The failure of Nabucco West is the result of a lack of strategic guidance and the inability of the Nabucco consortium and its shareholders to deliver on the market policy expectations of both Governments and societies in their respective countries. But it is too simplistic to say that the choice by the Shah Deniz II Consortium for the Trans Adriatic Pipeline (TAP) was made purely out of “commercial” considerations, argues Peter Poptchev, who has been Special Energy Envoy for Bulgaria in the past seven years. According to Ambassador Poptchev, TAP’s prospects cannot be taken for granted – and Nabucco could still become the ideal nucleus of a functioning gas market in Central and South East Europe.
Photo: Azerbaijani national energy company Socar as UEFA sponsor (Photo Firuza48)
The recent Shah Deniz Consortium’s Final Selection Decision on a preferred pipeline to carry Caspian gas to Europe cheered Governments and companies sponsoring TAP and disappointed those behind Nabucco West, formerly regarded as the Southern Corridor’s “flagship project”. Observers in Europe came out with bitter reactions like “a new Yalta”, “resignation to Gazprom” and “failure of the European energy policy”. The official statements of the Governments concerned were largely moderate, voicing disappointment but also a resolution to proceed with the realization of Nabucco West.
Regardless of hurt feelings and a considerable loss of money and efforts, the Southern Corridor will be opened thanks to the engineering talent and investments of the Shah Deniz Four and the TAP Consortium.
The Nabucco saga has undoubtedly turned into a case study of policy failure. However, the irreplaceable market integration value of Nabucco West will continue to engage the minds of those who believe in European energy policy and care about European energy security. A serious debate has yet to evolve.
The good news
Regardless of hurt feelings and a considerable loss of money and efforts, the Southern Corridor will be opened thanks to the engineering talent and investments of the Shah Deniz Four and the TAP Consortium. Only four years ago the Southern Gas Corridor was just a concept, a daring intention, in which few people and even fewer governments believed. The physical flow of 10 bcma (billion cubic meters per annum) from Baku to Europe and 6 bcma to Turkey will commence in 2018, if not earlier.
TAP is expected to boost the shattered economy of Greece, a strategically important EU and NATO Member State and a notable player in South East Europe. TAP, in combination with a SOCAR-privatized Greek gas transmission system and, most probably, Gazprom-privatized DEPA, will turn Greece into a gas distribution and gas pricing hub. In principle, this development could impact positively the future integrated gas market in Central and South East Europe, depending on the degree of responsibility and cooperation with neighbours of both Greece and Italy.
However, TAP’s prospects cannot be taken for granted. At least until 2020 Greece will not be the international investors’ best choice, to put it mildly. Besides, it could turn out that the market advantages that have been intended through TAP could actually be realized through Nabucco West more efficiently.
How “commercial” is the decision?
The failure of Nabucco West is the logical consequence of a rather light-hearted and short-sighted decision – a Joint Understanding – taken in November 2011 by EU Member States with a stake in the Southern Corridor. The European Commission was also instrumental in negotiating the Joint Understanding which stipulated that the EU Southern Corridor related countries and companies would support and accept the award decision of the Shah Deniz Consortium, “irrespective of the commercial outcome of the award process” – that is, Nabucco West or TAP
The Joint Understanding opted for an “exclusion” pipeline strategy, giving in to the interests of the upstream companies only and displaying a total disregard for the negative impact on European energy security if Nabucco West were to lose.
Taking award decisions on a commercial basis is the right approach. It should remain the guiding principle in the strategic management of European energy, in accordance with European energy acquis. It should however be applied in a manner that does not weaken the market prospects of countries like those in Central and South East Europe where a functioning gas market depends, for historical reasons, on a specific “market design” – coordinated regional infrastructure development coupled with enhanced diversity of gas supply.
The Joint Understanding would have supported the logic as well as the practical implementation of this regional market approach, had it been developed differently. It should have envisaged a stated phased-in utilization of both Nabucco West and TAP regardless of the chronology of the launching of each pipeline – within a reasonable time frame (such ideas were advanced but disregarded). Such an approach would have necessitated a survey on gas demand and on additional sources outside the Shah Deniz 2 gas field. Instead, the Joint Understanding opted for an “exclusion” pipeline strategy, giving in to the interests of the upstream companies only and displaying a total disregard for the negative impact on European energy security if Nabucco West were to lose.
The Nabucco-side participants in that Ministerial meeting back in November 2011 might have assumed, apparently wrongly, that just because Nabucco West had been well researched and developed as a section of “Nabucco-classic”, it would end up the winning project. The opposite should have been anticipated: as a private companies’ project TAP has, by definition, a comparative “commercial” advantage in regard to Nabucco West. The latter is based on the Public-Private Partnership principle and relies partially on institutional funds. The PPP principle has been embodied, inter alia, in the Nabucco Committee, a body of unique composition and powers, comprising the five Parties to the Nabucco IGA (intergovernmental agreement), the European Commission, NIC (Nabucco Gas Pipeline International, the operational company) and 3 international financial institutions. This body might have scared some of the international oil majors in the Shah Deniz Consortium: they have quite a different perception and methods of doing international gas business.
This is not to say that Nabucco West is lacking in commercial potential, on the contrary. Between September 2012 and 30 April 2013, the date on which both pipeline projects submitted their respective “competition packages”, the NIC Shareholders, spurred by events and becoming, with an unfortunate delay, much more accountable to their Governments, successfully completed the full range of Shah Deniz requirements. For their part, the four EU Governments issued extensions of all licenses and other permits necessary. Much of this work has not even begun in TAP-related governments.
It is difficult to see the commercial rationale behind the TAP decision.
In April 2012 the Shah Deniz Consortium announced 8 selection criteria, namely: commerciality, project deliverability, financial deliverability, engineering design, alignment and transparency, safe and efficient operability, scalability and public policy considerations. The last criterion embodies a body of EU energy acquis having been developed in particular after the gas crisis of January 2009.
There is irony in the fact that while Shah Deniz experts have been reported to evaluate both Nabucco West and TAP against these previously announced criteria, neither the official Shah Deniz Final Selection Decision statement, nor the unofficial contacts with “Nabucco” Governments revealed any specific conclusions of “commercial” nature or references to parameters that would have convinced the European expert community that the TAP selection had been made on a commercial basis. Indeed, on one occasion the authorized Shah Deniz representatives referred to “seven” and on another occasion to “eight” selection criteria.
The difference was not accidental. Shah Deniz’s No. 8 selection criterion reads in full, as follows: meeting of Azerbaijan strategic considerations, EU’s stated objective of enhancing supply diversity of European natural gas markets, and ensuring sustained support from all stakeholders. It is of course for Azerbaijan to formulate and implement its own strategic interests through TAP. The purchase of DESFA probably establishes a winning combination. Outside of this, it would be difficult to expect that the Shah Deniz Consortium could attain a high price for Caspian gas on the Greek market because it is already moderately diversified and enjoys a rather preferential price for Algerian LNG delivered at Revithoussa. “Friendly” Cypriot gas is in the offing, probably by the time Caspian gas begins to flow. It is laudable that TAP will deliver gas to markets like Albania and Montenegro for the first time but those two markets will remain modest for a very long time to come. As to Croatia, she is practically self-sufficient in gas. Last year the average gas price in South East Europe (mainly Bulgaria, Romania, Hungary, some outside of EU) was 15% higher than the spot-market price at Baumgarten and 5% percent higher than the price on the Italian market. Presently the Italian market is saturated but even if it were not, again, a high price could not be could not be sustained for a long period since Italy has many other more advantageous supply options.
So it is difficult to see the commercial rationale behind the TAP selection. When it comes to its Adriatic-Ionian pipeline extension the case becomes even weaker: early estimates indicate that the TAP Western Balkans option will be more expensive than the cost of the required Nabucco West-related interconnections in the region.
The way ahead
When we turn to the EU perspective, it is clear that the “stated objective of enhancing supply diversity” has not been really met by the choice for TAP, except in principle and with limited consequences. This challenge has yet to be addressed in a systematic way through various market and strategic options to be realized in a space extending from Greece to Poland and from the Bulgarian-Turkish border to Slovakia and the Czech Republic, including the whole of the Western Balkans. In this region the one source, one supplier, one directional gas flow model prevails.
This explains the bigger damage incurred during the January 2009 gas crisis. With one or two exceptions, these are inflexible “capacity markets”, with uncompetitive gas prices. Ideally, within a period of 5 -10 years, a fully liberalized, competitive, liquid, interconnected and inter-operational gas market should be in place in Central and South East Europe. There is no other way for these economies and people to get an option of secure, sustainable and affordable energy in the form of natural gas. It is a matter of economic development, growth and jobs, not one of geopolitical stand-off.
Such a grand market design should rest on a solid regulatory basis. The Third Liberalisation Package should serve, inter alia, two major goals: to underpin and guide local gas companies’ structural reform as well as cross-border infrastructure; and to streamline the conduct of third parties in long-haul gas supply projects to comply with EU energy acquis.
Nabucco West, or a variation if necessary, is ideally suited to the purpose of establishing the nucleus of such a functional regional gas market – with its main pipeline to the heart of Europe coupled with more than 12 interconnections and a number of enabling gas storage facilities. TAP provides valuable but marginal input in this regard. Regional LNG terminals as well as gas market developments, like shale gas, LNG and spot market trends, should also be brought into the picture. In principle, the same should apply to South Stream if it accepts to comply with the Third package and joins in the development of a regional gas target model.
Sulking and division among European countries and companies is no option. Both the European Commission and the European Energy Community should be much more engaged this time around.
Shah Deniz Consortium’s intentions to develop the Southern Corridor further are not quite clear yet. There are indications that following the initiation of TANAP (the Trans Anatolian pipeline that will run through Turkey) and “TAP-proper” under a Phase 1, there will be a Phase 2 within which the Adriatic-Ionian pipeline as well as interconnections Greece-Bulgaria and Turkey-Bulgaria will be built, to be followed by a Phase 3 which will, finally, be dedicated to constructing Nabucco West. In the absence of stated time-frames, volumes, schedules and alignment of schedules, and a regulatory framework, it is very hard to predict what will happen exactly.
Under the circumstances, it can be expected that a number of countries in Central and South East Europe will in the meantime stimulate Exploration and Production activities on their territories for both conventional and unconventional gas and will turn to new source options in the Black Sea and the Eastern Mediterranean. Nicosia has recently agreed with Noble Energy of U.S. that the latter would start shipping gas from Block 12 in 2016 rather than 2018.
What this means, in my view, is that consultations and negotiations between the Parties to the Nabucco Committee and NIC and Shah Deniz should be resumed. There are grains of hope in the broader Shah Deniz approach, following the predominantly dismissive decision of 28 June. One possibility lies in the interconnection on the Bulgarian-Turkish border. Should TANAP confirm a diameter of 56” as planned (meaning a capacity of 30 – 40 bcma, depending on scalability), Nabucco West will become plausible and desirable.
The next logical step is to develop a commonly acceptable concept for an interconnection between Nabucco West and TANAP according to the specifications and as an integral part of both pipelines. Under this option the Nabucco Parties are likely to see a common interest in building the interconnection well in advance because this EU-Turkey infrastructure will enhance healthy competition and provide some commercial and technical solutions before the physical flow of additional (post-TAP) Southern Corridor gas begins.
The other definitely positive move would be to negotiate as short as possible a time-gap between the launching of TAP and the launching of Nabucco West, preferably two years.
Energy diplomacy, like classic diplomacy, is capable of creating opportunities and finding solutions. Sulking and division among European countries and companies is no option. Both the European Commission and the European Energy Community should be much more engaged this time around.
Ambassador Peter Poptchev is a career diplomat, with over 30 years of contribution to Bulgaria’s bilateral and multilateral diplomacy in Lagos, Geneva, Brussels, Dublin and Vienna. Presently he is Ambassador-at large and Advisor to the Minister of Economy and Energy. At the Ministry of Foreign Affairs he held since 2007 the position of Ambassador-at-large for Energy Security and Climate Change. He was on the Bulgarian delegation negotiating the South Stream intergovernmental agreement; headed the team negotiating the Nabucco IGA and helped establish an international programme on energy security at the Diplomatic Institute. He has also held a number of elected positions at UN and specialized international organizations. A series of international treaties, conventions and protocols have been negotiated under his chairmanship and drafting. The author of four books and numerous articles in Bulgarian and English, he researches in particular the development of EU and NATO in the framework of globalization and asymmetric threats and challenges to security, including energy security and climate change.