The Nabucco gas pipeline, which was initially aimed at transporting vast amounts of central Asian gas through Turkey and into Europe, will have to downsize to meet lower, more humble demand if it is to avoid certain death.
The 4,000 km pipeline is officially aiming to transport over 30 billion cubic metres (bcm) - around a third of Britain's annual demand - per year of gas into Europe in order to reduce its dependency on Russian imports.
Its critics have long said that its cost - estimated at over $12 billion - was too high and that it would struggle to find enough gas to fill it with non-Russian supplies.
For the foreseeable future, the only substantial non-Russian gas supplies from central Asia will come from Azerbaijan, where producers in the Shah Deniz 2 field, led by BP and Statoil, plan to ship around 16 bcm a year through Turkey into Europe from 2017 or 2018.
"The original Nabucco concept has always had little chance to be awarded Shah Deniz 2 volumes," Massimo Di-Odoardo, analyst at energy consultancy Wood Mackenzie (WoodMac) said.
Industry sources say the key problem is that gas power generation is not profitable at the moment because high wholesale import prices are forcing European utilities to sell the gas or generated power to its customers at a loss.
"It is clear that nobody wants to take big gas infrastructure risks at the moment. The finance is drying up and there is also concern about the many gas pipelines and LNG gas projects around Europe at the moment, and whether there will be overkill," one industry source said.
SHRINK OR DIE
So far, Nabucco's six shareholders - OMV, RWE , MOL, Turkey's Botas, BEH of Bulgaria and Romania's Transgaz - have defied criticism and stood by the pipeline, once a pet project of the European Commission.
But Germany's RWE broke ranks earlier this year, publicly voicing concern, and this week Hungary's MOL said that it may sell its stake if the project wasn't cut to size.
The European Union receives around a third of its gas from Russia, and in parts of central and Eastern Europe the reliance is even higher, and the EU fears that Moscow may use its gas supplies as political leverage.
But even the European Commission (EC) has turned down its support for the project, and now instead says that it is "project neutral," as long as its so-called Southern Gas Corridor plan to receive non-Russian gas from Central Asia is realised.
As a result, Austria's OMV - arguably the biggest corporate driver behind the project - has also begun to consider a smaller version of Nabucco, known as Nabucco West.
This option would mean that the pipeline only begins at Turkey's western border, significantly reducing its length.
"Of all the projects, Nabucco West seems to be the most feasible and economic for a number of reasons. The legal structures are already in place, such as the intergovernmental agreements and regulatory regimes," said John Kennedy, analyst at Energy Quote JHA, said.
Turkey and Azerbaijan last December signed a deal for the $5 billion trans-Anatolian gas pipeline project (TANAP), led by Azeri state oil company SOCAR, which would run from Azerbaijan to the Turkish border with Bulgaria, effectively duplicating Nabucco in this region.
But the European Commission is worried that TANAP would not fall under European market regulation and that Turkey and Azerbaijan could one day divert some of the gas towards other markets than Western Europe through a liquefied natural gas (LNG) terminal.
And WoodMac's Di-Odoardo said MOL's retreat from Nabucco would also reduce the likelihood of Nabucco West getting the go-ahead from Shah Deniz 2.
"With MOL pulling out, the credibility of Nabucco West is also becoming questionable, thus reinforcing the concept of SEEP, the BP led project," Di-Odoardo said.
South East European Pipeline (SEEP) is a project led by BP to mainly use existing gas infrastructure to pump Azeri gas through southeastern Europe, including Hungary, into Western Europe.
"SEEP is preferable to Nabucco insofar as it would not only be much smaller (and thus cheaper), but also it would mainly use existing pipelines on its route, thus lowering the cost and increasing the potential profit margin," Elnur Soltanov of Azerbaijan's Diplomatic Academy (ADA) said in a research paper.
Another alternative route for the Azeri gas to come to Europe would be to pipe it through Greece and into Italy.
In February, the Shah Deniz 2 consortium selected the Trans-Adriatic Pipeline project should it choose this route.
Copyright 2012 The Financial Daily. All Rights Reserved.
(Originally published April 29, 2012, in The Financial Daily.)