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Is There Life Left In The Nabucco Project?, CU Issue 27, March 30, 2009

This question, which has been asked many, many times before, has taken on a new urgency in the last few weeks. The pressure is on for the transnational gas project, which would transport gas from the Caspian region to the heart of Europe. For a number of reasons, the project looks more significant and more jeopardised that at any time in its long gestation.

Nabucco lies on the intersection between the two biggest problems facing the Western world in 2009: firstly, the financial crisis, which is shaking Western economies to their foundations and opening up cracks within the EU, Nabucco’s intended customer; and, secondly, the tangled geopolitical web which involves America, Russia, Europe, Iran, and Afghanistan. Its position on this intersection poses major risks to Nabucco.

The EU is increasingly divided between the countries of ‘old Europe’, led by France, and the countries of ‘new Europe’ in the centre and east. The division is principally over protectionism and the dangers to the single market, but it undoubtedly taps into a lot of other differences between the ex-communist states and the richer Western nations. One of these differences is, increasingly, energy. Many eastern states, in and out of the EU, loathe their dependence on Russian gas (and indeed Russia itself). The ‘gas war’ between Ukraine and Russia in January was supposed to have demonstrated the politicised nature of Russian supplies and spur a united Europe on to alternative gas sources. It hasn’t. Things will not be made easier by the collapse of the Czech government, the current holders of the EU presidency.

The continuing divisions in EU energy policy were demonstrated at an EU meeting in Brussels on March 19, in which Berlin vetoed the allocation of Union funds to Nabucco. A day later, the funding was back on. But it remains unlikely that the Union will invest more money and time into the project as budgets shrink and tempers fray in Brussels. A cut-price option may be in the modernising of Ukraine’s pipeline network, a plan which the EU has welcomed (to Russia’s irritation) and which, Ukrainian Prime Minister Yulia Tymoshenko claimed, was a cheap alternative to new pipeline networks. Germany, among others, may choose to invite Russia into the upgrade talks and use this to argue that Nabucco is unnecessary and expensive. Perhaps realising the inevitable, European Energy Commissioner Andris Pielbags declared on March 26 that Nabucco was ‘peanuts’ and did not hold the key to Europe’s problems.

Even if the money does appear, the next obstacles are geopolitical. Turkey has been recently urging its partners to begin work, but continues to drag its heels over the transit fees it will receive for the project. Azerbaijan is growing increasingly frustrated with Europe’s dithering and is increasingly looking at bilateral deals – with Greece and Italy but also, worryingly for the EU, with Russia and with Iran. In February Tehran offered to invest $1.7 billion in developing the second phase of Azerbaijan’s Shah Deniz gas field, on March 27 Azerbaijan began formal talks with Gazprom over selling gas to the Russian energy giant. This is a concerning development for the West, suggesting that Azerbaijan’s exasperation has reached the point where it is actively courting other buyers. If Turkey soon re-establishes diplomatic relations and opens its borders with Armenia, as expected, Baku’s frustration with its erstwhile Nabucco partners could most probably lead it to sell its gas elsewhere, removing the one guaranteed supply source and almost certainly killing Nabucco for the foreseeable future.

Provided that the Turkish government softens its stance on transit fees and ensures the supply of Azeri gas, the biggest question of all - where the rest of the gas will come from – remains. Iraq is often touted as a possible supplier, but its gas fields are under-developed and the security situation, not to mention the ongoing disagreements about the division of energy wealth between Baghdad and the provinces, continues to worry potential investors. The two most likely sources are Iran and Turkmenistan. Both pose their own problems.

Turkmenistan’s opaque business strategy and its equivocation about export routes continue to frustrate Western businesses. Furthermore, Ashgabat’s appalling human rights record poses a dilemma for the EU, which worries that it may have to tone down its criticism of the regime in exchange for access to the gas fields. The European External Relations Commissioner, Benito Ferrero-Waldner, took the side of pragmatism when she urged the EU to upgrade relations or lose out to other states which cared less about human rights – i.e. Russia. But even Moscow has not managed to lock Ashgabat into an anticipated deal which would commit the country’s gas reserves to the Prikaspiiski pipeline, through Russia. Analyst Sergei Blagov believes that Russia’s financial troubles mean that it is no position to pay for the Prikaspiiski project, and that Turkmenistan is still hedging its bets. China is making inroads into the country’s energy market, and so is Iran, which in mid-February struck a potentially game-changing deal with Turkmenistan.

The agreement would see Turkmen gas fields being developed by Iran and then exported to the Islamic Republic. As Bruce Pannier at RFE/RL points out, this “would appear to be a dead end for a huge supply of Turkmen gas, unless Turkmenistan and Iran are already confident that a significant improvement is coming in EU-Iranian relations.” In this case, the Turkmen gas would transit Iran and enter Nabucco at the Turkish border, making the EU reliant on Iran’s favour to keep the taps on.

This is, of course, dependent on a major thaw between Iran and the West. The official line in Washington remains that Iran’s participation in Nabucco is ruled out, and European companies are unwilling to face US sanctions for doing business with Tehran. But this could change if the cautious rapprochement between America and the Islamic Republic results in the re-establishment of formal ties. Restoring relations with Iran would be a major boost to US operations in Afghanistan, and allowing Iran to participate in Nabucco could function as a quid pro quo for assistance there, as well as a symbol of the new friendship. Unfortunately, the timing is not auspicious. Many experts believe that Washington will restore ties after the Iranian elections in June. Nabucco is due to be formalised at a meeting in Istanbul that month, meaning that a decision will have to be made to either include Iran, hoping that the diplomatic détente goes ahead regardless of the election result (America is hoping that the incumbent hardliner, Mahmoud Ahmadinejad, will lose), or to exclude it and find another source.

The list of problems is endless. All of the elements must be aligned so precisely, and in such a tight timeframe, that deep scepticism about Nabucco’s future is warranted. An Israeli attack on Iran’s nuclear facilities, the opening of the Turkish-Armenian border, an EU bust-up at the G20 summit or a new conflict between Russia and Georgia could immensely complicate the project. And over everything hangs the spectre of the world recession which may, as optimists point out, have lowered the cost of building materials, but which has also sapped the EU’s appetite to drive forward bold new energy projects. Nabucco may not yet be dead, but keeping it alive will require nothing short of a miracle.

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