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CHAPTER III: Nabucco pipeline project

Project outline

This chapter will be begin with a description of the Nabucco project, as it is crucial to understanding how the project became a tool of Azerbaijan's foreign-policy. In this part, the key description of Nabucco pipeline project with its development phases is depicted. This description serves the purpose of locating Azerbaijan’s decisions regarding Nabucco in the following parts of the chapter. Nabucco pipeline is a 7.9 billion euro ($10.69 billion) project to transport gas from Turkey to Austria through Bulgaria, Romania and Hungary.

Map 1. Nabucco pipeline project

Source: European Dialogue, 2015, From

http://www.google.de/imgres?imgurl=http://eurodialogue.org/files/fckeditor_files/Nabucco-Pipeline-map.gif&imgrefurl=http://eurodialogue.org/NabuccoMap&h=564&w=800&tbnid=l5GhNF4C83Oa1M:&zoom=1&tbnh=94&tbnw=134&usg=__Lh8VBI5ZTPHPmpZ8FbTgNo5UEK4=&docid=x2r4jwUU0B3r7M, Accessed on 02 May, 2015.

Construction of the 3,300-km (2,050 mile) pipeline was scheduled to start in 2011 and the first deliveries were expected in 2014 with an initial annual capacity of 8-10 bcm. It was estimated that the pipeline would be able to transport a maximum of 31 billion cubic metres of gas annually. The first talks over the project were held in February 2002 between OMV Gas and BOTAS, MOL of Hungary, Transgaz of Romania and Bulgargaz EAD of Bulgaria. In 2002 the five parties signed a protocol of their intention to jointly construct a new gas pipeline connecting the significant Middle East, Egyptian and Caspian gas reserves with Austria and even further into Europe through a new gas pipeline crossing Turkey, Bulgaria, Romania and Hungary.

Nabucco project planned to transfer natural gas of different sources from Erzurum in Turkey to Baumgarten in Austria. The preparations for Nabucco project were started in 2002. Nabucco pipeline project, which was to have eventually transported gas from the Caspian Sea to Europe in order to bypass Russia, was cancelled in 2013. A project that began with high hopes, and sponsored by EU, it slowly dwindled away. In the summer of 2012 it was reduced to 1,300 km from an original 3,900 km. Eastern section, which was to have run from Azerbaijan across Georgia and Turkey to the Bulgarian border, was abandoned. Instead, Trans Anatolian Pipeline (TANAP), funded by Azerbaijan and Turkey, is due to come into operation in 2018. In 2013, Nabucco-West, which was to have carried gas from Turkey to Austria, through Bulgaria, Romania and Hungary, was only remaining part of the original project. At the end of June, it was announced that this project would also be dropped.

In October 2002 the parties involved commissioned a feasibility study for the construction of the new gas pipeline. In December 2003 EUropean Commission awarded a grant amounting to about 50 percent of the cost to conduct the feasibility study which included market analysis, technical, economic and financial studies. In 2004 the feasibility study was completed. The results indicated that the project was technically and economically feasible.In 2005 Nabucco partners moved ahead with the project, launching into the Development Phase. In 2006 the project partners took on a short term adviser to assist in tendering process of the engineering and development phase of the project. - In June 2005 the joint-venture agreement was signed. The agreement laid out the rules of Nabucco pipeline project. The RWE AG (RWEG.DE) becomes the sixth shareholder in February 2008. The consortium said it was open to a seventh shareholder if it further strengthens the project⁵⁶.

The Nabucco project had way too higher importance as it had the capacity of 31 bcma; which could have played important role in diversification of supply sources for the natural gas of EU. In other words, was supposedly would decrease EU’s energy dependence to a considerable degree from the Russia. It should be stated that Nabucco gas pipeline was not just counted on the gas from Shah Deniz field in Azerbaijan. To be attached to the planned Tran-Caspian gas pipeline in Turkey, it was supposed to transfer also potential gas from Central Asia, Caspian Basin as well as from the Middle East to EUropean Market.

Initially the investment costs for Nabucco was estimated at 5 billion Euros, which later on revised and indicated as high as 17 billion Euros.⁵⁷ Nabucco consortium consisted of 6 partners, one from each participating countries. The follows are the partners: Austria's OMV, Turkey's Botas, Bulgaria's Bulgargaz, Hungary's MOL, Romania's Transgaz and Germany`s RWE, which joined the project later on.⁵⁸ The Managing Director of Nabucco Gas Pipeline International Ltd, Reinhard Mitschek, stated that "in the future, Europe will need far more energy than it has until now. Nabucco project is our solution." With its international route, Nabucco pipeline is an important European infrastructure project, connecting Turkey, Bulgaria, Romania, Hungary and Austria.’⁵⁹

Despite many problems, on July 13 2009 an intergovernmental agreement on Nabucco was signed in Ankara among the prime ministers of Austria, Bulgaria, Hungary and Turkey and also the president of Romania.⁶⁰ According to this agreement the construction works were agreed to be done by 2014. Nabucco was a strategic project in terms of its support to EU`s energy policy, to the diversification of supply sources. For that matter, it was declared as one of the key infrastructure projects of EUropean Union’s Trans European Networks (TEN) program.<sup>61</sup> The enormous amount of gas flow from the Caspian basin and Middle East to Europe through Turkey was considered to cut down EU`s dependence on the Gazprom`s monopoly.⁶²

The failure of the Nabucco project did not harm the basic interests of Azerbaijan, which was to sell its gas resources to the promising European market. However it is not to deny that if realized, Nabucco project could have given Azerbaijan more geopolitical importance. The Shah-Deniz II consortium, which runs the largest gas field in Azerbaijan, awarded contract for the transportation of gas to the Trans Adriatic Pipeline (TAP), which runs through Greece and Albania and under the Adriatic Sea to Southern Italy. This route is a 500 km shorter than that proposed by the original Nabucco project. However, ever since its inception the project ran into problems. No steady and reliable energy supplier could be found, with Iran, Turkmenistan, Egypt and Iraq all pulling out. The final end came when Azerbaijan rejected the plan. Nabucco, backed by the European Union as a way to tap Caspian gas and diversify supplies away from Russia, has become “too politicized,” said President Aliyev in an interview to the Wall Street Journal.⁶³ From the beginning Azerbaijan acted carefully not openly to go against Russian interest; indeed that is also core of Azerbaijan’s foreign policy not to agitate its biggest neighbour. That taken into account, however, as the negotiating process shows Azerbaijan itself played a big role in the failure of the project. In other words, Azerbaijani government, pursuing its own national interest, did not openly give its support for the Nabucco, though it stated its willingness to supply its gas resources for the project. Azerbaijan showed its open intention to support TANAP and TAP projects, because they are in no way could be associated going against Russian interests; that is to say, supporting TANAP and TAP fulfils Azerbaijani national interest in two ways. First, they are enough for Azerbaijan to export its natural gas; second they are not agitating Russia, which is also core of Azerbaijan’s multi-vectored foreign policy.

Here was a good example of Azerbaijan’s strategy. The projected trans-Caspian gas pipeline is expected to transfer Central Asian gas transiting Azerbaijan and Georgia to Turkey and then to connect to Nabucco pipeline. Indeed what made Nabucco more promising were the possible gas transfers from Central Asia and Middle East, since Azerbaijan’s own gas resources cannot alone play that crucial role for the purpose of diversification of the supply sources for EU. It does not mean that Azerbaijani gas sources are not attractive for the EU members; especially if think about those Eastern European countries - Poland, Bulgaria, Austria, Slovakia etc., - who are mainly dependent on the Russian gas supplies.⁶⁴ If we think EU as a unit and look at the role of Azerbaijan in meeting its gas demands, then Azerbaijan’s gas resources have limited importance; however, if we take certain EU members, such as Bulgaria, than Azerbaijan’s gas resources can play vital role in rescuing them from Gazprom’s dependence. Therefore it is important to understand the importance of Azerbaijani gas resources for single member states of the EU.

However, if realised Nabucco could have played a crucial role in meeting the overall gas demands of the EU. But still Azerbaijan served the EU’s energy diversification policy and energy security, but with a limited impact in comparison with the planned Nabucco project.