imports is currently set
to quadruple from 200 billion cubic meters (bcm)
in 2002 to 850 bcm by 2030
The most significant reason for an increase in
natural gas use is environmental.
Power generation is the main driver of energy
demand in the EU and the largest source of its
greenhouse gas emissions. Thus, bounce in
expected natural gas demand of the EU will come
largely at the expense of declining coal usage,
but will also result from projected declines in
the use of nuclear power and oil consumption in
electricity generation

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TURKISH COMPETITION AUTHORITY

(4) Declining Production of Russian Gas Fields
An important side-effect of Russias cap for
foreign ownership in the energy industry is a
neglect of long-term foreign investments into its
energy infrastructure.
In consequence, most of the Russian fields today
are underinvested and with the partial exception
of Siberias large Zapolarnoye-field, 13 the
large gas-fields in Western Siberia of Degoy,
Nadim, and Purtazowskoy have all reported
stagnating or declining production

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WEAKNESSES
TURKISH COMPETITION AUTHORITY

(1) Lack of Finance
The main factor determining whether the project
will get off the ground or not, is if its
investors decide that Nabuccos commercial value
warrants the associated risks of the project
Risks associated with clarity is the most
important part of financing efforts and it is
being greatly hindered by the lack of supply and
Iranian supply problem between the EU and US.
Therefore, useful lessons could here be learnt of
how a politically-driven and risky BTC oil
pipeline project in the end turned out to be a
commercially sound project by a coherent strategy
and a joint push from important actors of the
project.
In this regard, nothing precludes the Nabucco
pipeline project from a similar financing
structure and implementation as BTC
European Investment Bank has already committed to
finance up to 25 of the Project during the
Budapest Summit on the 27th of January 2009
In addition to that, European Commission
allocated 250 million Euros to help launch the
construction of the pipeline's first stage.

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TURKISH COMPETITION AUTHORITY

(2) Lack of coherent strategy
The USs primary concern with developing the
East-West corridor in the first place was to
assist Europe to diversify energy away from
Russia. On the other hand, European policy-makers
have shown little appreciation while Gazprom has
strengthened its dominance over Europes gas
supply. Hence a fundamental change in Europes
strategy seems long overdue.
Another reason hinders the trans-Atlantic
cooperation is the Irans participation to the
Nabucco project. While the US has vehemently
opposed Iran supplying the project with gas, EU
is still holding Iran in the potential primary
suppliers list of the project which has caused
strains on the trans-Atlantic relationship.
It is a paradox that the Nabucco projects
postponement and Irans participation largely is
the result of a non-issue. The consequences are
also uniformly unfortunate for all actors
involved. It has both caused a trans-Atlantic
rift over the issue while US-Turkey relations
have deteriorated. Technically, in the short and
medium term, underinvested Iranian fields could
not be an alternative supplier for the Nabucco
project
Thus, in order to have quick progress in the
project, the single most important factor is that
the Europe and the US pursue a coherent strategy,
involving some degree of new thinking to realize
the joint interests of both sides.

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TURKISH COMPETITION AUTHORITY

(3) Ambiguity about the sources
The construction of the Baku- Erzurum gas
pipeline and the development of Shah Deniz have
made Azeri supplies more attractive in the short
run.
Azerbaijan is the only country which has
concluded an agreement on supplying the Nabucco.
The Shah Deniz field will thus fill the first
phase of the project
For the second phase, sources of supply are more
uncertain
At this point, Turkmenistan, has emerged as the
most likely candidate in filling the Nabucco next
to Azerbaijan, if the demarcation dispute is to
be resolved and the supplies can be piped across
the Caspian or from Turkmenistans off-shore
fields.

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TURKISH COMPETITION AUTHORITY

(3) Ambiguity about the sources
Even though, Turkmenistan and Azerbaijan
expressed their wish to jointly explore the
Kapaz/Serdar field, Turkmen President Gurbanguly
Berdimuhammedov, at a cabinet meeting on 24 July
2009, announced that Turkmenistan would be taking
Azerbaijan to the International Court of
Arbitration.
Should the Caspian Sea conflict (somehow) be
resolved, Kapaz/Serdar has the potential together
with Turkmenistans off-shore Block 1 field to
fill the Nabucco.
Other actors interested in taking a share of the
Nabucco today include Egypt, Iraq, Libya, Iran,
and Saudi Arabia.
However, the lack of infrastructure (or in Irans
case, lack of gas and the US sanctions) impedes
these states from filling it.
The Arab Gas Pipeline (AGP), via an extension
through Syrian border, could potentially connect
with Turkish grid. However the scant 2-4 bcm per
year that AGP could contribute is relatively
insignificant. In this regard, the main focus of
the EU and the US should therefore be on
Azerbaijan and Turkmenistan.

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OPPORTUNITIES
TURKISH COMPETITION AUTHORITY

(1) Solving the problems between Azerbaijan and
Turkmenistan
The division of the seabed among the littoral
states is one of the most contested questions in
Caspian Sea
The point of divergence is How to draw the
median line, dividing the shelf in a satisfactory
manner between Turkmenistan and Azerbaijan
At the heart of this question are at least three
major oil and gas fields. The way the median line
is drawn will determine the legal ownership of
these fields (Serdar/Kyapaz Omar/Azeri
Osman/Chirag)
The resolution process of the disputed offshore
field in between Turkmenistan and Azerbaijan will
likely be accelerated with the joint efforts of
EU and the US during the construction phase of
the Nabucco project.

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OPPORTUNITIES
TURKISH COMPETITION AUTHORITY

(2) Reconfiguration of Eurasia
The natural gas reserves of the Caspian Sea
region is estimated to have amount to 84 trillion
cubic meter of natural gas reserves (EIA)
With regards to oil, proven reserves are
estimated at 40-50 billion barrels (EIA)
The comparatively small domestic markets of the
Caspian littoral states, combined with high
productive capacity, have led them to be
attractive options for diversification.
Cumulative gas reserves of Kazakhstan,
Turkmenistan, and Azerbaijan are estimated to add
up to Russias total export capacity alone
Also, Caspian gas and oil is controlled neither
by OPEC nor Russia. This makes it one of a few
sources of energy located both in proximity to
Europe and outside of the control of these two
dominant players.
Consequently, not only would EUs and the USs
engagement with this region have political
benefits, but it would also make commercial
sense.

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THREATS
TURKISH COMPETITION AUTHORITY

(1) Alternative Pipeline Projects
No dominant market actor ever gracefully
relinquishes its pre-eminent position, and
Gazprom is no exception. To counter the Nabucco
project Russia has skillfully split the EU with a
counterproposal the South Stream project.
Additionally, Gazprom has signed an agreement
directly with Germany (the EUs single largest
consumer of natural gas) to build yet another
natural gas pipeline, the North Stream, which
would bypass Ukraine and bring gas directly to
Germany.
In addition to avoiding future disputes with
Ukraine, Russia is undoubtedly calculating that
it can undercut market support for financing the
Nabucco project if Gazprom can lock up Germanys
gas market in a long-term gas arrangement via the
North Stream project.
All of these moves are designed to lock
competitors out of the lucrative EU market, lock
in Russian control over Caspian gas reserves, and
increase the EU member state reliance on Russian
gas for the future.

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THREATS
TURKISH COMPETITION AUTHORITY

(2) Divergence among the EU
Ultimately, conflict of power and competing
interests as well as different energy security
definitions among the EU members hinder the
process of the Nabucco project
Despite EU efforts, many EU member states have
continued to tolerate, or even promote, large
incumbents in the gas markets such as Gaz de
France, or Germanys E. On Ruhrgas. These
companies have shown a propensity to strike
mutually profitable deals with Gazprom designed
to continue their market dominance and ensure
profitability.
For Russia, a fragmented regional European energy
market like this seems the best guarantee for
Russia to implement the divide and rule
strategy to be able to stay as a monopoly
supplier of European gas market.
Without the Nabucco, a united and liberalized EU
gas market and global competitiveness will hardly
been realized
If the Nabucco-pipeline cannot be implemented,
the new EU member states in Eastern Europe will
largely remain dependent on Russia

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THREATS
TURKISH COMPETITION AUTHORITY

(3) Absence of Reliable Agreement Between Russia
and the EU
EUs key international tool of energy security
has been the 1994 Energy Charter Treaty, which
entered into legal force in 1998.
The Charter attempts to provide a mechanism to
regularize interactions between foreign investors
and host countries, to promote international
transit of energy, and to provide a dispute
resolution mechanism.
Although this may sound useful, in practice
Russias status with the Energy Charter is
ambiguous. Russia is a member pending
ratification, having signed the Treaty in 1994
but never having ratified it. While this means
that Russia has agreed to apply the Treatys
provisions to the extent that they are compatible
with Russian law, it is unclear what practical
effect the Treaty would exercise over Russia in
the event of a serious crisis.
The EU, in the absence of a reliable
international agreement to provide energy
security, must take unilateral security-promoting
measures including realizing the Nabucco project

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CONCLUSION
TURKISH COMPETITION AUTHORITY

In barring Western investors from strategic
industries, demanding access to controlling the
upstream and downstream gas markets across Europe
and exerting its leverage upon CIS states, Russia
has created appreciable concern among European
policy makers about being a reliable trading
partner or not.
Therefore, after taking into account the
insufficient and declining indigenous natural gas
production of EU, it is evident and inevitable
that EU need to import more natural gas from
supplier countries but also diversify its supply
sources.
The Nabuccos viability mainly depends on the
ability of the Central Asian nations, mainly
Azerbaijan and Turkmenistan, to supply the
pipeline
There are no easy solutions for diversifying
natural gas supply to the EU and there are
certainly political and economic risks involved
in directly opposing Russian control of natural
gas given the EUs current level of reliance on
Russian gas. Nevertheless the EU should look to
the U.S.s successful efforts to assist the
design and construction of the BTC oil pipeline,
which broke the Russian Black Sea chokehold on
oil, and which demonstrates that with sufficient
political will, a positive outcome can be
achieved

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TURKISH COMPETITION AUTHORITY

CONCLUSION

What the EU needs most of all in the coming years
is to have the common political will of all EU
members including the major partners of Russia
such as Austria, Germany and Italy, to implement
all the decisions they have agreed upon strongly
and assertively
In this regard, unless the EU can liberalize its
own markets and introduce true competition
internally, Gazprom will be able to continue to
exploit the EUs market-based system
EU unity is necessary in order to aggressively
support the southern route gas pipelines, such as
the Nabucco, to bring them to fruition and keep
them outside Gazproms control.

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TURKISH COMPETITION AUTHORITY