Nabucco West: A Fateful Choice for Bulgaria
Aleks Aleksiev is Chairman of the Center for Balkan and Black Sea Studies (CBBSS) in Sofia, Ilian Vassilev, is a board member of CBBSS and managing partner of Innovative Energy Solutions, an international energy consultancy based in Sofia
By June 28, an international business consortium in Baku will make a decision that could decide whether Bulgaria will become energy independent and prosperous or continue to be totally beholden for its energy to Putin, Gazprom and their Bulgarian pawns. Despite the crucial importance of the choice to be made in just a few days, the Bulgarian public, with very few exceptions, is deliberately kept in the dark about its vast economic implications and long-term strategic significance for our country’s future. This is not a coincidence but a conscious effort by the current Bulgarian government, all three coalition members of which are well-known for their overt or tacit pro-Russian policies and origins. Indeed, Russia’s keen interest in a negative outcome of the Nabucco West issue and active lobbying against it, to an extent could help explains the desperate effort of the Bulgarian Socialist Party (BSP) to cling to power at any cost as a minority government with the support of the malodorous neofascist Ataka party.
So, what is Nabucco West? It is simply the first realistic effort to bring natural gas to Southeastern and Central Europe from sources and by pipelines not controlled by Russia. In this case, it is gas from the Shah Deniz 2 (SD2) field in Azerbaijan controlled by the Shah Deniz Consortium (SDC) of Azeri and Western companies, led by British Petroleum (BP). The choice to be made by SDC is whether to bring the gas to Southern Europe (after Turkey) through a pipeline called the Trans Adriatic Pipeline (TAP), by way of Greece, Albania and into Southern Italy or to Southeastern and Central Europe through the Nabucco West gas pipeline, which starts at the Bulgarian-Turkish border and proceeds to Romania and Hungary and ends at the big European gas hub at Baumgarten, Austria.
Most experts agree that Nabucco West should be the logical choice, both commercially and politically. It has several significant advantages over TAP:
• Much better developed regional infrastructure – practically all Nabucco West countries are or will be interconnected with their adjacent markets by 2017 – which guarantees easy gas transfers between Nabucco route countries and their neighbors, which is a vital precondition for higher and stable demand in a liberalized European energy market. The transit infrastructure is already in place for gas from Nabucco West to reach virtually all Central and East European countries (Serbia, Croatia, Bosnia and Herzegovina, Macedonia, Slovenia, Poland, Slovakia, the Czech Republic and Ukraine) and with the construction of a few short interconnectors, also Montenegro, Kosovo, Moldova and Albania, for an additional market of some 4-5 billion cubic meters per year. These new markets along the Nabucco West route are capable of absorbing the initial SD-2 10 billion cubic meters of new gas both by covering new emerging demand (power generation and transport) and by crowding out current suppliers.
• All Nabucco route countries have existing strategic gas storage facilities, which neither Greece nor Albania possess, that can be used by the SDC members to respond to market demand swings and optimize operating and transit costs. There are over 16.4 billion cubic meters of gas storage capacity along the Nabucco West route.
• Nabucco West is a scalable project and multi-sourcing (between 10-23 BCM) project which can eventually accommodate exports of natural gas from Turkmenistan, Iraq and Iran, as well as the Eastern Mediterranean, allowing the SDC partners to greatly expand supply to meet rising demand in Europe. It provides for the perfect partnership between upstream companies that produce gas and mid and downstream national gas companies that have an established client base of individual and industrial consumers.
• Finally, unlike TAP, Nabucco West represents a direct challenge to the Russian South Stream monopolistic project and thus meets the requirements of EU’s Third European Energy Package for diversification of supplies to Eastern Europe and curtailing the present monopolistic practices of the Kremlin. The SDC partners as new entrants have a vested interest in converting this diversification imperative into market shares in the target Eastern and Central European markets at the expense of the current Gazprom monopolistic shares. Without alternative supplies, such as Nabucco West, market liberalization could result in sustaining Gazprom’s monopoly in these markets and legitimizing the exorbitant prices it charges of Bulgaria and others.
Here, it is important to understand, that a victory for Nabucco West will represent a grievous defeat not only for Gazprom, but for Putin himself, who is widely believed to personally make all important Gazprom decisions and has invested tremendous effort and prestige in the South Stream project. Yet, these decisions have lately led to one failure after another. According to a recent Bloomberg article by the well-known economist Anders Aslund, “no other world company is run as badly as Gazprom.“ “In the last ten years, it committed all imaginable mistakes,” Aslund argues, and as a result, its market capitalization has collapsed fourfold from $369 billion in 2008 to $83 billion today.
Aslund is right about the dire straits in which Gazprom finds itself presently, if looked at as a business corporation. But, it has never been just that. Rather it is an important political instrument for the Kremlin in Europe and elsewhere and a cash cow for Putin’s ‘clan’ of close associates domestically.
Gazprom price formation, for example, has nothing to do with market considerations, but is directly related to the degree of dependence of a given country on Russian gas. For instance, Bulgaria’s nearly complete gas dependence on Gazprom forces it to pay just about the highest prices in Europe. The recent price hike of 18% for Armenia, one of the closest ‘friends’ of Russia at a time of falling prices in Europe, is yet another testimony that dependence on Russia costs money.
Further, Putin's emphasis on new Russian-controlled pipelines, such as South Stream, makes little economic sense given that Gazprom's existing pipeline capacity to Europe is twice as high as its ability to supply gas. The Nord Stream pipeline, which runs under the Baltic to Germany is a good example. It was designed to bypass Poland and provide the Kremlin with a convenient instrument for political blackmail. Unfortunately for Moscow, Putin appears to have miscalculated. The twin-pipe Nord Stream came online in late 2011 with a capacity of 55 billion cubic meters (bcm). Yet, Gazprom has been able to utilize only a third of its capacity and is losing large amounts of money presently. On top of that, the land extension of Nord Stream in Germany, called OPAL, is now under EU regulatory jurisdiction and no longer controlled by Russia with half of its capacity reserved for Gazprom competitors. As a result, Poland now gets Russian gas from Germany at prices cheaper than its direct imports from Russia. It has also forced Gazprom to renegotiate gas prices and give it a 20% discount retroactive to 2011 and is actively pursuing energy independence by drilling for shale gas and building a liquefied natural gas (LNG) terminal at Swinoujscie. In another example, the Blue Stream pipeline to Turkey, a twin to the South Stream project has never been operated at more than 50% of capacity and plans to double its capacity have long been abandoned.
A similar failure of Putin’s heavy-handed gas policies is in the making in Ukraine, heretofore the most important transit country for Russian gas to Europe and one with a large Russian-speaking minority. In trying to coerce Kiev into political concessions, such as joining the Russian-dominated customs union and turning over the country’s extensive gas pipeline network to Russia, Gazprom imposed on it extortionate gas prices and threatened to bypass it completely with South Stream. Kiev’s reaction was the exact opposite of what Putin expected. In short order, Ukraine cut its imports from Gazprom by 27%, gave concessions to Western companies to drill for shale gas and offshore, boosted coal production and started importing cheaper Russian gas by reverse flow from Poland and Hungary.
Should Nabucco West be chosen in the next few days, the Kremlin will suffer a similar humiliating defeat with South Stream, which is unlikely to be built in this case. This will represent a boon for the Bulgarian energy sector and the country as a whole, by transforming it from a Russian energy dependency into a significant player in the European energy market on the road to energy independence.
With such promising prospects for the country, one would expect the current Bulgarian government to join President Plevneliev in actively lobbying for Nabucco West. Unfortunately, despite occasionally paying lip service to it, the Oresharski government has largely kept Bulgarians in the dark about Nabucco West and its huge economic and strategic promise for Bulgaria. Instead, it has acted as the faithful servant of Russia’s interests in the country typical of Bulgarian socialist governments. Among its very first acts, it announced that it might consider reviving the disastrous Belene nuclear power plant project and declared that it has no intention of doing away with the shale gas moratorium even for exploration purposes – both of them key Russian imperatives. If Nabucco West is selected, it would be despite the attitudes of the current Bulgarian government.