European Union Set to Continue its Reliance on Russia as Nabucco Pipeline Unlikely to go Ahead
The announcement by German energy giant RWE, on 18 January 2012, that it would consider less capital-intensive alternatives to the troubled Nabucco pipeline has increased the likelihood that the project will be shelved. Growing costs and the failure to secure adequate supplies have been the primary impediment to plans to go ahead with development which envisioned delivering 31 billion cubic meters (bcm) of gas from the Caspian Sea to Austria via Turkey. While other pipeline proposals that would bypass Russia, such as the Italy-Greece Interconnector (ITGI) and the Trans-Adriatic Pipeline (TAP), provide a more commercially viable option, with cheaper energy costs for European consumers, neither these nor the Nabucco proposal are likely to provide a serious counterweight to European dependence on Russian energy. Instead, significant investment in new pipelines directly linking the Russian gas market to Europe, such as the Blue and South Stream projects, will likely increase this dependence regardless of what alternative transit route is chosen.
The Nabucco pipeline, driven more by political considerations that prioritised diversification away from Russian energy supplies over economic viability, has failed to sufficiently consider issues of supply, costs and political tensions within the proposed transit route. Originally conceived in 2002, the project gained momentum in 2009 following an intergovernmental agreement between the main transit countries of Turkey, Romania, Bulgaria, Hungary and Austria. Significantly, the proposed pipeline never gained the formal cooperation of critical gas suppliers Azerbaijan and Turkmenistan - in part due to efforts to gain favourable pricing concessions.
Costs of the project have steadily risen from an initial estimation in 2002 of 8bn euros (US$10.4bn) to 14bn euros (US$18.27bn) in 2011. The commercial viability of the Nabucco project has been further undermined by uncertainty regarding the sufficient supply of non-Russian gas to fill the pipeline. Turkmenistan, despite sitting on the world’s fourth largest reserves of natural gas, remains an uncertain party to the project due to underdeveloped energy infrastructure, ongoing tensions with Azerbaijan regarding resource divisions in the Caspian Sea and Russian pressure to back out. Azerbaijan will likely only be able to commit 8bcm of gas to the project, around a quarter of Nabucco’s total capacity, due to growing energy commitments to Asia. Furthermore, statements by Austrian energy firm OMV (an important member of the Nabucco consortium) as well as the International Energy Agency, have suggested that Europe’s gas market may be oversupplied in the short term, further undermining the economic efficiency of the project.
In addition to the withdrawal of support from RWE in January, partially due to the firm’s heightened caution in the aftermath of losses incurred as Germany phases out nuclear power, the US, a strong supporter of Nabucco in the past, has also indicated that it would support a more commercially viable, if less ambitious, alternative to the project.
Alternative pipelines lack sufficient capacity
Alternative pipeline routes which bypass Russian territory, such as the Italy-Greece Interconnector and Trans-Adriatic Pipeline will not significantly reduce European dependence on Russian Gas. However, they provide a more commercially viable alternative than Nabucco, while strengthening, if marginally, energy supply. The proposed ITGI and TAP pipelines, which will transmit gas from the Caspian Sea through to Turkey, Greece and Italy, have design capacities of 10bcm/year. While this is smaller than Nabucco, it is consistent with the available supply of gas and as such will operate at fuller capacity. Both the ITGI and TAP will also benefit from the use and expansion of pre-existing pipeline infrastructure through Turkey, which will reduce transport cost and as a result provide lower energy prices for European consumers. The total estimated costs of either TAP or ITGI is estimated at only US$5bn, significantly below the US$18.7bn for the proposed Nabucco pipeline.
Russia to remain integral supplier
Despite European efforts to reduce dependence on Russian energy sources, neither Nabucco nor any of the proposed alternatives provide a significant step towards greater energy dependence. According to the European Commission, Europe’s energy needs are anticipated to grow from the current 540bcm to around 800bcm in 2030 as domestic production declines and nuclear power is gradually phased out in Germany, Switzerland and Spain – partly as a policy response to the nuclear disaster in 2011 at Fukushima. Greater competition from Asia and other emerging powers for access to natural resources in Central Asia and the Caspian will further complicate European efforts to increase supply of energy from the region. Increasingly, non-European powers are securing the Caspian regions gas reserves for their own growing domestic energy demands limiting available supply.
The significant investment in new pipelines directly linking the Russian gas market to Europe provides the greatest medium-term opportunity for Europe to meet its growing energy needs while enhancing security of supply. The proposed joint Russian Gazprom and Italian ENI South Stream project, a pipeline which would transport Russian natural gas to the Black Sea to Bulgaria and further to Greece, Italy and Austria, provides European markets with a potential capacity of 61bcm annually in gas – significantly above either Nabucco or the proposed alternatives. While there are concerns about Russia’s ability to meet growing supply demands given maturing gas fields and underdeveloped infrastructure, Moscow will remain the most critical energy partner for Europe well into the future.
Greater stability in commercial relationship
European vulnerability to supply disruptions, a previous source of tension between Moscow and Brussels, has also been reduced. Political and economic tensions between Russia and the Ukraine (an important gas transit country to Europe) resulted in the temporary disruption of gas supplies to Europe in 2006 and 2008. New pipelines such as the Blue stream (inaugurated in 2005), which delivers Russian gas through Turkey and onto Europe, and the Nord Stream (inaugurated in 2011), a pipeline from the Russian port of Vyborg to Greifswald in Germany, directly bypass both the Ukraine and Belarus, whose often contentious relationship with Russia contributed in the past to an unreliable supply of energy. Greater commercial links between Russia and the European Union have also increased security of energy supply. The two asides are currently negotiating a new Partnership and Cooperation agreement (PCA), which will enhance commercial and investment relations. Negotiations, which have been on-going since 2008 due to disagreements over import quotas as well as the reluctance of Moscow to accept provisions within the European Energy Charter, are anticipated to be finalised within the near future following Russia’s 16 December 2011 accession to the WTO which resolved most outstanding commercial disputes with the EU.
What next?
The Nabucco pipelines’ likely failure, a result of its commercial unviability and its failure to secure adequate energy supplies, places a greater emphasis on Europe’s continued dependence on Russia. While alternative proposals such as the Italy-Greece Interconnector and the Trans-Adriatic Pipeline are set for greater prioritisation by policymakers, they provide an insignificant source of energy diversification for Europe. Europe and its consumers will continue to rely heavily on Russia to meets its gas demands with projects such as Blue stream, Nord Stream, and the proposed South Stream consolidating this relationship. While concerns of unreliable gas flows from Russia persist, the diversification of Russian routes of gas supplies to Europe will enhance the consistency and stability of supply.
This article was written Matthew Schulz Analyst at Maplecroft , a leading source of global risks intelligence