Nabucco strikes back

Two days after Gazprom pulled ahead in the race, Nabucco’s shareholders countered with their own major leap. Austria’s OMV and Hungary’s MOL said on May 17 that they struck a deal with United Arab Emirates firms Crescent Petroleum and Dana Gas, which operate fields in the Kurdistan region of Iraq, to supply the pipeline after meeting local demand in northern Iraq and Turkey.

OMV said it would pay $350 million for a 10 per cent stake in the company developing the fields and MOL would give up six per cent of its shares in exchange for a 10 per cent stake.

MOL will give three per cent of its shares each to Crescent and Dana. In return, MOL will also take 10 percent in the joint venture.

The Khor Mor and Chemchemal gas fields in Kurdistan had enough reserves to "satisfy the requirements of local industry with substantial quantities available for export to destinations primarily Turkey and Europe via the planned Nabucco pipeline," OMV said in a statement.

"It’s an important and promising development for the acquisition of a huge volume of natural gas for Turkey and for Europe via Nabucco," Nabucco managing director Reinhard Mitschek said, as quoted by Reuters.

OMV and MOL jointly own 33.3 per cent in Nabucco. The rest is equally split between Bulgaria’s Bulgargaz, Romania’s Transgaz, Turkey’s Botas and Germany’s RWE.

The pipeline was initially planned to carry Caspian gas through Turkey, Bulgaria, Romania and Hungary to Austria. The project, on which construction is meant to start in 2011 with the first gas deliveries planned for 2014, is intended to deliver 15 billion cubic metres of gas a year through a 3300km pipeline, doubling to 31 billion cubic metres at full capacity.

South Stream, with a submerged portion of 900km under the Black Sea and 2300km from Bulgaria to Greece and Austria, is scheduled to make its first deliveries in 2015.

Despite unwaivering political support and a five-year head start on South Stream, Nabucco shareholders have not secured enough gas to fill the pipeline. The deal in Kurdistan is far from a certain shot either.

"We will not allow any side to export gas from the region without the approval of the central government and the Iraqi oil ministry," Iraqi oil minister Hussain al-Shahristani said, as quoted by Reuters on May 18.

Opposition in Baghdad and squabbles with Ankara about transit conditions may yet scupper Nabucco’s progress, as Russian officials are all too eager to point out. "I consider South Stream to have every chance of being realised earlier than Nabucco. Nabucco has a range of issues which still need to be resolved," Russian energy minister Sergei Shmatko said on May 18. "I don’t think the partners who will supply the resource base for Nabucco will be too liberal on price."

Even if it takes doubling South Stream’s capacity, Gazprom looks willing to make the gamble that would persuade potential Nabucco suppliers to chose its rival instead.

Pipe dreams
Russia and Italy’s plans to build the world’s largest underwater gas pipeline was based on shaky economics, Russian business daily Kommersant said on May 18. Looking in-depth at the scant details of the deals signed three days earlier, the daily dismissed the new estimates of the project costs – $8.6 billion versus the earlier 25 billion euro – as irrelevant. The costs cut and the capacity increase proved only that Russia was determined to leave Nabucco not even scraps.

Even the technocrats involved in the negotiations were caught unawares by Putin and Berlusconi’s decision to increase the capacity of the underwater stretch of the pipeline, the daily said, while independent analysts were surprised by the new dimension of the project.

Based on the costs announced for South Stream’s twin project in the Baltic Sea, Nord Stream, South Stream costs outside Russia would be at least $32 billion, Kommersant quoted Mihail Korchemkin, head of consultancy firm East European Gas Analysis, as saying. In an investor meeting in February, Gazprom’s own estimates were in the 19-24 billion euro range.

Gazprom had few new customers that could buy some of the added capacity, certainly not enough to justify the extra supply, Kommersant said, quoting an unnamed company source. Some of the excess capacity could be used by diverting it to boost the Blue Stream pipeline to Turkey, as agreed by Putin and Turkish prime minister Recep Tayyip Erdogan on May 16, just a day after the signing of the South Stream package.

Ultimately, the goal was to impress Europe and dwarf the importance of Nabucco, Kommersant quoted Valeriy Nestorov from investment bank Troika Dialog as saying. If Nabucco had difficulties securing supply, South Stream was likely to run into the opposite – finding enough demand – considering the number of transit contracts Gazprom already had, Nestorov said.