EU REMEMBERS NABUCCO

The beginning of 2008 was marked by another upsurge in rivalry between the regional gas projects Nabucco and the South Stream. The headquarters of Gaz de France said on 7 February that the French energy company has given up on partnership in the project on the construction of the Nabucco gas pipeline. This decision was predetermined by Ankara, which has repeatedly criticized France for its position on the recognition of the so-called "Armenian genocide" in Turkey and Turkey's accession to the European Union. This time Ankara decided to bar the French company from the project in protest against the French parliament's decision to recognize the "Armenian genocide" in the Ottoman Empire. This theory is also confirmed by the Turkish Daily News which quotes its source at the Turkish Energy Ministry as saying that Ankara will oppose the French company's membership of the consortium because "France is the flagship of the European Union in barring Turkey from the EU because of the Armenian question". Now the French company intends to "study the possibility" of participating in the Russian-Italian South Stream gas pipeline project which will supply natural gas to the Balkans and other European countries from Russia through the Black Sea. The French press reports that even the visit to Ankara by French Secretary of State for External Trade Herve Novelli did not change Turkey's position on this issue.

Ankara understands very well that it has trodden on the "sore point" of the EU - the positions of this project will be weak without France, first of all, from a political point of view. But there is a question - what are its prospects if Turkey continues to insist on its position? This project has many problems anyway, related to the prospect of gas from Central Asia and Iran joining it. From this point of view, it is notable that Ankara's demarche overlapped with the decision of the operator, Nabucco Gas Pipeline International GmbH, to postpone the launching of the project from 2011 to 2013. Thus, the project is already losing its two-year advantage to the rival project - the South Stream. The company is concerned that there may not be enough gas to fill the pipeline: the suspension of natural gas supplies from Central Asia has caused deep concern in EU countries, The Wall Street Journal writes. According to this well-informed publication, the events of late 2007 and early 2008 have questioned Turkmenistan's reliability as a supplier and Turkey's reliability as a European transit energy corridor.

Ankara's demarche which coincided with Gazprom's activity on the European front prompted EU officials to act more decisively in support of the Nabucco project. The EU coordinator on this issue, Jozias van Aarsten, flew to Ankara in mid-February to discuss with Turkish officials a complex of issues related to the implementation of this project and Turkey's role in it. Following his two-day talks in Ankara, Aarsten said that the feasibility study of the project will be completed in summer or in September. He also said that an agreement has been reached to call an international Nabucco conference for heads of government in spring this year. Turkish Prime Minister could be vice-president at the conference. "I want to stress that Nabucco is becoming a matter of the near future." Aarsten said, adding that this project is a priority for the EU and that Turkish officials have also expressed their allegiance to its implementation.

It is interesting that the decision of Gaz de France was adopted two days after the German company RWE became the sixth member of the international consortium which will be engaged in the construction of the Nabucco gas pipeline. In other words, there is a real chance to increase politicians' and investors' interest in the swift implementation of the project. The German energy concern RWE officially announced its decision to join the project on 5 February. "This will significantly strengthen the project," said Wolfgang Ruttenstorfer, the director of the Austrian company OMV which operates the project. "The stakeholders are ready to accept the seventh partner if the members of the consortium unanimously approve this." The emphasis is placed on the proposal of Austrian Economy Minister Martin Bartenstein who said during his visit to Baku in November that the project may be joined by the State Oil Company of Azerbaijan. Analysts link RWE's decision to the fact that against the background of growing concern within the EU about Europe's increasing dependence on Russian gas supplies, Germany and its business cannot ignore Brussels' appeals to reduce dependence on the importation of Russian gas and support the rival of the South Stream.

The split in Nabucco is taking place at the same time as the success of Moscow's gas diplomacy. Moscow has intensified its talks on the South Stream with a number of European countries - gas consumers. After Bulgaria joined the South Stream and Gazprom purchased 51 per cent of the Serbian oil company NIS and 50 per cent of the shares of the Central European Gas Hub (a daughter company of OMV), one of the largest gas trading platforms in Europe in Baumgarten in Austria, the only obstacle to the implementation of this project, or to be more precise to the operation of the Bulgaria-Serbia-Hungary-Austria line, is Hungary. Every new decision taken by the participants in the South Stream project strengthens its competitive positions by weakening Nabucco. For this reason, Hungary is becoming a kind of "battlefield" between rival gas projects and has drawn all attention now. In early December 2007, Russian Prime Minister Viktor Zubkov visited Budapest in order to persuade his Hungarian counterpart to join the South Stream. In Budapest, Russia's Deputy Minister of Industry and Energy Ivan Materov maintained that the feasibility study of the South Stream project will be drawn up in 2008 and the first supplies of gas are planned in 2013. Interest in the Hungarian-Russian talks was fuelled also because quite recently, Gazprom failed to agree on the joint construction of the South Stream not with Italy's ENI, but with Hungary's MOL. But on 6 December, one day before Viktor Zubkov's visit to Budapest, MOL announced its decision to create an alternative transport network called New Europe Transmission System (NETS), involving eight countries of Central and Southern Europe. The purpose of the project was to get a loan for the construction of the Nabucco pipeline. When Zubkov's plane landed in Budapest, in Brussels EU official Ferran Tarradellas Espuny supported the NETS project on behalf of the EU. According to him, this project does not run counter to the energy policy of the European Commission, will help attract investment in distributing networks, increase competition and improve the European system of gas supplies. During the negotiations in Budapest, Ivan Materov tried to persuade the Hungarian delegation that Nabucco cannot be regarded as a supplement of or alternative to the South Stream because gas transportation by Nabucco will be expensive. He said that with the commissioning of the South Stream, the fate of Nabucco will "become very problematic".

But these arguments were not enough to persuade Hungary to give up Nabucco immediately. "We are not re-distributing a pie, but are baking a new one, leaving the biggest slices for everyone," the secretary of state of the Hungarian Economy Ministry, Balazs Felsmann, told the Russian delegation in Budapest. He said that Nabucco's capacity will be 20-30 billion cubic metres per year, i.e. less than half of the natural gas which experts believe the EU will need by 2020. Nor did Hungarian Prime Minister Ferenc Gyurcsany reject Nabucco or the South Stream. During his negotiations with the Russians, he carefully formulated his position: "The whole history of Hungary shows that being between Byzantine and the Latin world and between the Christian and Islamic world at different times in history, our country sought its place, and we learnt that we can live in peace only when there is dialogue." Mr Gyurcsany expressed his desire to ensure that "there is more economy and pragmatic approach in relations with Russia". He also demonstrated this approach to Viktor Zubkov who only heard from his counterpart a statement that Hungary does not want to receive gas from just one source, and a vague proposal "to work on a pipeline that might affect Europe".

Hungary's game with Gazprom continued earlier this year. At the end of January, the coordinating committee of the Sepco company (which belongs to MOL and Gazprom on a parity basis) to develop the feasibility study of the gas pipeline held a session. "After the signing of the agreements with Bulgaria, Serbia and Austria, the idea of the gas pipeline acquired more or less clearer outlines and we can move on more quickly," said a manager of the Russian monopoly who was involved in the talks. MOL press secretary Catalina Roman confirmed that "MOL regularly meets with Gazprom within the framework of Sepco, and the next meeting is scheduled for March". In February, it is planned to hold the first consultations with Hungary and Greece at the government level.

It must be noted that Gazprom's active energy diplomacy is accompanied with a well-coordinated propaganda campaign against Nabucco, orchestrated by Russian MPs, members of government and representatives of Russia's major investment companies. For example, the deputy speaker of the Russian State Duma and president of the Russian gas society, Valeriy Yazev, thinks that the series of talks on the South Stream in late 2007 and early 2008 "seriously undermined" Nabucco's positions. "There are more and more doubts about the expediency of this project," the MP said. The difference between the two projects is that the South Stream has a resource base and Nabucco does not have one, he clarified. Many Russian experts believe that there is no extra gas in the region, which is why the chances of the South Stream are growing, whereas the issue of Nabucco's resource base has yet to be resolved.

The "Russian chorus" in support of the South Stream is backed by European politicians who are loyal to Moscow. In their opinion, the Nabucco project, which was supposed to reduce the EU's dependence on Russian gas significantly, is rapidly coming to nought. During the summit of EU heads of state, attended by Russia, in Lisbon on 25 October, the secretary-general of the secretariat of the European Union's Energy Charter, Andre Mernier, called Nabucco "a stillborn child". This position was quite unexpectedly supported by the monopolist on the Austrian electricity market. During a round table discussion organized by Energie Allianz Austria (EAA) in Vienna, company experts pointed out two serious obstacles to the implementation of Nabucco - the lack of resources and terrorism risks due to transit through Turkey which may launch a military operation on the border with Iraq at any moment. Gerhard Mangott, a professor in the Department of Political Science at the University of Innsbruck (Austria), said at the EAA round table that Nabucco "will die before it is even implemented", because the EU is considering it "first of all, as a political and anti-Russian project", wrongly thinking that "the provision of Europe with gas may secure Europe's independence from Russia". OPEC energy adviser Karin Kneissl drew attention to the shortage of resources. "In order to fill Nabucco, 30 billion cubic metres of gas per year are required, whereas Azerbaijan can supply a maximum of 11 billion cubic metres of gas per year in the next five-seven years. What's more, this country needs more and more gas for domestic consumption and for supplies to Georgia," Kneissl explained. In her opinion, Nabucco will not be implemented because "there is no European energy policy as there is no common foreign policy in the EU".

However, the managing director of Nabucco Gas Pipeline GmbH, Reinhard Mitschek, defended Nabucco during the round table in Vienna. "In 2020-2025, Europe will have to import 500 billion cubic metres of gas (300 billion cubic metres in 2006). For this reason, we need different gas pipelines," he said. It is believed that by that time, gas extraction in Azerbaijan will increase to 50 billion cubic metres (10 billion in 2006) and in Turkmenistan - to 180-200 billion cubic metres (70 billion). These sources will help provide Nabucco with gas, Mitschek said. "We hope that the political situation in Iran will not be so tense and we will also be able to use Iranian gas for Nabucco," he said.

But the matter is not just about exporters' possibilities and impor-ters' needs. Politics are a much stronger factor that is covertly behind the rivalry between the two projects. Nabucco's failure would be a heavy blow to the image and political positions of the EU and the USA in their confrontation with Russia. For this reason, the gas fight between the two projects will continue.