14 02 2008 - AZERBAIJAN: BAKU HESITATES ON NABUCCO PIPELINE PROJECT

BUSINESS & ECONOMICS
The recent decision by the Russian energy giant Gazprom to increase prices for Central Asian natural gas will damage construction prospects for the Nabucco pipeline, some Azerbaijani analysts believe. Even prior to the Gazprom move, support in Azerbaijan for the Nabucco route seemed lackluster.

Gazprom in March surprised regional energy analysts with an announcement that it would pay "European market prices" for gas exports from Turkmenistan, Uzbekistan and Kazakhstan. [For background see the Eurasia Insight archive]. Some experts in Baku believe the Gazprom gambit will be successful in achieving its main aim -- to frustrate American and EU efforts to establish an alternative export network that would circumvent Russia. The projected 3,400-kilometer Nabucco route would become, if built, a major component in the envisioned Western network. [For background see the Eurasia Insight archive].

At present, however, some in Baku wonder if Nabucco, despite strong backing in Washington and Brussels, will ever become a reality. "The possibility of selling gas at higher prices than offered by Russia was the main economic reason for the Central Asian states to join the Nabucco project as potential suppliers, despite Russia’s negative stand on the issue," said Ilham Shaban, director of Baku’s Energy Research Foundation. "Now, there is no economic reason, as world market gas prices minus transportation costs would make the price offered for Turkmen gas equal to the Russian one."

Shaban’s calculations might be a little off. Russia’s "European market price" offer to Central Asian states is thought to be in the neighborhood of $300 per thousand cubic meters (tcm). At the same time, Russia will be looking to get roughly $400/tcm from its Western European clients in 2009. So although Gazprom’s profits stand to take a big hit, the conglomerate will not exactly be hurting.

Even if the price differential theoretically still provides space for Nabucco to wiggle into the Central Asian market, Shaban said the project faces many other obstacles. "What is needed for the project - consumers, sellers, and infrastructure? None of these ingredients are in place so far. Talks about the Nabucco gas pipeline started in 2006, but I haven’t heard about any deals between potential buyers and sellers so far," he said.

A final decision on the pipeline’s route -- expected to stretch from Turkey to Austria -- is expected in early 2008. Construction has been slated to start in 2009.

By comparison, the South Stream project, stretching from Russia’s Black Sea coast to Italy, already has agreements with suppliers and concrete project participants -- Gazprom and the Italian energy firm Eni SpA. South Stream’s construction is projected to start in 2012 and end in 2013, Gazprom officials have stated. But Serbian government approval of the pipeline project hasn’t been forthcoming as expected, perhaps threatening to push back the construction timeframe.

For Central Asian gas suppliers, the distance to market in Europe is also less lengthy with South Stream, meaning lower cross-border transit fees. Gas sent via Nabucco would have to go through Azerbaijan, Georgia and Turkey before arriving within in the target market.

Meanwhile, competition is also building in the wings with the so-called Prikaspiisky pipeline that will link Russia, Kazakhstan and Turkmenistan. Construction is slated to begin in the second half of 2008, although the project currently seems at a standstill. [For background see the Eurasia Insight archive].

European and American officials continue to speak optimistically about Nabucco’s future. Andris Piebalgs, the European Union’s commissioner for energy, argues that Nabucco has nothing to do with Russia’s plans for South Stream.

"What concerns Nabucco, it is our desire to diversify. It has nothing to do with South Stream or not South Stream, " Pielbalgs told the weekly New Europe in an interview published on April 7. "It is our desire and also our action to get gas from Azerbaijan, from Turkmenistan, from Iraq, from Egypt and in this way giving them new suppliers to the European market."

Meanwhile in Washington, US Deputy Assistant Secretary of State for European and Eurasian Affairs Matthew Bryza has insisted that Nabucco is "viable."

Rovshan Ibrahimov, editor of the Energy Review, a biweekly published by the Turkish International Strategic Research Organization, contends that Nabucco should also be viewed as geopolitically motivated. The route’s profit potential, accordingly, should not be the sole factor in determining whether it is built. "Nabucco is a political undertaking and the project will be realized even if there will be no other supplier but Azerbaijan," Ibrahimov predicted.

"In addition to the fact that the pipeline would ensure an energy supply bypassing Russia, it is the key factor for helping 27 European [Union] countries centralize their energy policy," Ibrahimov continued. "It would be a supranational project, strengthening the economic links among EU countries."

Ibrahimov said that the lack of a clear-cut gas-oriented energy policy for the EU means that some members are more enthusiastic than others about Nabucco. "Some EU countries are just switching their infrastructure from coal to natural gas as opposed to Eastern European countries, which had been using Soviet natural gas as their main energy resource. That is why the Eastern European countries are more enthusiastic about the gas pipeline than their northern and western neighbors," Ibrahimov said.

However, analyst Shaban also notes a lack of enthusiasm from the Azerbaijani side. "With or without Nabucco, Azerbaijan has a market in which to sell its gas production. These are Georgia, which wants to buy one bcm [billion cubic meters] annually, Turkey, with a purchase capacity of 5 bcm annually, and Azerbaijan itself needs four bcm annually," Shaban said.

The existing Baku-Erzurum pipeline is considered able to handle those shipments, as well as a potential 8 bcm per year to Italy and 1 bcm to Israel, Shaban said.

"Having a large enough market for its product, why would Azerbaijan be enthusiastic about the Nabucco project and spoil its relations with Russia?" Shaban asked.

Turkish officials are also starting to question Baku’s enthusiasm for Nabucco. "Azerbaijan has to decide whether it will or not ship gas from the Shah Deniz field by the Nabucco project," Emre Engur, director of international projects for BOTAS, the Turkish state-run hydrocarbon transportation company, said in a recent interview with Radio Free Europe/Radio Liberty’s Azerbaijani service.

The Azerbaijani state energy company SOCAR and other stakeholders in the Shah Deniz field have never clarified where the gas will flow, Engur continued. "Will it go to Europe, or somewhere else, or stay in Azerbaijan to meet internal needs? It should be decided. If it goes to Europe through Turkey, we want to have reasonable transit arrangements," Engur said.

In response to the inferred criticism, a spokesperson for SOCAR has stated that Azerbaijani officials have already declared the government’s commitment to Nabucco, and that that commitment remains firm.

One of the problems for Azerbaijan with Nabucco, according to analyst Shaban, is product marketing for phase 2 of the Shah Deniz project, slotted to start in 2013. The firm has not yet been defined, though Azerbaijani Minister of Energy and Industry Natik Aliyev stated in January that Azerbaijan is likely to take over gas sales for the project.

The Norwegian firm Statoil, which is handling current sales of Shah Deniz gas, is believed to be increasingly involved in its Barents Sea projects in Russia, which "is much more important for the company than their commitments about marketing Azerbaijani gas," Shaban said.

A spokesperson for Statoil Azerbaijan told EurasiaNet that since "SOCAR representatives have repeatedly declared that SOCAR wants to do the marketing for Phase 2 on its own. ... Statoil has not been authorized by [its] partners to start negotiations on the sale of gas to be produced under Phase 2."

With the amount of Azerbaijan’s long-term gas sales to Europe still undefined, Nabucco’s attractions for investors are, for now, similarly vague, Azerbaijani analysts say. Meanwhile, Turkey has made a move to hedge its bets. Turkish Foreign Affairs Minister Ali Babacan has called for Iran to join the Nabucco project as a supplier. Babacan told an April 3 news conference at the NATO summit in Bucharest that Iran, which contains the world’s second-largest gas reserves after Russia, could use Nabucco to become a leading gas supplier to Europe. Iranian participation would run into political obstacles, however, as the United States, at least under the Bush administration, would staunchly oppose Tehran’s involvement. Analyst Ibrahimov suggested that Washington’s inflexible opposition renders talk of Iran’s potential participation "nonsense."

In his comments to New Europe, EU energy commissioner Andris Piebalgs also flagged Iran’s ongoing flirtation with nuclear research as the key stumbling block for such a plan. "I see Nabucco being fed by Iran," he said, "but I also see that it could be achieved only after the solutions being found for the enrichment facilities in Iran."

Editor’s Note: Khadija Ismayilova is a journalist based in Baku.

Posted April 10, 2008 © Eurasianet
http://www.eurasianet.org

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