Nabucco: Delivering Diversification to the European Gas Market
By Christian Dolezal, Head of Corporate Communication & Public Affairs at Nabucco
European gas demand, although not at the levels of a decade ago, is forecast to increase (1). Consequently, gas will provide a solid platform for creating sustainable, long term growth. The future of the European gas market will be about diversification, security of supply, interconnectivity and liberalization.
Today, however, the gas market in Europe still exhibits regional development differences. In many parts of Europe, especially in the countries which make up the so-called Southern Gas Corridor, gas markets continue to be under diversified. The countries of South Eastern Europe continue to rely heavily on a single source for their gas imports, and in some cases this dependence on one source is as high as 100%.
There is also a pressing need for interconnectivity among the gas transmission networks of these countries. Interconnectivity aids in the creation of a common gas market, which promotes market liberalization. Market liberalization creates price structures based on supply and demand and delivers increased levels of investment to the economies of these countries.
Nabucco, often called the flagship project of the Southern Gas Corridor, provides a solution to all of these issues. By opening the Southern Gas Corridor, Nabucco, whose shareholders are OMV, FGSZ, Transgaz, BEH and BOTAS, will connect the geographical heart of Europe with new sources of gas from the resource rich Caspian region. The pipeline will transit and connect the gas networks of Bulgaria, Hungary, and Romania, as well as the entire South Eastern European and Balkan region. The 1329 km pipeline will be scalable between 10-23 bcm, in response to market demand.
Nabucco’s company headquarters was established in 2009, bringing together a team of international experts in Vienna with the aim of building a pipeline that would open the Southern Gas Corridor. Today, we are closer than ever to the realisation of the vision of diversifying European gas supply, as the consortium charged with developing the Shah Deniz II gas fields weighs the merits of the Nabucco West pipeline as the preferred European transport route for its gas. A final route decision is expected at the end of June 2013.
The advantages that make Nabucco the ideal answer to the needs of Caspian producers and European producers alike are ingrained in the Intergovernmental Agreement (IGA) that was signed in July 2009 by the governments of Austria, Hungary, Romania, Bulgaria and Turkey. This IGA was without precedent in projects of this kind, and provides a stable legal framework for 50 years. The IGA also confirms that 50% of the pipeline’s capacity will be reserved for the shareholders and the remaining 50% offered to third-party shippers. The Agreement also lays down a solidarity mechanism between the signing countries and a standard tariff methodology. These measures promote stability and mitigate risk for investors in the project.
The watertight legal framework set up by the IGA was strengthened further with the signing in 2011 of the Project Support Agreements between Nabucco and each of the Transit countries. The main elements of the PSAs are the affirmation of an advantageous regulatory transit regime under EU law; the protection of the NABUCCO Pipeline from potential discriminatory changes in the law; and support for legislative and administrative actions for the further implementation of the project.
Nabucco’s Intergovernmental Agreement also established the Nabucco Political Committee comprising representatives from the ministries of all signatory countries. The objective of the Committee is to support the ongoing development of the project, by ensuring an effective cooperation between the state parties. These political, legal and regulatory frameworks form the basis for the successful development of the Nabucco pipeline. Since it was established in 2009, the Nabucco team has worked to ensure that the project is advanced and ready to transport gas when the producers are ready to ship it.
The Nabucco route is optimised for CAPEX, utilizing a significant proportion of existing pipeline infrastructure. Interconnectors are already available between Hungary-Croatia, Austria-Slovenia, Bulgaria-Serbia and Bulgaria-Macedonia. In addition, there are over 16bcm of combined storage capacities along the Nabucco route, which promotes energy security and business opportunities in the transit countries.
The Environmental and Social Impact Assessment procedure for the pipeline is far advanced in all the transit countries. In Hungary and Bulgaria all of the necessary environmental permits have already been obtained. Romania and Austria are not far behind. Nabucco is also conducting a Social Impact Assessment procedure, with stakeholder engagement and livelihood restoration components which are in accordance with best practices in the industry and with the Equator Principles laid out by International Financial Institutions (IFIs). As project development continues and construction begins, Nabucco will continue to work with local communities to ensure that the pipeline adds value to the community wherever possible, and that any negative impacts are effectively mitigated.
In terms of financing, the European Bank for Reconstruction and Development, the European Investment Bank, and the International Finance Corporation began their appraisal of the Nabucco project via a joint mandate letter in 2011. Since then, the close cooperation between Nabucco and the IFIs has continued to be a key advantage of this project. The IFIs are already progressing the legal due diligence of Nabucco. The next steps will be taken after the Final Investment Decision in September. The comments of the IFIs on the Environmental and Social Impact Assessment, the legal framework of the project and other key aspects of Nabucco’s development have proven to be invaluable in establishing the bankability of Nabucco.
In January 2013, we signed a Cooperation Agreement and an Equity Option and Funding Agreement with the members of the Shah Deniz II Consortium. The terms of these agreements provide joint funding of the costs of Nabucco’s further development until the Shah Deniz II Consortium’s final route decision; and grants SOCAR, BP, Statoil and Total options to take up to a total of 50% equity in the project, following a positive selection of the Nabucco West pipeline by the Shah Deniz II Consortium. This signing was an important milestone as it confirms both parties’ commitment to transporting Shah Deniz II gas to Europe via Nabucco.
Project development has continued to accelerate following this milestone. In the past few months there have been a number of key events that have furthered the project. For example, we concluded a Memorandum of Understanding (MOU) with the Trans Anatolian Pipeline (TANAP), formalizing our agreement to co-operate on the development of the Southern Gas Corridor. Nabucco offered the results of the engineering works and all EIA permits already obtained on Turkish soil. This MOU further confirms that Nabucco is an integral part of the value chain for Caspian gas and that all of the members of the value chain are aligned and working together to ensure maximum benefits for producers and consumers.
In March, Nabucco submitted its Decision Support Package which was ratified by Nabucco shareholders in April. It contains all of the information required to demonstrate that the pipeline is the best option for the transportation of Azeri gas to Europe, with an unrivalled win-win situation for shippers and producers. Most recently, we have also launched the Open Season Process for the project, which allows potential shippers to register their interest in capacity allocation for the transport of gas via the Nabucco pipeline.
In addition to its commercial and financial strengths, Nabucco is also a uniquely European project. Its transit states are European states and its target market is the 500 million gas consumers in Europe. Nabucco meets the European energy markets’ needs for diversification, interconnectivity, increased competition and open access. This recognition of Nabucco’s important role in the European energy market was highlighted again in April 2013, in a joint letter sent by the Foreign Ministers of the Nabucco transit countries to the European Commission, asking for active support for the project from Brussels. The letter stated:
“From its very inception, the Nabucco project has been an embodiment of the European principles and priorities in achieving energy security. It connects a new source of hydrocarbon resources to markets that need them most, through new and safe transit routes. In doing so, it also links the geographical center of the European gas market, through a scalable transport corridor to a verified source of gas as well as future potential providers. It also brings together the commercial substance of an international company with the tested political support of our countries.”
The signatories of this letter clearly recognise the unique advantages of Nabucco for the producers, shippers and consumers, as well as the consumers across Europe.
We are convinced that when the time comes for Shah Deniz II Consortium’s gas to be transported to the European consumer, the Nabucco pipeline will be the preferred route.
1 According to the IEA: http://www.iea.org/aboutus/faqs/gas/