Problems in the pipeline

The new Great Game in energy politics - the race between Gazprom's South Stream pipeline project and the European Union's planned Nabucco route - is escalating as countries are increasingly being pushed to take sides.
In the latest developments, Italy's Eni agreed to double South Stream's capacity and Gazprom offered to buy Azeri gas in a deal that would be a major blow for Nabucco, while a tentative EU-backed deal to pump gas from Kurdish-controlled northern Iraq faltered after Baghdad vetoed the plan.
The $8 billion deal with Kurdistan could have seen Nabucco pumping gas by 2014, a full year before Russia's rival South Stream project.
Alexander Medvedev, deputy CEO of Gazprom, told Bloomberg television that it could buy all the gas from the Shah Deniz-2 field, which many had previously thought would be used for Nabucco. However, the reasons for the Russian monopolist's interest in Azeri gas remain unclear as it would be unlikely to make a profit on the Caspian Sea field.
"We believe that Gazprom would buy this gas with the main aim of providing trouble-free gas supply to Europe," said Natalya Milchakova, senior oil and gas analyst at financial company Otkritie. "Nevertheless, we do not rule out that the government, as Gazprom's controlling shareholder, could force the company to adopt such a decision in order to offset the potentially competing Nabucco project."
Gazprom is losing around 20 per cent of its income on gas from Central Asia as it is paying more than the export price to Europe and has also had to cut back on highly profitable domestic production due to the decrease in demand.
"Azeri gas is too expensive to be sold domestically, so it can only be re-exported," Mikhail Korchemkin, managing director of East European Gas Research, wrote in an e-mail. "To re-export Azeri gas, Gazprom needs to cut down exports of Russian gas, the main source of its profit."
Gazprom has denied that the offer is connected with Nabucco, stating that it is a long-term plan to increase the reliability of its deliveries and diversifying its export portfolio.
"Russia and Azerbaijan are connected already with a developed gas-transport infrastructure," Gazprom's press office wrote on Thursday in an e-mailed response to questions. "The contract negotiations about purchasing Azerbaijani gas are a logical step not connected with the project Nabucco and directed towards the development of bilateral cooperation in the field of power."
The State Oil Company of Azerbaijan, or Socar, is due to meet officials this month to discuss deals with Russia. Currently it only exports gas to its neighbours and both Nabucco and Gazprom could give it more options.
"With Moscow we are negotiating this issue but I don't know how it will be able to transport gas from Shah Deniz and I don't think a big amount of that gas is able to be transported by Russia," said Vafa Guluzadeh, a longtime former national security advisor under Azerbaijan's late president, Heydar Aliyev, the father of current president Ilham Aliyev. "Azerbaijan wants to have many exits for the gas."
In the longer term, Azerbaijan is looking to improve its relations with Europe and is likely to play a part in Nabucco. However, it also wants to remain on good terms with Russia and therefore some compromise would need to be agreed.
"If I was the decision-maker in oil and gas resources, I would sell all oil and gas resources through Nabucco," said Guluzadeh. "But we are on the [Russian] border and that is why we are taking into consideration that the appeasement of aggressors may be the only way."
Buying gas to limit the amount available from Azerbaijan would cause problems for Nabucco and some suggest that even with the participation of Shah Deniz, the pipeline may not be viable as the field wouldn't be able to export more than 10-11 billion cubic metres of gas per day.
"It supplies gas to Georgia under a long-term contract, and opportunities for additional gas exports are limited," said Milchakova. "We assume that the owners of the Nabucco pipeline would prefer to see some Middle Eastern countries as key gas suppliers, rather than Azerbaijan or another gas producer from the CIS."
While Azerbaijan and Central Asia remain a priority for the EU project, because they will at least be used as transit countries, the deal with Kurdistan would have provided enough gas to fill the pipeline.
"It's an important and promising development for the acquisition of a huge volume of natural gas for Turkey and for Europe via Nabucco," Nabucco managing director Reinhard Mitschek told Reuters.
Kurdish gas could have made Nabucco operational by 2014, a full year before Russia's rival South Stream project, but the Iraqi central government has overturned the deal.
The Middle East's on-going political strife has the potential to disrupt Europe's Nabucco deadlines.
"Nabucco has actually had Central Asian [gas] from the former Soviet Union in mind primarily," Pavel Sorokin, oil and gas analyst at Unicredit, wrote in an e-mail. "However, Iran/Iraq gas can indeed be used as well, but the political instability in the region can be a problem in terms of attracting investors and providing security, which would virtually render Nabucco's main reasoning (security and diversification of import routes into Europe) useless."
Despite the problems Nabucco faces, Guluzadeh said he expected it to go ahead and Azerbaijan to be involved. However, he claimed that Russia and Gazprom could raise tensions in the region to maintain their dominance in the energy market.
"Russia is trying to become a superpower in energy and dictate to Europe," said Guluzadeh. "But the Europeans are not stupid, they understand and that is why I think Nabucco will go ahead and succeed but the Russians will do their best to stop it."
Gazprom's South Stream was also sped up after Russia agreed deals with Italy, Serbia, Greece and Bulgaria and is set to be completed by 2015, but Slovenia or Romania would still need to sign up. Although it is in competition with Nabucco, both projects could be successful and would ease consumer worries after the tensions with Ukraine in January.
"If both pipelines are built, it may be a problem utilizing their full capacity (provided the route through Ukraine also remains in operation), as demand in Europe may not grow as fast," Sorokin said.