Don’t cry for the Nabucco pipeline

By Leslie Palti-Guzman
May 1, 2014

The site of a newly opened distribution hub of the gas pipeline Gazelle is pictured in Primda

It is too late for regrets. With Europe worried that Moscow could cut off gas deliveries to Ukraine, which would trigger price volatility and supply risks throughout the continent, the failure of the Nabucco pipeline project stands out.

Created to carry Caspian gas into Europe by bypassing Ukraine, Nabucco would have given Europeans and Americans a much-needed sense of supply security — though the pipeline would have carried its capacity of 31 billion cubic meters of gas annually only near the end of this decade. Instead, Europeans are left scratching their heads and searching for alternative energy supplies.

Russia, meanwhile, is likely to remain Europe’s chief natural gas supplier through at least 2020, despite the anticipated growth of diversified gas shipments to Europe, including liquefied natural gas (LNG) from the vast U.S. shale-gas resources.

The problem is that Europe and the United States virtually fell asleep during the past decade. They forgot their 1990s strategic goal to cut European dependence on Russian gas. The European Union also failed to recall Moscow’s tendency to use its gas reserves as a bargaining chip in negotiations. Russia is, after all, a reliable supplier to the wealthy and powerful Western European markets, which are more liberalized and diversified than those in Central and Eastern Europe.

Russia's President Putin meets with Gazprom's Chief Executive Miller at the Novo-Ogaryovo residence outside MoscowBut the time has come to digest the lessons of the Nabucco failure. We need a serious political and geopolitical agenda to give clout to the European Union and U.S. talk about greater European gas-supply diversification. We also  need to put an end to Russia’s intimidation tactics.

Many factors contributed to Nabucco’s failure, but the main reasons were political rather than commercial. The pipeline was replaced by a more modest plan to upgrade and expand the Southern Corridor, which includes the Trans-Adriatic Pipeline that will carry Azerbaijan gas from the Turkish border into Greece and Italy.

The selection of the Trans-Adriatic Pipeline in late 2013 left a bitter taste in Europeans’ mouths. The pipeline will bring Azeri gas to Italy, which already has fairly diverse energy sources, while Nabucco, even in its smaller version (known as Nabucco West), would have supplied gas to EU member states — notably Bulgaria, Hungary and Romania — largely dependent on Gazprom.

The first lesson of Nabucco’s failure is that Russia’s carrot-and-stick approach not only worked, it also exposed the lack of a common EU energy policy. Moscow was able to safeguard its dominant market share in Central and Eastern Europe, where Gazprom faces little competition. Moscow pressured most of these countries to support Gazprom’s South Stream pipeline, a rival to Nabucco. That pipeline was developed to bring Russian gas into Eastern and Southern Europe.

The European Commission tried to protect countries like Lithuania by launching an antitrust investigation in 2012 to determine whether Gazprom might be hindering competition. Gazprom, however, was not punished and was allowed to continue its anti-competitive practices. There were not enough political guarantees at the EU level for the Central and Eastern European states to withstand the threat of retaliation by Gazprom. In addition, the lack of a united EU energy policy continues to encourage Russia to play the national interest card by fostering strong bilateral energy relations — such as the Germany-Russia cooperation.

Baku was also concerned about geopolitical considerations. It was important for Azerbaijan to be wary of taking too much too fast from Gazprom’s European market share. Moscow would have seen that as a direct threat. Azerbaijan, however, could have been more assertive if the EU and the United States had offered stronger support.

The second lesson is that the Caspian region is a clear loser in the U.S. energy revolution. Washington has historically played a role in Caspian energy development because of regional strategic interests and volatility generated by the competition among major powers for Eurasia’s oil and gas reserves — comparable to the gas reserves of Russia and Iran, among the world’s largest. U.S. engagement has helped stabilize the Caspian region and kept product flowing toward the West, rather than letting Russia, China and Iran monopolize it.

Pipes and valves are seen at an underground gas storage facility in the village of MrynBut the revolution in U.S. shale oil and gas has prompted Washington’s energy policy to turn inward — giving the nation less of a stake in some of the energy hotspots around the globe. In addition, the Obama administration has more pressing foreign policy priorities than Caspian energy. Yet growing tensions in Ukraine and risks of contagion to other former Soviet republics may soon test Washington’s disengagement.

Overall, the Nabucco pipeline lacked the necessary political and diplomatic support from both the EU and the United States to overcome disarming pressures from Russia and Gazprom.

What should EU and U.S. policymakers do? Here are four ways to move beyond Nabucco and create a successful gas diversification in Europe:

1) Energy geopolitics should be the basis of cooperation and dialogue in transatlantic relations. EU and U.S. diplomacy should include political support for gas producers that can rival Russia. The ambition to bring additional gas from Azerbaijan, Turkmenistan, Iraq, Cyprus or Israel into mainland Europe should not be abandoned.

Whether the Southern Corridor will be expanded to carry new supplies or new routes are built, they will provide volumes necessary to meet future European gas demand and compensate for the decline of North Sea production.

2) A common EU energy policy must be developed. Integrating the EU energy market should be the top priority. This would allow construction of missing interconnectors and reverse flow capacitors that could transport, for instance, significant volumes of Slovakian gas to Ukraine. European leaders can accelerate permitting and increase funding for the connector projects. More important, they should rein in countries that are still catering to national interests.

3)  The European Union should encourage more liquefied natural gas imports to boost supply diversification. The role of such imports as an alternative to Russian gas cannot be overstated. These imports can offer transport options from different routes and sources, especially amid abundant LNG supplies coming online by the end of the decade. The U.S. liquefied gas is unlikely to enter European markets before 2016, but over the long term, the United States could become the world’s primary emergency supplier.

4) The emergent shale gas play in Europe should be encouraged at both the European Commission and national levels. Improvements in fracking technology could entice reluctant countries, such as France and Germany, to undertake shale-gas development. The Russia-Ukraine crisis could give the sector an immediate push.

The European Union should monitor the industry’s practices to guarantee that the sector develops sustainably, which will help make shale gas more socially acceptable. The European Commission and member countries should also regularly consult with environmental groups, providing timely information on developments.

The Ukraine crisis has emboldened gas opponents. They argue that the solution is to decrease European gas consumption in order to reduce dependency. In the medium-term, however, this path is unrealistic if Europe wants to maintain its industrial competitiveness and economic growth.

The European Union and the United States now have a small window of opportunity to reengage politically and geopolitically to solve Europe’s gas puzzle.

 

PHOTO (TOP): The site of a newly opened distribution hub of the gas pipeline Gazelle is pictured in Primda, January 14, 2013. REUTERS/Petr Josek

PHOTO (INSERT 1): Russia’s President Vladimir Putin (R) meets with Gazprom’s Chief Executive Alexei Miller at the Novo-Ogaryovo residence outside Moscow, October 29, 2012. REUTERS/Aleksey Nikolskyi/RIA Novosti/Pool

PHOTO (INSERT 2): Pipes and valves are seen at an underground gas storage facility in the village of Mryn, 120 km (75 miles) north of Kiev, May 21, 2013.  REUTERS/Gleb Garanich

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