Nabucco, South Stream Backers Strive for Upper Hand at Bulgaria Energy Summit

More Talk, But More Urgency Too

The competition between the proposed Nabucco and South Stream gas pipelines, which for the most part has played out behind the scenes on various stages at different times, burst out into the open on Friday (24 April) as backers of the two projects met in the Bulgarian capital, Sofia, for a high-profile summit focused on Europe's energy security. The summit, dubbed "Natural Gas for Europe, Security and Partnership", was attended by a wide range of company officials and policymakers from gas producer countries in the Caspian region, Central Asia, Russia, and the Middle East, was well as government officials from gas importing countries in the Balkans region and the European Union (EU).

Bulgaria, of course, was one of the countries that was the most severely affected by the January 2009 "gas war" between Russia's Gazprom and Naftogaz Ukrainy that halted Russian gas exports to Europe via Ukraine for two weeks. With little of its own gas production, Bulgaria is almost entirely reliant on imports to meet domestic demand, and virtually all of its imports come from Russia. What is more, Bulgaria receives its gas from Russia via the Trans-Balkan pipeline that runs via Ukraine and Romania, so while the impacts of the crisis were not felt evenly across the European Union, the incident laid bare Bulgaria's vulnerabilities and prompted the country to host the summit on improving Europe's gas supply security.

The summit focused heavily on improving reliability of gas supplies to Europe (and, in particular, to Bulgaria and the Balkans region), which translated into a central theme of diversifying the supply routes through which Europe imports gas. Not surprisingly, this boiled down to a familiar argument, pitting supporters of the Nabucco gas pipeline—which aims to link Turkey to Austria via the Balkans—against proponents of the South Stream gas pipeline, which would run from Russia to Bulgaria via the Black Sea and then split into north and south branches.

Higher Stakes as Decision Time Nears

Supporters of each project touted the merits of their respective pipeline, making most of the same by-now-familiar arguments: Nabucco will allow Europe to open up a new supply corridor via Turkey, as well as allow the continent to source gas supplies from producers in the Caspian region and the Middle East, while South Stream will ensure stable gas supplies from Russia and reduce Europe's over-reliance on Ukraine as a transit state for gas imports. In the face of persistent questions about Nabucco's ability to source sufficient gas supplies to be viable, project leader Reinhard Mitschek touted the "build it and the gas will come" leap of faith, arguing that a final decision to build the 3,300-km pipeline will provide the incentive for additional gas exploration and production in Central Asia and the Middle East in an effort to fill the 30-bcm/y capacity pipeline.

Russian officials sought to downplay the competition between the two pipelines, while at the same time touting the benefits of South Stream. Energy Minister Sergei Shmatko said both projects "are at such early stages that it is too early to even call this competition", but then added that South Stream is more advanced and warned that, "It is after all the European consumer who will have the last say but I can assure you that Russia would always be able to offer Europe a better gas price than Nabucco." Gazprom's Stanislav Tsygankov added that the EU needs to show that it wants a partnership with Russia to improve gas supply security, warning that Gazprom could sell its gas to Asia and other markets if Europe is not interested in South Stream.

This "fear factor" is precisely why the EU and the United States have supported Nabucco, concerned about the continent's growing reliance on Russian gas, but also why several countries in the Balkans and Central Europe have hedged their bets, supporting Nabucco and South Stream as a way of diversifying and expanding their gas import pipeline options. With the financial crisis and the economic downturn, however, weaker gas demand in Europe means that only one of the two pipelines is actually needed, and only then from 2016. Nabucco would be the more important pipeline for Central and Eastern Europe's diversification of supply, although with better market integration and reinforcements in this region over the next five to seven years, the case weakens.

Mitschek said that the Nabucco consortium members are planning to make a final investment decision by 2010, but the project—which has already been pushed back from an earlier target of being operational by 2011—could now be delayed again, according to StatoilHydro Azerbaijan president Kristian Hausken. Speaking to Reuters on the sidelines of the conference, Hausken said that the phase-two development of Azerbaijan's Shah Deniz gas field—expected to be the main source of initial gas supplies for Nabucco—is likely to be pushed back from its current timetable of 2014 to "around 2016, plus or minus" due to the continuing stalemate between Turkey and Azerbaijan over transit conditions.

Outlook and Implications

The deadlock between Azerbaijan and Turkey over gas transit, as well as price and supply terms for gas deliveries to Turkey from Shah Deniz phase two, remains a major hurdle to progress on the Nabucco pipeline. This issue, along with growing tension between former allies Azerbaijan and Turkey over the latter's move towards a normalisation of relations with Armenia (which Azerbaijan opposes without progress on resolving its own dispute with Armenia over the future of Nagorno-Karabakh), was one of the reasons why Turkish prime minister Recep Tayyip Erdogan refrained from attending the summit, dealing a blow to hopes for a breakthrough for Nabucco's prospects.

At the same time, the South Stream project failed to land a knockout blow that supporters had hoped for, as Russian prime minister Vladimir Putin also stayed away from Sofia, reportedly due to a squabble with Bulgaria over terms related to construction and transit fees for the gas pipeline. Putin had hoped that Bulgaria would firmly endorse South Stream before the summit, but Bulgarian officials have objected to Russia's plans to use existing gas pipelines in Bulgaria for South Stream in an effort to minimise the pipeline's ballooning costs. Reports suggest that Bulgaria wants an all-new pipeline built on its territory as part of South Stream, or at least a commitment by Russia to pay transit fees for the option of using existing pipelines. Shmatko said that there is still scope for a compromise, although Bulgarian prime minister Sergei Stanishev is heading to the Russian capital, Moscow, tomorrow to meet with Putin in hopes of securing better terms for Bulgaria. This rift is likely to be particularly frustrating for Bulgaria, which has ambitions to become a gas hub. Under South Stream plans, Bulgaria would be the landfall country for the pipeline, whereas under Nabucco's route, that country would be Turkey.