Will Nabucco pipeline deal free Europe from Russian gas?

The EU and Turkey signed a $11 billion gas pipeline deal that should give Europe more supply options.

Burhan Ozbilici/AP
From left, European Commission President Jose Manuel Barroso, prime ministers Gordon Bajnai of Hungary, Werner Faymann of Austria, Recep Tayyip Erdogan of Turkey, Sergei Stanishev of Bulgaria, and Emil Boc of Romania are seen during the Nabucco Gas Pipeline signing ceremony in Ankara, Turkey, on Monday.
Rich Clabaugh/Staff

It's being called a milestone for energy-hungry Europe.

Today's European Union-Turkey deal to begin building the 2,000-mile Nabucco gas pipeline from the Caspian Sea to Austria – reducing Europe's dependency on Russia – means investors can legally move on a project that has been much more talked about than acted on since 2002.

But many milestones remain in the great geopolitical game over energy from the Caucasus and Central Asia – many involving the Russian bear.

"We are determined to make the Nabucco pipeline a reality as quickly as possible," said José Manuel Barroso, head of the European Commission, staking out a tough position. Last week, Russian national energy security fund chief Konstantin Simonov pooh-poohed the deal, calling it "only a piece of paper."

After a brutally cold winter in which much of the Balkans and southern Europe faced freezing cities and homes due to a Russia-Ukraine gas and politics dispute, the EU has been under pressure to act on its members' behalf.

The pipeline is named after a Verdi opera whose subject is liberation from bondage.

Along with EU representatives, officials from Bulgaria, Romania, Hungary, and Austria – all states the pipeline will transit – were in Ankara for Monday's signing.

The €8 billion ($11 billion) project will now compete with a €10 billion ($13.9 billion) Russian South Stream project, which will also be laid under the Caspian, bypassing Ukraine, and that may come on line in 2015, the same year Nabucco proposes to.

"Barroso wants to show to European countries that he is very active in this project of so-called energy security of Europe," Mr. Simonov told New Europe magazine last week. "Barroso only wants to show to [Russian Prime Minister Vladimir] Putin that 'You see now we have this project.' And Europe is involving Russia in this dangerous game."

Yet energy experts say a competitive pipeline may be as much a useful strategic political tool as an energy source – in dealing with Moscow, and in forcing Ukraine and Russia to settle disputes.

If they build it, will gas come?

Nabucco's commercial success is considered a frail reed, and it may be reliant on EU and US government backing. The EU has already designated €200 million ($278 million) in start-up funding, with more to come as part of a stimulus package distributed in 2009 and 2010.

"Nabucco is turning pipeline economics on its head," says Paul Stevens, senior research fellow on energy at Chatham House in London. "Normally you find gas and build a pipeline. Nabucco is building a pipeline, and then looking for gas."

A main unanswered question is whether governments and energy fields in the supply states of Azerbaijan, Turkmenistan, Kazakhstan, and Uzbekistan – can or will reliably divvy up and deliver gas over time. There's an expected intense bidding war, in some cases over gas fields whose yields are not yet concretely confirmed.

In recent weeks, Azerbaijian signed a deal with Russia, but also says it will sell to Nabucco. Turkmenistan had said it would not sell gas for the Nabucco pipeline in a meeting in Prague, Czech Republic, in May, but last week said it would.

US says 'no' to Iran gas

Reuters reported that US special energy envoy Richard Morningstar said Sunday that Russia is free to supply gas to the Nabucco pipeline, if countries participating in the project accept it as a partner. But he reiterated Washington's opposition to the use of Iranian gas.

Energy from Egypt, Iraq, and Iran would make Nabucco more likely to be a commercial success, experts say. Mr. Stevens at Chatham House says an Iranian deal alone could put it close to the black.

He says that this looked viable prior to the Iranian elections, with President Obama looking to open relations with Iran. But the "de facto coup in Iran makes the immediate commercial goals dimmer for Nabucco."

Today's signing was made possible by an agreement from Turkey to back off a whopping bid to take 15 percent of the pipeline's flow, for use as it wishes. However, Ankara agreed to a substantial cash transit fee instead.

Giles Merritt, director of the Security & Defence Agenda, a think tank in Brussels, warns that this deal is "triumphalism" designed to "cock a snoot" at Moscow. He says that all parties in the discussion, starting with Turkey, will be extremely difficult to deal with every step of the way.

But he says that the EU may be moving ahead with the pipeline deal as a way to force "a catalyst for Europe's energy security strategy." This deal forces a change in EU politics. "We've had uplifting rhetoric [on a common energy strategy], but now we will need to define the details.... The solidarity of EU nations will now be tested."

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