Nabucco’s Final Curtain

The European Union needs natural gas. It needs it to fuel its economy and to keep households warm in winter. It needs it because it is a versatile energy source with multiple uses and because it is the least contaminating fossil fuel.

And although the EU itself does not have much gas, its neighbors have plenty. Also, gas can be imported by sea.

However, so far, there is no clear energy policy for the Union, and member states see energy issues as national. Thus, EU states and companies compete against each other to meet their own needs and make the best possible deal.

Nabucco, a project led by the Austrian OMV (Österreichische Mineralölverwaltung), was once the flagship of the European Commission in the Southern Corridor. The EC even labeled it as a project of "strategic importance".

Originally planned to bring up to 31 billion cubic metres of gas per annum (bcma) from the Caspian region to the Central European Gas Hub (CEGH) in Baumgarten outside Vienna, the project was to span five countries and almost 4,000 km of pipeline.

 

Trans-Anatolian competitor

Then in 2012, everything changed with the decision by Azerbaijan and Turkey to launch a competing project, the Trans-Anatolian gas pipeline (TANAP). And Nabucco reinvented itself. Reduced to 1,329km, Nabucco-West was to bring to Austria up to 23bcma of gas from the Turkish border – still well in excess of Austria’s needs.

Currently, Austria uses around 9bcm of gas, according to the US Energy Information Administration, while importing, as in 2012, some 42bcm. The surplus is exported to other countries (34bcm in 2012), using the CEGH as a main distribution and trading point.

Access to the source gas was always at the center of Nabucco’s viability and Azerbaijani gas from the Shah Deniz Consortium was critical for the project to work.

Yet no deal was ever on the table.

Nabucco competed for gas supplies with other European projects such as the Trans-Adriatic Pipeline (TAP, originally led by the Norwegian Statoil, the Swiss Axpo and the German E.ON), and for clients with non-European projects such as the Russian South Stream (led by Gazprom). Under the stated objective of enhancing security of supply, each pursued its own interests in this very lucrative business.

Then last June, the Shah Deniz Consortium (SDC) chose TAP for the surplus destined for Europe, through Italy, Greece and Albania. Allegedly, TAP’s offer was simply better, according to Gordon Birrell, regional representative for BP.

However, most analysts question this explanation. Italy and Greece have saturated markets and well-known economic difficulties. Furthermore, BP, SOCAR (the Azerbaijani national oil company) and Statoil participate now in both SDC and TAP.

Others may welcome the decision. TAP’s lower capacity (10bcma) poses less of a threat to South Stream (63 bcma), Nabucco long-time rival. And Gazprom’s CEO Alexeï Miller described SDC's decision as the "death of the Nabucco project". South Stream is also considering bringing gas to Austria in collaboration with OMV. With Nabucco offstage, this option may turn into a reality.

SDC’s decision was the final blow to Nabucco. Although officially the "shareholders are considering alternatives for the use of the project and its assets," Nabucco is in the process of a controlled shut down, starting with closure of the website and cutbacks in staff.

Industry insiders are not all that surprised. "The project was headed in the wrong direction right from the beginning," said Laura Atkins, a former analyst for OPEC in Vienna, now working for a research and upstream/downstream consultancy company specializing in unconventional energy sources. To enhance Europe’s security of supply, mega-pipelines such as Nabucco are not the answer, she said; building a pipeline is "costly, difficult and requires many parties to be in agreement." Besides, pipelines physically attach supplier and client to one another, requiring long term cooperation and trust. Any remaining assets, she said, should be shifted towards more flexible solutions.

And anyway, there are other ways to increase Europe’s number of gas suppliers.  Instead of a pipeline, Atkins added, European countries should invest in Liquefied Natural Gas (LNG) and LNG terminals, which increase the potential number of suppliers.

Although still not fully developed, the LNG market is more dynamic and flexible and competition here is higher. Europe’s potentially large shale gas deposits could also bring more independence, at least to those countries willing to exploit their reserves. In Europe, the United Kingdom pioneers the use of this unconventional energy source, followed by Germany and Poland.

In Austria, however, OMV abandoned plans a year ago to exploit Austria’s potential shale gas, driven in part, but not only, by environmental concerns.

While the negative public perception of hydraulic fracturing, or fracking, was a factor, OMV has held on to its plans for exploring and exploiting shale gas elsewhere. Although shale gas is likely to become part of Europe’s energy mix, it will be neither "a full replacement" nor a major resource as in the US, Atkins says, an opinion shared by EC’s Joint Research Centre in a report published in 2012.

Although OMV’s idea to bring gas from the Caspian region through Nabucco as originally envisaged will not materialize, bringing gas to Baumgarten is still an attractive prospect. The company’s new plans, in partnership with the American super-major ExxonMobil, point towards promising offshore fields in the Romanian Black Sea. Shale gas in Ukraine may also be accessible to the Austrian group.

As for Nabucco, the consortium led by OMV will now have to regroup and turn the fiasco into a learning opportunity, said Enrique San Martin,  a professor of Applied Economics at the Universidad Nacional de Educación a Distancia (UNED) in Madrid. Analysing and identifying the reasons why Nabucco failed and why TAP succeeded are necessary steps to be taken by the stakeholders, including the EC. The possibility of turning the CEGH into a leading distribution and trading hub may be the golden opportunity they need.