The European Union has finally signalled its willingness to finance Nabucco, the proposed gas pipeline linking the Caspian Basin with Europe via Turkey. At a summit in Brussels on the weekend of 22 March, EU leaders gave final approval to a €200 million finance package intended to kick-start the controversial project. However, the pipeline is still by no means guaranteed, as a number of other obstacles, including ensuring reserves, remain. 

The money that the EU has pledged to provide comes from a larger pot of five billion euros earmarked for investment in energy and telecoms infrastructure as part of the wider European stimulus package. This is an important step forward for the Nabucco project and brings an intergovernmental accord closer to reality. However, the agreement was not reached easily, and comes after weeks of tortured wrangling and negotiations between heads of state.  

In the wake of the Russia-Ukraine gas crisis in early 2009, eastern European governments reiterated their support for the pipeline at a meeting in Budapest in late January. In response to eastern Europe’s pledged support, German chancellor Angela Merkel, backed by Italian prime minister Silvio Berlusconi, moved against the project. Both leaders attacked the proposals on the grounds that the construction of Nabucco is unlikely to begin for many years, undermining the stated objective of providing jobs and stimulating economic growth. This position belies a wider truth; neither Germany nor Italy is keen to invest in energy diversification projects, having secured bilateral energy treaties with Russia.

Somewhat ironically, chancellor Merkel’s insistence on the money being spent on projects with immediate economic impact may actually speed up the construction of the pipeline. If the Nabucco consortium is to receive the funds, they will need to bring the project’s start date forward to early 2010.

The €200 million will be made available to the Nabucco consortium via the European Investment Bank. The consortium consists of OMV (Austria), MOL (Hungary), Transgaz (Romania), Bulgargaz (Bulgaria), BOTAS (Turkey) and RWE (Germany), each with a 16.67% share. In early 2008 GDF-Suez’s attempt to gain a stake in the pipeline was vetoed by Turkey on political grounds. However, the State Oil Company of Azerbaijan Republic and Polish gas company PGNiG plan to join the project in the future.

The money being given to this consortium is essentially a loan, intended to be used to generate further cash. Somewhat optimistically, the EC estimates that this could eventually yield some two billion euros. Even if the final figure is only half that, it is symbolically important, Mr. Burchett says. “The loan comes at a time when credit markets have all but seized up and securing finance for any project, let alone one as risky as Nabucco is difficult. The EC, which has continued to back the project in the face of mounting obstacles, can legitimately view this as a victory.”

 It will also be seen as a victory for the eastern European states that view Nabucco as a means of escaping dependency on Russian gas. Poland, Slovakia and Romania in particular see reliance on Gazprom as the central threat (as opposed to transit through politically unstable Ukraine). This distinction was made explicit last week when a draft document presented at the EU heads of state summit replaced references to Nabucco with a more general proposal for pipelines through the “Southern Energy Corridor”. This implied tacit support and indeed potential funding for the Russian-backed South Stream pipeline, the latent rival to Nabucco; feeding Russian gas to Europe through Bulgaria. This proved unacceptable to the former Soviet satellite states, which insisted on explicit reference to Nabucco.

Their success in excluding South Stream is a set-back for Gazprom, which has until now proved adept at promoting its alternative (and for that matter Nord Stream) though divide and rule tactics.  

As the critical transit state, Turkey is demanding a pre-emptive right to buy 15% of the Azeri gas that will pass through the Nabucco pipeline en route to Europe. Furthermore, Ankara insists on paying less than European netback prices for that off-take portion, and on taxation rates higher than those proposed by other states through which the pipe would flow. These demands may cause turbulence in the future.

 In recent months, Turkey has started to voice these demands more confidently. Buoyed by the damage done to Russia’s reputation in Ukraine and Georgia, and by the potential for energy exports from an increasingly stable Iraq, primemMinister Recep Tayyip Erdogan envisages Turkey as Eurasia’s energy hub. Concurrently, he sees Europe as increasingly amenable to Ankara’s objectives. Mr. Erdogan’s confidence in the future of Nabucco was manifest two months ago when he essentially threatened to withdraw from the project if EU leaders were not more forthcoming over Turkey’s accession to the club.  As well as revealing how Ankara sees itself, this willingness to ‘play the energy card’ also poses a deeper questio – will Turkey follow Ukraine’s example and become more bullish in exacting transit fees? If so, this could prove an even bigger obstacle to Nabucco’s eventual realisation than securing upstream reserves.

Kash Burchett, Datamonitor

Mr Burchett’ full report is available from the Datamonitor Press Office: contact Matthew Dick, Datamonitor T: +44 20 7675 7824 F: +44 20 7675 7016