Wednesday, July 15, 2009

EU Natural Gas Consortium Flexing Tiny Muscles

CFA Institute Financial NewsBrief | 07/14/2009

After years of painstaking negotiations, the EU and Turkey cleared the way for construction of a natural gas pipeline that could end Europe's dependence on gas from Russia. The agreement to build the Nabucco pipeline from the Caspian Sea to Austria was signed by the prime ministers of the nations through which the pipeline will run: Austria, Bulgaria, Hungary, Romania and Turkey. The route bypasses Russia. Spiegel Online (Germany) (13 Jul.)
The proposed Nabucco pipeline would run from Turkey's eastern border, through Bulgaria, Romania and Hungary, to a key gas terminal in Baumgarten, Austria.

Germany is also a partner in the deal, which is being signed in the Turkish capital, Ankara.

Russia controls the current network of pipelines that supply Europe with natural gas.

To challenge the Nabucco proposal, Russia has proposed a competing natural gas pipeline to southeastern Europe. The South Stream pipeline would pass under the Black Sea and connect with Bulgaria. Russia and Italy would each control half of that pipeline. See map of pipeline »

However, Nabucco got a boost after Russia turned off the gas to Europe in January, during the latest in a series of price disputes with Ukraine, according to industry analysts.

The Nabucco project is budgeted at €7.9 billion (about $11 billion).

Since the idea's inception in 2002, plans for Nabucco have languished amid disagreements among consortium partners and lack of commitment from natural gas suppliers.

Turkey had demanded to retain 15 percent of the gas passing through the pipeline for consumption and export, which its European partners rejected.

The energy minister of Azerbaijan is expected to attend Monday's signing, a top Western government official said. Gas from Azerbaijan's Shah Deniz 2 field will be a crucial component of the project. European officials have raised hopes that other gas producers, such as Iraq and Turkmenistan, also might contribute to the pipeline.

Big hurdles remain for the pipeline project named after an opera by Verdi.

Consortium members must raise billions of dollars for the Nabucco project. Construction has not begun, and gas is not projected to be pumped through until 2014.

Still, industry analysts called Monday's intergovernmental agreement a significant development. "It's one of those steps that moves Nabucco out of the possible column and into the probable column," said John Roberts, an energy security specialist with Platts.

"My own guess is roughly by the end of the year, it will be pretty clear that Nabucco will be built."
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