Pipeline politics: Why Nabucco is stuck

by Katinka Barysch

Last year, plans for the Nabucco pipeline – almost a decade in the making – appeared finally to make some headway. In March, the EU earmarked €200 million for preparatory work. The European Investment Bank and the European Bank for Reconstruction and Development promised to help with financing the €10 billion cost. In July, the countries through which the 3,000 km pipeline will run (Austria, Bulgaria, Hungary, Romania and Turkey) signed a long-awaited ‘intergovernmental agreement’ on transit rules. Ratification of the IGA has been plodding along. Meanwhile, the six energy companies (from the transit states and Germany) that form the Nabucco consortium continued to look for gas to fill the pipeline. Two of them are trying to get involved in a big gas project in northern Iraq and another one in Turkmenistan. The EU started looking at the idea of aggregating European gas contracts through a ‘Caspian development corporation’ to get the likes of Turkmenistan interested in selling large volumes of gas westwards.

Now, however, Nabucco is stuck again. The reason is a dispute between Turkey and Azerbaijan. The 8 billion cubic metres of gas for the first phase of Nabucco was always expected to come from Azerbaijan’s new Shah Deniz II gas development. But Baku and Ankara cannot agree on how much Azerbaijani gas should go to Turkey, at what price and under what conditions. While the dispute continues, the companies involved in Shah Deniz II have stopped drilling.

Turkey already buys around 6 bcm of gas from the Shah Deniz I field, for a very good price. It sells half of that gas on to Greece at a much higher price. Baku insists that the old pricing formula needs to be revised. Turkey disagrees. As long as this issue is not resolved, an agreement on the Shah Deniz II gas looks unlikely. Without that gas, it is hard to see how Nabucco could get under way. Meanwhile, Azerbaijan has started shipping gas to Russia instead and promised to sell some to Iran and even China.

Although both Turkey and Azerbaijan insist that they really quarrel about energy, the fact that the two countries get on badly these days does not help. Azerbaijan became less forthcoming in the negotiations after Turkey announced a courageous plan to normalise its relationship with Armenia last year. Azerbaijan is furious about the idea that Turkey could open its border with Armenia before a solution has been found for the ‘frozen’ conflict in Nagorno-Karabakh, an area that has been occupied by Armenian troops since the early 1990s. Turkish leaders are in fact ambiguous about that, with Prime Minister Erdogan saying that the two issues are linked somehow. The Turkish parliament has not yet ratified the documents needed for the normalisation of relations with Armenia. Some now say it never will.

Although the prospects for a Nagorno-Karabakh settlement are not great, it is likely that Turkey and Azerbaijan will eventually reach a deal on energy that could restore momentum to Nabucco. Baku has a strategic interest in getting access to the European gas market. Turkey’s interest in becoming a European energy hub is just as strong. Both countries know that once gas starts flowing through Nabucco (or another pipeline that connects the EU market directly with the huge gas reserves of the Caspian), oil majors will be much more willing to explore other projects in the region.

The EU should stand ready to give Nabucco a bit of a political push once the Turkey-Azerbaijan dispute is resolved. Europeans have been too ready to dismiss Nabucco as a ‘pipe dream’. Russia, on the other hand, is taking it extremely seriously. Moscow fears that Nabucco will further erode its lucrative and politically expedient gas transport monopoly on the Eurasian landmass. It is pushing the rival South Stream pipeline and has signed agreements with a number of potential transit countries, including Turkey. It is also trying to buy up gas that could potentially feed Nabucco in Azerbaijan and Turkmenistan. A lot of that is posturing: “Any energy company that wants something from Russia at the moment has to sign up to South Stream,” says one gas expert. The memoranda of understanding on South Stream are vague and do not involve any financial obligations. But they could be just enough to put off potential financiers for Nabucco and sap what little political momentum there still is behind the project.

South Stream looks expensive, technologically complicated and unnecessary. Nabucco appears relatively realistic and it is further advanced in the planning process. The EU should call the Russians’ bluff by asking Gazprom to use Nabucco to ship gas into South and Central Europe.

The EU also needs to work harder to create more coherence between its energy policy and the political relationships it is building with potential supplier countries. In the past, the energy and foreign relations departments of the Commission, the European Council's high representative and the member-states have not always acted in unison.

The Lisbon treaty (which streamlines the EU’s foreign policy machinery) should help. But the EU’s nascent energy diplomacy can only make progress if the EU governments allow this to happen. Many European leaders and officials (in particular in Germany) remain convinced that the task of securing oil and gas supplies must be left to private companies and that the EU has no role to play in talking to energy producing countries about gas contracts and pipelines. The current highly politicised dispute over Nabucco should help to convince them of the contrary.

Katinka Barysch is deputy director of the Centre for European Reform.