Russia Out, Middle East In, as EU Pursues New Gas Supply Deals

On The Offensive

The European Union (EU) has stepped up its rhetoric on diversifying its energy supplies, with Energy Commissioner Andris Piebalgs yesterday ruling out the possibility of inviting Russia to participate in the proposed Nabucco gas pipeline. Speaking to reporters, Piebalgs said that Russia was "working with its own project: South Stream" and indicated the country had "never expressed any wish to join Nabucco", adding that no discussions were currently taking place between Russia's Gazprom and the Nabucco consortium. Piebalgs concluded that the EU "should not ask Russia to join a project which they have never shown an interest to join".

The comments are perhaps Piebalgs's strongest yet with respect to Russia's participation in Nabucco, the pipeline backed by the EU as a key means of opening up new supply sources and diversifying the bloc's energy supplies away from Russia. The plan is for the link to tap into growing gas exports from the Caspian and Middle East regions, feeding them through Turkey and south-eastern Europe to the Baumgarten hub in Austria, where gas could then be distributed more widely to central and western European markets. However, progress has stalled of late with prolonged talks over appointing a sixth consortium partner and a seeming lack of progress on securing supplies to feed into the route. The emergence and rapid progress of the Gazprom-backed South Stream proposal, which would dissect the Black Sea and follow a similar north-westerly route to central Europe, as well as having a southern branch to Greece and Italy, has piled further pressure on the Nabucco project, with the consortium partners forced to fight off claims that South Stream would undermine the project's rationale. Some members of the Nabucco consortium have conceded in the past that Russian gas may flow into the pipeline—claims that would seem to contradict the EU's intentions for the project—and some suggestions have even been made that Gazprom could enter the project as a partner.

Seeking Out New Partners

Nonetheless, the EU looks to have come out fighting, with Piebalgs again dismissing the prospect of Russia taking a stake in the Nabucco project. This time round, however, the EU's words may be seen as holding greater weight. At the same time as ruling out Russian participation in Nabucco, Piebalgs has detailed progress in the bloc's emerging partnerships with alternative gas suppliers. Along with the EU's Commissioner for External Relations Benita Ferrero-Waldner, Pieblags yesterday met with senior officials from Syria, Egypt, Iraq, Jordan, Lebanon, and Turkey to discuss energy matters. Following the meeting, the two EU commissioners announced that 7 bcm of annual gas supplies had been secured for the European market. While this figure incorporated an already-known agreement in the form of 5 bcm/y from Iraq's Akkas field—as announced back in April—it also included an additional 2 bcm/y of supplies from Egypt that could be piped to the EU from 2010. The gas is expected to be delivered via the Arab Gas Pipeline, which currently runs from Egypt to Jordan and on to Syria, and is to be extended to Turkey, allowing for a link-up with the EU via Nabucco. Attendees at yesterday's meeting agreed to push ahead with the Arab Gas Pipeline extension, completing the connection by 2009 and thereby opening up a further path for direct imports to the EU from non-Russian sources.

Promises, Promises

While the Egyptian gas might give the Middle Eastern promised volumes an aura of security as the link-up between Syria and Turkey is finalised over the coming months, most of the 7 bcm/y still look quite uncertain. The 5 bcm of annual Akkas field supplies from Iraq have not yet been contracted to a developer, meaning that the discovered, but mainly undeveloped, field yet has to come onstream. Before any work commences, the prospective developers, led by front-runner Shell, demand that an Iraqi oil law is passed, to give their investment a legal framework. On top of that lies the security issue, with the volatile Anbar province having been much stabilised over the past year, although Iraq's ability to uphold continued stability after a wind-down of the U.S. Army's surge programme still remains untested. Banking on Iraqi supplies in the short-to-medium period—despite their vast potential—hence seems somewhat premature.

In addition, Egypt will find it hard to increase its pipeline exports to Europe. IOC investors are pressing for new liquefaction trains in order to see future investment in exploration and development, while the domestic gas market continues to grow at high speeds. Unwilling to pay international market prices for its domestic gas, Egypt will continue to be tempted to allow further expansions of its LNG ventures to placate the companies and allow them to export some of their gas through their own integrated operations, rather than sending it through the Arab Gas Pipeline. Also, booming consumption along the route in Jordan and increasingly in Syria and Turkey, might stunt the EU's potential to lift Egyptian supplies, especially if Syrian production capacity build-ups continue to experience delays.

Outlook and Implications

While there evidently remain substantial uncertainties over the realisation of the supply promises made by Iraq and Egypt, the promises themselves are nevertheless positive steps. The EU's expectations of the Arab Gas Pipeline being extended and the receipt of gas deliveries from the Middle East should add motivation to the realisation of these objectives for the countries responsible, so that even if the agreed deadline of 2010 is not met, the start-up of gas deliveries is still likely to occur earlier than would otherwise have been the case. Furthermore, the recent meeting looks to have further solidified relations between the EU and the six-country Middle East consortium and to have led to a shared recognition that energy co-operation between the parties will be of mutual benefit. Such a development, together with recent agreements with countries from the EU's other targeted supply hub, the Caspian region, are indeed an indication that the EU is making progress in its efforts to diversify supplies.

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