Brussels fails to woo Caspian or Iraqi gas suppliers.

Op-Ed: By Alexandros Petersen, The Wall Street Journal
New York, New York, Monday, August 10, 2009

Last month’s euphoria over the European Union’s agreement with Turkey on the Nabucco gas pipeline was perhaps a little premature—Brussels still has a long way to go to reduce its energy dependence from Russia.

No doubt the agreement on the terms for Nabucco’s construction between Turkey and the other prospective pipeline transit states—Bulgaria, Romania, Hungary and Austria—is a step forward. The problem, though, is that not a single Caspian gas-producing country has yet signed on to the project.

Just before the EU signed the agreement in Ankara, Azerbaijan—one of Nabucco’s potential suppliers—agreed on an export deal with Russia’s Gazprom. The gas is officially destined for Russian consumption but could also be resold to EU consumers at ramped-up prices.

With just 500 million cubic meters of gas a year, however, the contract seems more designed to get the West’s attention than to ship serious quantities of gas to Russia. It’s basically a warning shot to Europe as Baku is telling Brussels that it could get a bigger deal with Moscow if Europe doesn’t get its act together.

And this is the EU’s main problem: It is not alone in vying for Caspian gas. Apart from Russia there is also interest from China, potentially India and even Iran. Brussels, as well as U.S. diplomats tasked with improving Europe’s energy security, will have to step up their efforts to put together a comprehensive deal.

While Nabucco is the EU’s primary southern-corridor project to diversify supplies away from Russia, it is far from receiving the investment needed to meet the 2014 time frame for its completion. The consortium—made up of the transit states’ national energy companies (OMV, MOL, BOTAS, Transgaz, Bulgargaz) and Germany’s RWE—will only commit specific funds once the producers have signed up. To make matters worse, the other pipelines that would feed gas into Nabucco have received even less attention from Brussels.
In its first stage, Nabucco could transport 10-15 billion cubic meters of gas by just tapping into Azeri fields. But in order to deliver the full 31 billion cubic meters of gas a year—which would be about 5% of Europe’s projected gas consumption by the time the pipeline is finished—Nabucco would have to access Turkmen reserves.

Reaching Turkmenistan’s fields, though, requires building the Trans-Caspian pipeline to connect Turkemistan with Azerbaijan. That project was actually on the cusp of realization well before Nabucco. But a lack of Western political will in the early part of this decade led to the plan’s disruption. Contrary to normal business practice, the Europeans wanted Turkmenistan and Azerbaijan to agree to the pipeline before making an offer for the gas. Naturally, the two producer countries balked.

Then last year, an EU delegation almost sealed a preliminary deal with Turkmenistan only to spoil it all in the last minute. The Turkmen offered to supply Nabucco with 10 billion cubic meters of gas a year but wanted that figure to remain confidential until a final deal had been signed so as not to undermine its talks with China, Iran and Russia for the same gas. Unfortunately, the European Commission immediately revealed the offer to the press, prompting Turkmenistan to retract its offer.

Ashgabat recently tried to revive the talks, sending an envoy to Brussels and its foreign minister to Washington. But that window of opportunity may have just closed. Talks between Azerbaijan and Turkmenistan to divvy up Caspian seabed resources ended in acrimony on July 24. A firm European offer would help solve this Azeri-Turkmen dispute.

The Europeans also have a long way to go to catch up to their Chinese competitors, who just poured $3 billion into Turkmenistan’s South Yolotan gas field and stepped-up efforts for a pipeline to China across Kazakhstan. That pipeline may be finished as early as 2010—one year ahead of schedule.

Another possibility would be to link Nabucco to Iraq. The country has enough natural gas to fill at least five Nabucco-sized pipelines. Now that Iraq’s highly anticipated natural-resources law has been finalized, the still-volatile country presents a realistic option for Europe. Two of the Nabucco consortium companies, Austria’s OMV and Hungary’s MOL, have already invested in gas fields in Iraqi Kurdistan.

Many Iraqi politicians, however, prefer keeping their gas for domestic consumption and export through the Persian Gulf. Neither Washington nor Brussels has so far made much effort to court Baghdad for Nabucco.

This is not to say that Russia’s alternative to Nabucco is faring any better. Prime Minister Vladimir Putin signed an agreement with Turkish Prime Minister Recep Tayyip Erdoğan just last Thursday to gain Ankara’s support for the South Stream gas pipeline, which would connect Southern and Central Europe with Russia through the Black Sea. But that project is no more than a geopolitical gambit.

The price of building South Stream—$20-$24 billion, the most expensive pipeline project in history—is prohibitively high. The proposed capacity of 61 billion cubic meters of gas a year appears far-fetched. That said, Moscow will do its best to undermine the Nabucco project to secure Caspian gas for its own consumption and cement Europe’s energy dependence on Russia.

Getting the Caspian producer countries on board remains Europe’s best chance of achieving energy security. So far, Europe’s capitals have done far too little to pursue that goal.

NOTE: Mr. Petersen is Dinu Patriciu fellow for trans-Atlantic energy security and associate director of the Eurasia Energy Center at the Atlantic Council, Washington, D.C.