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OPINION: The Maginot Pipeline
by Kyle Wingfield    The Wall Street Journal Europe
Thursday, March 20, 2008
BRUSSELS (Dow Jones)

Intended as a defense against Russian dominance of EU natural gas supplies, the $7.4 billion Nabucco pipeline is beginning to look like a modern-day Maginot Line.

It's not just that Russia is outflanking the 3,300-kilometer pipeline to the north and the south with rival projects. After all, Nabucco is intended to carry only up to 31 billion cubic meters (bcm) of gas a year from Central Asia through Turkey, Bulgaria, Romania and Hungary to a hub in Austria. Growth of demand for gas in the EU, though, is projected to be several times that figure by 2020. So neither Nabucco, slated to begin deliveries in 2013, nor any other project could fulfill it alone.

No, the trouble here is that Nabucco has exposed the EU's inability to put up a unified front on energy security. Though EU leaders say it's the union's highest-priority project, Europe's capitals are failing miserably to rally around it.

In looking to strengthen its energy security, Europe's foremost interest is to diversify suppliers and transit routes. The point is to branch out beyond Russia and its state monopolist Gazprom, not to try to exclude them, which would be impossible and counterproductive given Russia's proximity and vast resources.

There are also political reasons to reduce European dependence on Russia. Continental fears have risen each time Gazprom has turned off the taps to Ukraine and Belarus, whose pipelines supply EU member states. Yet Russia has no immediate alternative gas customers to replace European purchases and has no financial interest to keep the taps off long.

A larger problem for Europe is Russian underinvestment in its own gas fields. The International Energy Agency estimates that Gazprom by 2020 will need new gas fields capable of producing about 300 bcm annually, or half the company's total capacity, if it is to meet demand. The IEA also estimates that Gazprom is making less than 60% of the $22 billion in annual capital expenditures needed to bring those new fields on line in time.

Yet despite these good reasons for Europe to look beyond Russia, Nabucco "has been labeled . . . as an anti-Russian project," says Jozias van Aartsen, appointed last year as the EU's point man for the pipeline. So the Kremlin has struck back both with rhetoric and its own pipeline plans. Chief among them is a joint venture between Gazprom and Italian energy giant Eni known as South Stream, which will move gas across the Black Sea to Bulgaria and then northward.

The rhetoric has softened of late. Dmitry Medvedev, the Gazprom chairman who was just elected Russia's next president, had this to say last month in Budapest: "South Stream will have no negative impact on Nabucco, just as Nabucco will have no negative effect on South Stream."

Then again, Mr. Medvedev was in Hungary to persuade the government there to sign on to South Stream. It did. So has fellow Nabucco partner Bulgaria, as well as Greece and Serbia. Then there's the January deal that Gazprom struck with Austrian energy major OMV for a 50% stake in the same gas hub that Nabucco is supposed to feed. While South Stream and Nabucco might be more complementary than competitive from a capacity standpoint, these European capitals are either hedging their bets or feeling Kremlin pressure.

But capacity is not the only issue here; sourcing is another -- and here the two are competitors. "If South Stream sees Caspian gas as its main source, then these two projects are definitely rivals," Huseyin Saltuk Duzyol, the head of Turkish gas company Botas, said Tuesday in Ankara. Russia has been extremely active in the Caspian region, aiming to lock up gas supplies from Kazakhstan, Turkmenistan and Uzbekistan.

The largest of these, Turkmenistan, currently exports only to Russia and Iran. And while Turkmenistan plans to increase its exports greatly in the coming decades, it's also looking further afield for customers: East to China, which will get 30 bcm of Turkmen gas per year via a new pipeline, and south to India and Pakistan. In any event, getting Turkmen, Kazakh or Uzbek gas to Europe without Russia's help would require an as-yet-unbuilt pipeline across the Caspian.

For now the only immediate source for Nabucco is Azerbaijan. But even the Azeris' large Shah Deniz gas field may not be able to satisfy their numerous customers. Iran could be an option if its regime weren't at loggerheads with the U.S., which otherwise is one of Nabucco's biggest cheerleaders.

Further complicating matters, the Turkish government is muddling its role in Europe's energy calculus. The most unhelpful possibility, from an EU perspective, is that it acts as a sort of southern Ukraine -- receiving gas from several sources, mixing it together, siphoning off a portion, and then selling the rest to Europe in a nontransparent way while collecting transit fees.

Time will tell whether Gazprom is moving to protect its market share (which would be rational) or, more insidiously, to maintain its political leverage over Europe. Either way, Nabucco's viability is in doubt as it loses sources and, more importantly, market and government confidence.

It doesn't have to be this way. Demonstrable political will in European capitals could change the terms of the debate. For starters, it would enhance the credibility of EU or Nabucco representatives when they meet with their Central Asian counterparts, who might welcome the chance to negotiate in earnest with someone other than the Kremlin. It might also convince Gazprom that Europe means business with this project, and that it would be better off investing in new gas fields than in risky endeavors like South Stream, which includes a 900-kilometer portion beneath the Black Sea.

EU leaders talk tough about charting their own energy future. So far, though, no such will is forthcoming. Collaboration with the Kremlin appears to be more popular.

Copyright (c) 2008 Dow Jones & Company, Inc.