Energy Transit Hub

Economic News

22 Jul 2010
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Bulgaria's strategic position between the hydrocarbon-rich countries of the Caucasus and Central Asia and energy-hungry Europe is again brought to the fore. The stop-start progeny of the Nabucco pipeline, designed to transport gas to Europe bypassing Russia, may have entered a new phase. However, political wrangles over the source of the pipeline's gas remain and Bulgaria, which provisionally sealed a deal for the construction of a Russian-funded pipeline through its territory last year, could face a tough choice.

The Nabucco project, which has long been on the drawing board, envisages the construction of a 3300 km pipeline running from the Caucasus through Turkey, Bulgaria, Romania, Hungary and Austria, for distributing gas to the wider Western European market. The energy firms directly involved in Nabucco are Bulgarian Bulgargaz, Turkey's BOTAS, Hungarian outfit MOL, Transgaz from Romania, Vienna-based OMV, which has become an increasingly influential player in the game of European energy security, and German giant RWE, which joined the consortium in February this year. France's Gaz de France (GDF) would also like to join as the seventh partner, but is facing stiff opposition from the Turkish side due to disagreements over France's stance on the alleged Armenian "genocide" at the end of the First World War.

According to current plans, the Nabucco pipeline should be completed by 2017, though delays in the planning process make this date little better than speculative. A further setback came last month from the Nabucco consortium's announcement that the project could cost $12.3bn, rather than the $7.2bn originally forecast.

The EU has thrown its support behind Nabucco as a vital factor in diversifying the continent's energy supply away from an increasingly belligerent Russia. This leaves Bulgaria in a difficult position, given its commitment to another, Russian-funded, gas pipeline.

Bulgaria's economy and energy minister Petar Dimitrov has made it clear that the Bulgarian government's official position is that it sees no contradiction between its support for Nabucco and the agreement to run the so-called "South Stream" gas pipeline which will carry gas from Russia through Bulgaria to Central Europe. The South Stream project, and Bulgaria's involvement in it, has however raised some eyebrows in Brussels and beyond, as it has been seen as a sign of Sofia's continued closeness to the Kremlin, despite its newfound EU commitments.

Dimitrov asserts that the combined capacity of the South Stream and Nabucco pipelines will be 62bn cubic metres per year, equal to only a fifth of the European EU's annual needs by 2020; therefore neither exercises a stranglehold on the continent's energy supplies.

There have been allegations that Russia has made deals with Central Asian countries previously included in the Nabucco scheme, encouraging them to withdraw from the project. In the same line, there have been reports that the whole project might be ruined by Russian manoeuvrings. However, it appears that Azerbaijan has moved to offer around 8bn cubic metres of gas from its Shakh Deniz 2 field to the Nabucco cause, probably in exchange for greater political and economic cooperation with the EU and US. This cooperation could involve technical development of Azerbaijan's gas sector, officials have suggested. Other enticements could include cheap loans and easing visa restrictions on Azeris, though these have yet to be offered.

On June 4, Dimitrov reaffirmed that the oil-rich Caucasus state of Azerbaijan was a potential source of gas to supply the Nabucco pipeline. Werner Auli, CEO of Austria's OMV Gas, arguably the most important single firm involved in the Nabucco project, has also cited Azerbaijan as a possible source of gas for the Nabucco pipeline. The implication is that Central Asian countries may no longer be willing to supply the project after Russian pressure. Meanwhile, however, Gazprom has also been making overtures to Baku over supplying South Stream with Azeri gas.

A further twist in the story has come from OMV's assertion that the pipeline could use gas from Iran, currently regarded as something of an outsider by the EU and US. "Especially after 2017, Iranian and Iraqi gas could be considered," Auli said on June 2. His statement that "even Russia could be one of the suppliers...we are not excluding anyone", may raise even more concern in Brussels and beyond.

Yet another dimension is added by recent reports that Russian state energy giant Gazprom is looking to buy controlling stakes in both OMV and MOL, which could put a whole new complexion on the Nabucco issue.

Currently, South Stream seems likely to get the go-ahead before Nabucco, given the financing and supply problems the latter faces. If the two projects are indeed mutually exclusive, this may spell trouble for Nabucco, given the Bulgarian government's understandable desire to boost the national coffers sooner rather than later. With its place at the European table already assured, Sofia may also feel that it can risk.

Much as it may irritate Brussels, Bulgaria benefits from its geographical relationship and a strong rapport with Moscow. One of the unchanging elements in the Nabucco and South Stream stories is Bulgaria's central role as a transit point. Tougher choices may lie ahead, but for the time being, Bulgaria has enviable suitors.

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