Caspian uncertainty biggest threat to EU gas scheme

Reuters News, 22/01/2008

By Anna Mudeva and Thomas Grove

Uncertain central Asian gas supplies have emerged as the largest threat to an EU scheme to provide an alternative to Russian gas following a month-long stand-off between Turkmenistan and Iran, analysts say.

The Nabucco gas pipeline project is designed to diversify the European Union’s supplies but ironically places the bloc’s energy security in the hands of producers who have no misgivings about turning off the tap, they said.

Turkmenistan, which Brussels has been trying to lure into becoming a major Nabucco supplier, cut off supplies to Iran at the end of December, creating a domino effect that stretched to Greece and raising doubts about its reliability as a supplier.

« Last week’s developments haven’t exactly helped Nabucco’s arguments in favour of energy security, » said Jonathan Stern of the Oxford Institute for Energy Studies.

« We have a situation where Turkmenistan has not supplied Iran, Iran has not supplied Turkey, Turkey has not supplied Greece. And this is the corridor that people want in Europe because they are worried about unreliable Russian gas, » he said.

The Nabucco was born out of anxiety over Russian supplies when a political dispute between Moscow and Kiev cut exports in 2006. Russia supplies a quarter of the EU’s gas and four-fifths of the exports travels via Ukraine.

Russia has also been pushing for another gas pipeline — its own South Stream, which Brussels views as a rival to the Nabucco. Last Friday, Moscow secured the participation of new EU member Bulgaria in the ambitious 10 billion euro project.

Some commentators say joining South Stream, which aims to meet all central and southern Europe gas demand from 2013 via a pipeline under the Black Sea, could weaken Bulgaria’s political support for Nabucco and deal a blow to the EU plans.

No guaranteed supplies

But energy analysts argue that Nabucco — due to bring gas from untapped fields in the Caspian and Middle East via Turkey and the Balkans to Austria — faced much bigger challenges than South Stream, primarily lack of guaranteed supplies.

« There are a lot things that are making Nabucco difficult. It’s not impossible but it’s relying on a lot of ifs, which right now are not settled, » said Charles Esser, energy analyst at Brussels-based International Crisis Group.

Turkmenistan, along with Azerbaijan, Kazakhstan, Iran, Egypt and even Iraq have all been mentioned as possible suppliers to the long-delayed 31 billion cubic metre (bcm) pipeline.

So far the shareholders of the 5 billion euro ($7.21 billion) Nabucco have signed an import agreement with Azerbaijan, but volumes will not be enough to make the scheme viable.

Esser and other experts say the EU had to bring investment to develop new fields and infrastructure in Kazakhstan and Turkmenistan, where reserves are rich but infrastructure is lacking beyond pipelines leading to Moscow and China.

Gazprom buys the bulk of Turkmen gas production, or around 50 bcm, as well as volumes from Kazakhstan, for re-export to Ukraine and western Europe. And that agreement was revised last year to expand the existing pipeline infrastructure by as much as 20 bcm, pushing imports to Russia higher.

But analysts say the problems only begin with Moscow’s influence.

« Gas coming from central Asia, apart from being largely reserved by Russia, has the problems of infrastructure and regional politics to establish that infrastructure, » said Turkey-based independent energy analyst Necdet Pamuk.

Even if European investment were to break Russia’s stranglehold on the country, it is unclear whether Turkmenistan would open up to foreign investment and play by the rules.

« If they have investment, they shouldn’t change the conditions or allow for double standards, » said Fatih Birol, chief economist at Paris-based International Energy Agency.

Analysts, who say price disputes are the real issue behind the recent Turkmen gas cut, predict that the Caspian country would continue to flex its resource-owner muscle and pitch customers against each other.

The construction of a Trans-Caspian pipeline linking Azerbaijan and Turkmenistan that could provide an independent route to the West has been frozen by conflicting claims between the two over reserves in the Caspian.

Meanwhile Iranian gas, which Turkey has offered to supply for Nabucco, has been turned down by Brussels, as the Islamic Republic is subject to United Nations sanctions over its nuclear programme. Iran has a poor track record as a supplier due to underdeveloped infrastructure.