Tag Archives: Nabucco

Inter-European Gas Wars: Europe’s pursuit of Energy-cide

Also published on Natural Gas Europe.

There is a gas race in Europe. This rivals the well reported US – Europe gas price difference, due to cheap US shale gas and high European imported gas prices. In an attempt to compete against the US European industry just got handed a price break in the form of lower support payments for the renewable energy sector. However, European countries also compete against each other over the price of electricity, a race to the bottom, or rather Energy-cide: the destruction of sovereignty in the pursuit of lower energy prices.

This price war also forces countries to develop strategies to keep electricity prices low. An example is Hungary’s deal with the Russians for a ‘low’ cost nuclear power plant. This inter-European energy price war holds significant long-term political and economic costs, which can hobble Europe’s competitiveness and political independence.


The result of this inter-European price war is Russia captures the Crimean prize by understanding how the game is played. The limp EU financial sanctions to hold Russia in-check are framed as the EU punishing Russia. But this is Europe, the ‘unified’ EU action mask the inter-country price wars raging between member states. In each region this plays out differently, for those in the west of Europe (old member states) it is the result of the high initial cost of shifting towards renewable energy and the impact on industry; for those in the east (new member states), it is reliance on Russian gas and householders proportionally high utility bills.

The impact of this price war can be seen playing out in Berlin and Brussels in April, 2014. First the German government approved amendments to its renewable energy law, lowering the cost of German industry financing for renewable energy. Second, the European Commission voted to reduce payments energy intensive industry make to fund the renewable energy shift. The pressure is now intense in Western Europe to reign in energy prices and the real and potential threat of industry flight to the United States. The US, and its cheap shale gas, is held up as a magnet sucking European jobs. Europe feels the coming climate change apocalypse, just as much as a faltering economy, Russian tanks in the Crimea are simply less threatening. But this is a Brussels’ view of the world, in the east the people and politicians feel the heat from Russia.

The Hungarian government continuously lobbies against sanctions on Russia for the violation of Ukrainian sovereignty. With Hungary dependent on Russia for gas and nuclear power, its current charade of low energy prices can only be maintained by the wishes of Russia. The Hungarian government secretly inked an agreement with Russia to take a 10 billion euro loan to build two new reactors. Despite no social or political debate, the overriding excuse for such a deal by Hungary’s Prime Minister was lower energy prices – even if the numbers show a doubling of electricity prices. He envisions to have Europe’s most competitive electricity cost for industry and be more competitive than the Czech Republic or Germany. Hungary will be a manufacturing powerhouse fuelled by cheap Russian nuclear power. In return, the Russian’s hold over Hungary a huge mountain of debt which they’ll use to manipulate Hungary’s foreign and domestic policies.

Other countries in Eastern Europe are the same, Bulgaria has been plagued with violent riots over electricity and gas bills. The country’s seven member energy and water regulatory commission had 17 different members and six different chairman in 2013. Poland has lost an environmental minister due to bungling the country’s shale gas ‘revolution’ – it still awaits a commercially viable well. Each country in Eastern Europe has the stated aim of having the cheapest gas and electricity and literally being a regional powerhouse. Each country wants to compete and attract industry from Western Europe. Poland wants chemical manufactures from Germany. Hungary wants auto manufacturers to set up shop. It is a continental race to the bottom.

Russia benefits in spades from intra-European conflict over energy prices while the continent as a whole attempts, by any means, to close the price gap with the US. In 2012, the German border price for gas was four times higher than the US Henry Hub price (even if this is a flawed comparison, it is often made as an excuse for needing lower EU energy prices). To close the price gap, somehow the solution is more Russian gas. Russia’s South Stream pipeline project will avoid Ukraine and deliver the same gas to Europe, without Ukrainian interference. The pipe will traverses the Black Sea, landing in Bulgaria and connecting Serbia, Hungary and Austria. When the going got tough over a year ago for South Stream’s competitor, Nabucco, which would bring non-Russian gas to these same countries, both the United States and the EU failed to step up to ensure its success. The project offered to diversify Eastern Europe’s gas supply. Instead the EU accepted another gas pipeline to Italy – a long running ally of Russia and thus acceptable to both those in Brussels and in Moscow.

nabucco and gazprom v4

The evolving gas map keeps the east boxed in: South Stream and Nord Stream. There is almost zero western support for diversification, the result is high prices and Russian dependency with low security of supply.  But is this paranoia? Not when the German partner of South Stream remarks over EU blocked talks with Russia, “If anything, the approval procedures should be accelerated, not delayed,” said Rainer Seele the Chief Executive of Wintershall.

Should the only means of leverage Ukraine holds over Russia be sped up? Just so Ukraine can be eaten faster by Russia? Hungary’s Orban signs secret deals with Russians because he knows he needs to compete against the west on price, Berlin or Paris aren’t going to send cheaper electricity or gas to the east.

The true price masters are the Russians. They see this intra-EU country price competition. They see political leaders hanging by economic-popularity threads, industry bent over a Russian pipeline – sucking gas, Bulgarians protesting over prices and burning utilities’ cars, while Viktor Orban proclaims an energy price war against Brussels while furtively flying off to Moscow. Even the ‘green’ German consumer demands cheaper electricity. Industry perception of the energy system as a whole matters, even if Russian gas is marginal in Western Europe. The closure of German nuclear was perceived as a blow against German industry, another blow is unwelcomed.

The Russians hear from European industrial and political leaders, “take the Crimea, but just help us compete against our European neighbors and America.” Energy-cide, the destruction of sovereignty in the pursuit of lower energy prices. Russia is the cat and Europe is the mouse. Russia eats part of Ukraine, while Russia also politically binds the Bulgarians, Hungarians and Germans over gas prices. Unless Europe stops its Walmart-like energy price race to the bottom, and shores up energy diversification routes for Eastern Europe, Russia will continue to be the top consumer.

The Russian Rock: Re-landscaping CEE energy (in)Dependence

The recent ‘war of independence’ against Western European owned utilities in Central Eastern Europe (CEE) and South East Europe (SEE) sets the stage for re-integration into Russia’s energy sphere – and dependence. A war against electricity, gas and water prices has been raging in Hungary since 2012 while SEE countries have a longer history. The firm rejection throughout the region of privately owned utilities managed by independent regulatory institutions limits capital inflow to upgrade and diversify the region’s energy infrastructure.

Omul de tinichea transfagarashan

Benefiting from the ‘war’ against Western capital is Russia. State owned Gazprom remains the dominant and stable supplier of gas to the region’s state owned firms and centralized energy systems. The CEE (including Poland) and SEE regions reject complex market structures with competition and diversified generation technologies pushed by the EU. Full independence from Russia is no longer sought, rather a ‘safety’ margin to weather a Russian gas storm provides a low cost diversification option. Three historical periods are discussed, with the third marking the re-integration into the Russian fold.

  • Stage one, fully dependent on Russian resources and technology;
  • Stage two, building an energy system semi-independent of Russia;
  • Stage three, ‘(in)Dependence’ on Russia’s energy wealth, the recognition of benefits gained from dependence coinciding with diversification of energy sources.

The CEE and the SEE regions see energy dependence as strategic while allowing for new infrastructure, such as gas interconnectors, shale gas and LNG terminals to rebalance the energy landscape and provide space for energy independence, rebalancing the historical Russian dependence. The term, ‘(in)Dependence’ provides a encapsulating expression of how Russia remains firmly positioned in the CEE/SEE regions’ energy landscape. It is the rock in the region that despite the best efforts of multiple countries, governments and international organizations, Russia remains firmly positioned in the CEE/SEE energy landscape.


The Central Eastern European Region, including the Southeast of Europe, is heavily dependent on Russia’s energy resources. This includes gas, oil and nuclear technology. The ability to cement through physical infrastructure and human capital during Communist period established a robust connected system of resources and expertise between the region’s countries and Russia. The headlines hold that gas security is the most contentious issue. But finding a solution to this dependency requires a complex and stable energy investment climate. Since the fall of the Berlin Wall and 2004 and 2007 eastward expansion of the EU, diversification away from Russia for CEE countries was the overall most important headline issue. Despite concerted efforts the region has failed to find alternative sources for Russian gas and remained wedded to Russia. The era of Russian energy dependence can be seen to have evolved over decades under the technical capabilities of the Soviet Union.

We see the impact that this uncoordinated, but regional consistent energy strategy has on the CEE region: Complete reliance on Russian gas and oil imports. After the political winds shifted in 1998 and the region shifted towards Western Europe for political and economic integration these energy links were viewed as high risk entrapping the region into an almost single sided relationship where the terms are dictated from Moscow. The region may have gotten democracy and removed overt economic and political control but the energy infrastructure is a strong reminder that continues the previous political-economic relationship.


The launching of the energy independence period, away from Russia, began in the mid-1990s.  Privatization of energy assets and the establishment of energy regulators brought private capital into the energy system, transforming the role of the state. Market considerations would help guide and fund development of the national energy system. Technocratic independent regulatory institutions would oversee the region’s energy system.

Privatizations of energy companies, mainly electricity and distributions companies were never very popular, but the politicians making these decisions were aware the state was incapable of funding a renewed energy system able to operate efficiently. Bloated inefficient companies, were typical and unable – or unwilling due to political pressure, to collect from large and small consumers. In Macedonia at the time of privatization there were 500,000 individual court cases filed over fee collection. Large state owned factories paid little or nothing. Other countries mirrored this systemic inefficiency resulting in underfunded and crumbling energy systems. The entire CEE and SEE region made the hard decision to bring in mainly Western European energy companies to fund the renewal of power generation and electricity and gas distribution systems. These important energy assets were privatized, in some countries more than others, but each country, usually with strong encouragement from international organizations, did privatize. Enough to place the energy sector on a market footing.

By the mid-2000s sufficiently robust national and regional markets in electricity and gas were well under development in the CEE and SEE region. Strong market and regulatory elements were integrated into the system. Authority of the energy system typically, on a technical level, transferred from an energy minister to an ‘independent’ energy regulator, who set prices and technical standards. This technocratic system was established to ensure the long-term commitment and investments by private energy companies were secured and the system as a whole was managed to ensure its continual long-term development.

Since the onset of the 2008 financial crisis already strained relations between private energy companies and governments escalated. The underlining truth to the ‘Utility Rebellion’ of the CEE and SEE region is politicians had a hard time letting go.  From price setting, control or influence over cross-border electricity and gas interconnectors politicians have a hard time coming to terms with allowing the energy sector to operate like an open, but regulated, market. Repeated attempts to establish a transparent and unified electricity system in the Southeast of Europe has failed, despite consistent support (and pressure) from international organizations and institutions. In 2013, the tension has spilled over into outright social and political rebellion against private owners. This includes (but not limited to) some headline cases:

  • Albania: In January 2013 the energy regulator took away the license of Czech power company preventing it from operating in the country.
  • Macedonia: Disputes between Austria’s EVN and the Macedonia government over debts and investments are on-going since privatization in 2006.
  • Bulgaria: After years of building tensions, including court cases, between private investors (CEZ, EON, EVN), the spring of 2013 saw public street protests erupt over electricity and gas prices resulting in new elections, along with investigations and regulatory changes in Bulgaria’s energy sector. Although the fury is equally directed at state owned companies as well as privately owned ones.
  • Hungary: What was once a success story of privatization and equal risk levels to Western Europe, changed after the 2010 elections with the new Fidesz government.  Extra taxes on energy companies were introduced after which the energy regulator was sidelined and forced legislated price cuts above 20% in 2013, compounded by a proposed law to be passed before the 2014 elections of utilities becoming non-profit entities. Many privately owned utilities are making losses since 2011 and have slashed investments.


Markets and independence

The focus on market transformation contributed to two false assumptions: First, from a Western European perspective, overall EU gas supplies were not significantly exposed to Russian gas interruptions – if they were to occur at all. Russia was a stable supplier not willing to use gas as a political weapon and the governments of the CEE and SEE regions could diversify themselves; second, over time alternative sources could be secured from Europe’s ‘near abroad’. During this age of attempted energy independence, the pro-market perspective and activity created an assumption that the market would induce greater supply security, investments by Western European firms would contribute to greater energy security. However, these assumptions came to a head at the start of 2009.

Supply disruptions, between Russia and the Ukraine, were already regular seasonal events, but in 2009 the crisis cascaded into disruption to EU Member States. This disruption showed, what was already known in the region, diversification away from Russia was important for the energy security and security of supply for the region. It was not the overall EU level of dependence that matter, but the regional dependence. EU institutions woke up, but not until after they coordinated a technical response of sending gas to dried up systems in Bulgaria, Hungary and Serbia. Afterwards, the EU threw greater effort and coordination into helping the region diversify and open up alternative routes of supply for the region. These include interconnectors, expanding gas storage, ensuring reverse flow in pipelines and instituting new procedures and guidelines to ensure a timely coordinated action in case of emergencies. However, much of this diversification is funded by national governments. Key diversification projects include:

  • Polish LNG
  • Poland’s push into shale gas
  • Hungary’s oil and gas group MOL upgraded an oil pipeline to the Adriatic, tying the region into global oil supplies.
  • Bulgaria signed an agreement to import gas from Azerbaijan starting in 2019, completely avoiding Russia by transporting the gas through Turkey and Greece.
  • Bulgaria will build interconnectors with Turkey and Greece.
  • Upgrading gas interconnectors between Hungary and neighboring countries, particularly a new Hungary-Slovak interconnector that begins to establish a north-south gas corridor to Poland.
  • Gas storage investments in Hungary and Austria
  • Western interconnectors to Austria and Germany with reverse flow capability are being built or upgraded.

Missing from these ongoing or completed projects, is the most symbolic project of all, Nabucco. The failed bid to transport Azeri gas to the SEE and CEE regions may turn out to be more politically significant than functionally significant. Existing Soviet era transport pipelines to Russia remain the only large supply route of gas into the region. Regardless of boosted interconnectors, regional LNG access or gas storage, Russia will remain the dominate gas supplier to the entire region, all the additional projects provide a boosted level of energy security and improve security of supply in times of emergency. Nonetheless, if the goal is to ensure operations through a cold winter when the gas is cut off from Russia then the region can weather a Russian storm.

The failure of Nabucco to launch prevents the region from adding the significant alternative capacity, which combined with on-going diversification projects, could reduce further Russian reliance. Nabucco, backed by a consortium of CEE, SEE and Western European companies represented the most symbolic effort for energy independence. It was the battle between competing gas pipelines through Europe’s southern gas corridor: Russia supported South Stream vs. Nabucco. The EU backed Nabucco, had the political-economic edge to deliver more gas while increasing energy security. In the end, the pure commercial decision was taken by the upstream consortium to deliver gas into the Italian market through a competitor private pipeline to Nabucco. The downstream activities in the CEE and SEE region prove themselves just as important as the upstream transit routing decisions, which together influence large scale investments into the region.

Building the Nabucco pipeline through the CEE/SEE region would require decades of commitments from all upstream extraction parties tying them into downstream distribution partners. As outlined above, past relations between the region’s governments and foreign energy investors is turbulent. If Nabucco went ahead the upstream suppliers, extracting in Azerbaijan, would be tied to the political whims in the CEE and SEE region. If the original point is to play Nabucco against the Russians, then the tables could be turned to threaten the extra capacity from the older Russian pipelines to drive prices lower once Nabucco pipes are in the ground. Fixed assets and fixed prices are only as fixed as the political winds.

Current actions of governments throughout the CEE and SEE region demonstrate independent energy regulators are used for window dressing to meet EU requirements. Energy regulators were meant to ensure the long-term investments by energy companies were protected. This has turned out to be false. Under current conditions, the forced price reductions, revoking – or the threat of revoking – licenses and continued disputes over the prices of electricity and gas creates a significant challenge to maintain necessary investment levels, upgrade or prevent a company from financial losses. It is hard to imagine the political rhetoric and actions stopping for upstream suppliers physically locked into the region and with alternative sources of gas for governments to buy.

The original energy newcomers to the region, described above, are now withdrawing – or literally being squeezed out, like in Hungary. In short, the energy investment environment has turned negative, price pressures dominate, and political along with social demands result in an unpredictable market. Despite gas being a global commodity, politically mandated cuts in electricity and gas prices force losses onto distribution companies. Building a multi-billion Euro pipeline through the region begins to weaken under the current domestic and regional conditions energy providers are met with.

The loss of Nabucco should send a clear message, and the politicians of the CEE/SEE should hear it: Market fundamentals, are the basis for investments, not political considerations. Politicians can fight downstream electricity and gas companies for lower prices, argue with Russia over contracted prices, but unless governments are prepared to pay a market price for commodities – thus subsidizing their consumers, energy companies will go elsewhere. Private capital doesn’t finance displays of populism and energy independence that in the long-term undermine both security of supply and energy security.


Today, 2013, we have a new era, of energy (in)Dependence. It represents the limits of infrastructure development, alternative import routes and politically induced market risks. Constant political warfare with private energy companies, in most of the CEE and SEE countries, has resulted in depressed incentives for infrastructure upgrades and price instability. Building a non-Russian transit pipeline into a region of significant market instability requires incentives outweighing these negatives. Each country in the region is proclaiming energy independence, which then (laughably) increases their reliance on Russian gas and increases security of supply risks. Resiliency within national systems is less than in regionally integrated systems. Faltering now on regional integration or preventing foreign capital from entering only underfunds alternative energy solutions which displace Russian gas.

The region’s largest gas projects moving ahead mainly rely on government efforts and financing. Gas storage in Hungary, network interconnectors, Polish LNG terminal and shale gas. While these efforts are able to move the ball down the court towards greater energy security, they do not provide substantial regional upstream diversification. The original intent of privatization of energy companies was to infuse capital into the regions’ energy systems to modernize the infrastructure, governments lacked the money to redevelop the basis of their economies. The question must be asked, does this trend continue, or has energy capital taken flight?

CEE and SEE governments cannot finance a new energy system that excludes market based elements and players. EU institutions are pushing for great market transparency, elimination of state aid, stronger energy regulators, stability in prices for private energy investors, and the interlinking of national and regional markets, thus reducing the room for political interference in energy markets.

There are now a number of attraction for CEE/SEE governments to deal with Russia and maintain its dominate position in the region, and in fact, moving away from Russia now appears more dangerous as the original – and justifiable reasons for energy independence fade. Russia remains a single supplier who is ‘simple’ to deal with. The terms of gas supply are clear, ‘You buy it we deliver it.’ Not the Brussels motto of, ‘If you buy it then here are the competitive conditions that have to be fulfilled, here is the transparency that is expected, and we expect the energy regulator to make well-reasoned opinions based on professional decision making process.’ Politically, that EU garbage only works in Western Europe.

Politically for CEE countries, Moscow can now act as a counterweight against Brussels. Whether this is just symbolic or not, the political elite in the CEE region is learning to balance energy relations between the old foe and the new foe. Finding a common cooperative topic with Russia is also beneficial for on-going relations, if not energy than what? Agriculture or software? There’s nothing that says a serious relationship than building long-term energy ties with Russia. Satisfying the strong neighbor, financially and commercially on energy issues distracts them from other issues.

A cooperative relation also demonstrates that CEE countries can stand by themselves with Russia. The rules of the energy sector may be dominated by Brussels and Western European companies, but the national governments of the CEE region still have an important role to play in their national gas markets and pricing. Bilateral relations are fostered and maintained with energy. While Russian gas, in the age of independence, was viewed as a necessity, in the age of (in)dependence, negotiations demonstrate politicians are in control of their country’s energy assets and a solid relationship exists between old foes/friends. This is contrasted against the assumed friendly relations with Brussels and the EU’s demands for an independent and transparent energy sector with complex rules and limited room for political grandstanding and influence. Russia and Gazprom are more than happy to lend to the showmanship, with the price of gas possibly linked to the temperature of relations between countries. Energy (in)Dependence provides security, simplicity, political capital and limits the need for a more complex energy market to replace Russian sourced gas.

The intertwined concepts of finance and market complexity, for alternatives to Russian gas, provide another reason for energy dependence on Russia. Despite alternative gas supplies, like LNG and shale gas, becoming more available, they will only make a small dent into the domestic or regional gas market. Any alternative to Russian gas requires considerable investments into developing a functioning gas market, including a nationwide network with gas power plants. Failure to incentivize private companies to invest in alternatives to Russian sourced gas (such as shale gas) ensures continued Russian dominance, for example in Poland’s gas market. Poland values energy independence, but not even concerted investments into LNG, shale gas and interconnectors can reduce its heavy reliance on Gazprom. The same applies to all the other countries in the CEE and SEE regions.


The political and economic hurdles for energy independence are too high for the CEE and SEE regions: Building a new energy system, funded by private capital, requires competition and complex market structures with limited political involvement.  Extending dependence on Russia energy resources provides the opportunity to maintain centralized energy systems and using Russia as a counter weight to Brussels non-political energy market schemes.

The collapse of Nabucco represented the failure of an energy independence strategy. A high priced, visionary project that was politically supported but without the political or economic stability required for its long term success. The debate over Nabucco overshadowed the on-the-ground work of building and expanding interconnector capacities, LNG terminals, domestic gas deposits and an overall beefing up of security of supply components. Enough so that supply disruptions, from Russia or transit countries, would have a limited impact. Energy independence can be gained by small hedges against Russian agitation and action. Therefore, (in)Dependence provides a lower cost, economically and politically hedged energy strategy that balances the local politics of the CEE/SEE region and the competing demands of Brussels and Moscow. A classic Central European strategy.


Hungarian Politics Torpedoes Nabucco Participation

The analysis of energy policy goes to the heart of a countries political and economic system. The statement by Hungarian Prime Minister, Viktor Orban that MOL, the Hungarian Nabucco gas pipelinepartner, was pulling out, can only be seen as a politicization of Nabucco and MOL decision making. It is no secret that Orban has a testy relationship with the European Union. But has he really removed a diversification option from the table? Despite increased regional options Hungary only perpetuates its present day dependence on Russian upstream supplies. Now Orban has thrown the country solely into supporting South Stream – diversifying to more Russian gas does not constitute noticeable diversification.

Continued on Natural Gas Europe…

Short, Short Nabucco Man

I decided the other week, to really focus on professional posts on this blog. As my father mentioned in my last post about Nabucco, if I swear then people won’t take me seriously. Absolutely true. 😉  But then should we always treat the world of energy so seriously? For me it is a such a great topic. Multiple perspectives offer greater insight.

Thus, when I read on Natural Gas Europe that Nabucco was changing size, my professional restraint went out the window.

A new proposal, would see a pipeline between Bulgaria and Austria with a reduced capacity approximately half of what was originally planned. The consortium however, is still maintaining the viability of the original plan. “We are in the process to calculate several scenarios, including different sizes in terms of capacity and length of the pipeline. However, our preferred scenario still is the base-case and no final decisions have been made, yet,” said Christian Dolezal, spokesman for the Nabucco consortium.

But a shorter and smaller Nabucco? Is it really the big Nabucco that we know? The one that was so attractive to so many people, the pipeline extending from the Caucasus all the way to Austria? Well, no not really. It is another pipeline plan that relies on the Turkish infrastructure (or the jumble of other pipelines that have to be sorted out) and is aimed at the short to medium term for meeting Europe’s demands. The substantial changes to the project, while retaining the Nabucco name, requires a bit of teasing to call the consortium out on their obvious gutting of the project.

The new market reality (for the short and medium term) may demonstrate that a smaller pipeline can get Europe by for some years to come. The recent cold winter and high gas demand has shown, even when Russia reduces delivers, the sizable storage facilities and greater interconnection (compared to 2009) in Europe provide an effective buffer. Southern Europe (particularly Italy), which was hit hardest in the past few weeks from reduced Russian deliveries, may benefit from Azeri gas being delivered through TAP or SEEP, now that ITGI could be out of the picture. So maybe this is the future of European gas: storage, continued reliance on Russian gas with some diversity for South East Europe and Italy. South Stream has never looked better.

As for a shorter and smaller Nabucco, it didn’t come to me right away, but then I thought… isn’t there a song about this? No, no, not the opera one…. something more modern. And well, yes there is. The teasing element for the Nabucco consortium, for the switch, needs to be expressed in song – straight from ‘bad taste hits’. And I think this song better describes the new Nabucco pipeline than the opera (I’ve posted the censored version to maintain my professionalism). And just maybe Nabucco needs a new name, the short, short man pipeline (SSMP). Meet the new Nabucco Man:

20 Fingers – Short Short Man – MyVideo

Nabucco’s bubble bursts

Death is now amongst us. Stalking the Nabucco partners… watching as they each pull away. RWE is prefering to get away from the corpse. Death was not the result of a lack of gas, lack of finance or lack of political will: death came from reality. The broader social-political and economic reality that security of supply is not worth $10 billion.

Nabucco rose on the 2009 gas crisis between Russia and the Ukraine – the only viable long term option to for Southeast and Central Europe to diversity away from Russia. The timing was right for the plans and the consortium, the shutting off of gas and the impact it had on countries largely reliant on Russian gas spurred a great impetus to diversify.

Nabucco’s bubble grew with the momentum built on the concept of security of supply for Europe. For companies and governments who supported the project, their commitment and involvement meant that the momentum needed to be maintained. The competition against the Russian backed South Stream, meant there was a race occurring and neither Nabucco’s supporting companies or governments could be seen as folding to the demands – or in the face of Russia’s demands. The hot air continued to be pumped into the bubble as the company executives and politicians spoke.

But now it is done. The decision is made – now the companies and governments have to think of how to exit. I know the feeling. On this topic, I’ve had writer’s block for three months. I couldn’t figure out what was going on. In a previous post, I tried to make sense of it- tried exploring in my writing what was going on. But I just ended up with a feeble post. My friend at Natural Gas for Europe asked for something. I couldn’t deliver, was my explanation…. maybe if I had known my feelings more, I would have known I was watching my prized project – the one I invested so many hours analyzing, die. Like a football fan watching his winning team go down to an inferior team, the impossibility of it all means the mind can’t process the events. Nabucco is dead.

The popping of Nabucco’s bubble was not done in dramatic fashion. Death did not come from the lack of finance, lack of supply or lack of political support. Each of these factors other analysts have claimed would be the reason for Nabucco not to be built. I always argued otherwise; my reasoning was based on the trued concept of Earth, Wind and Fire. Man’s desire for the Earth’s mineral riches is too great, so geology (Earth), finance (Wind) or politics (Fire) could not stand in the way. My argument rested on the nonsensical argument that gas can be created, money spent with flimsy conditions and politicians can all get along. And this is all still true – Man (and I am being sexists in my use of the term) can make anything stupid happen.

The death of Nabucco was caused by a ‘holy shit moment.’ We all have these. Doubts stir, finally they emerge, not just in strong terms, but through clarity. The shift of US support in November 2011 to commercially viable projects that delivers gas to the CEE/SEE region marked an important point. While the other smaller pipeline projects were getting attention and it was ‘out there’ that these could become viable, it was all noise. (That’s all I could hear for the past few months – noise.) But now with the reduction of support from RWE, and the broader shift in the economic conditions in Europe and the world, air is seeping from Nabucco’s bubble. People and companies are ready to buckle down and see how the next few years go.  The importance of security of supply is now reduced. We are all back to comfort foods.

Death did not come about by alternative gas sourcing either. Shale gas did not kill Nabucco. Just as Nabucco went through a three year bubble of irrational discourse, so too is shale gas.  Pipelines did not kill Nabucco. There are two proposed smaller pipelines that would see the Turkish system beefed up, the Turkish and Azerbaijan TANAP project, and now the strong contender, South East Europe Pipeline project, each delivers less gas for lower cost to Europe – and from available reserves in the region. While these now appear to be commercially viable – it was never realistic that Nabucco could compete – or be built – with small capacity and a short term time horizon for payback. Nabucco was a large long-term project that was on the point of visionary –  smaller does not win in the long-term. And so Europe will not either from Nabucco’s demise. Political rationality helped kill Nabucco. The apparent rapprochement, or entrapment –  between the Ukraine, EU and Russia over the Ukrainian transit system, means that reality has also returned to the most financially viable method of transferring Russian and Central Asian gas to Europe. (Can the Ukraine afford to have South Stream built?) In an age of comfort food and ‘STOP – what’s rational?,’ then the continued use of the Ukraine for transit is also smart.

The public death of Nabucco will continue for sometime now. It won’t be fast. But for me, Nabucco is dead. South Stream, will be analyzed in a later post, but what killed Nabucco can also kill South Stream. They are the same creature. But just as one is at a loss after a death, I’ll have to search for a new way to perceive the EU- Russia gas relationship. Pipelines are so 2010’s; now we all have to understand and reconceptualize what the new energy relationship is between the EU and Russia – now the fun begins again.


Nabucco, and the distant love of Europe

Nine lives or no lives? That is the prospect for Nabucco.

Noise or game changing events: another round of alternative pipeline plans, the re-positioning of political actors, makes another act in the Nabucco opera either more intriguing or increases the restlessness of the audience.

Separate actions inflict little wounds on Nabucco but collective cuts may be eroding the ground underneath. Does the U.S. still fully support Nabucco? What’s the purpose and/or reality of  the new South East Europe Pipeline project?

Will there be any life for Nabucco?

All these questions lead to separate and diverse perspectives of what the future may hold for Nabucco. The doubts begin to settle in as the relationship between EU backers and the governments in the two distant regions move beyond the courting phase of their relationship and seek to build a solid gas link.

Reassessment of relations

There comes points in a long-term relationship where an assessment of what each partner wants…. is it true love, infatuation or is there a true coupling where each partner brings important elements to the relationship? Europe must decide whether it wants to develop the relationship further with the countries of the Caucases and Central Asia. The recent – warning shot – provided by the U.S. State Department Special Envoy for Eurasian Energy, Richard Morningstar should begin to focus attention in Brussels. The ‘misinterpreted’ comments that smaller pipeline projects that are more commercially viable may be better.  While the U.S. embassy rushed out a ‘clarification’ it still states that the sooner a commercially viable pipeline is built the better.

Reality or love

There are always reasons why a relationship will fail over the long term. Particularly when you put two ‘individuals’ together from two different cultures. Maybe now is the right time to review these. What are the worries that prevent countries from the EU to solidify their relation with potential supplier countries for Nabucco?

Financial:  “How are we going to pay for it?”

Distance: “But you are so far, can we really have a long distance relationship?”

Distractions: “What if you find someone else, while I’m away?”

Parental approval: “My mother wouldn’t approve” (i.e. Mother Russia)

“Your father has other plans for you.” (i.e. US wants EU to use shale gas)

Hometown girl: “Maybe you want a girl from home.” (i.e. shale gas)

Like most love story, it is the parents that get in the way. Those guardians that seek to steer their children in the right direction. Mother Russia certainly has a strong interest to insure that the EU is only supplied by Russia. The United States, is attempting to force a gas strategy on Europe – shale gas. The recent Baker Institute Study that projects a drop in European gas dependency from 27% to 13% because of the full utilization of European shale gas, has unfortunately – I believe, influenced US policy to push the EU to delay or stop the Nabucco Pipeline. Therefore comments emerge that discourage investment into Nabucco and encourage switching to a lower capacity pipeline that is commercially viable in the short term.  Pursing the most commercially viable pipeline option today does not provide the long term boost to security of supply nor provide the foundation the EU needs to have gas fill its power plants.

Multilateral and multicultural relations are at the heart of everything the EU does. Also central to the EU is the role of energy – the foundation of the EU rests on energy. Providing the will and reasoned justification for building a robust pipeline that will serve the long term interests and needs of Europe requires significant commitment today. Many of the issues that are meant to derail Nabucco are not strong enough to trump the security of supply implications that expanded gas supplies, that are not controlled by Russia, offer. Just as love can overcome obstacles, the large and abstract notion of security of supply serves as the impetus to take resolute steps to cement a relationship. It is time to stop worrying about what the future in-laws think.

Baking the Baker study in a European gas oven

Following my earlier post about the report from the James A. Baker III Institute for Public Policy at Rice University on shale gas and the impact on European energy geopolitics, I wrote a longer piece for Natural Gas for Europe. It can be found here. Below is the introduction to the lengthy piece.

The potential of shale gas to alter the geopolitical landscape of energy is becoming too delicious to ignore. The recent report by researchers from the James A. Baker III Institute for Public Policy at Rice University determines that Russia will become a shriveled supplier to the European market by 2040. According to the report, Russian exports will only comprise 13% of the European gas mix, compared to 27% in 2009. The dramatic impact, as determined by the researchers, will be the scrapping of South Stream and altering supply sources for Nabucco. Europe will thwart Russia’s energy weapon by utilizing the increased liquidity in the European and global gas markets. The findings suggest that the overall impact on Europe, of exploited shale gas plays, will be a more independent continent with a reorientation towards the foreign policies of the United States. However, this perspective overlooks fundamental realities about the geopolitics of gas in Central and Eastern Europe and how US foreign policy should respond.

For the rest of the analysis please visit here at Natural Gas for Europe.

Skewing Geopolitics of Energy: US researchers mix French wine with Hungarian Goulash, producing gas

The potential of shale gas to alter the geopolitical landscape of energy is becoming too delicious to ignore. The recent report by researchers from the James A. Baker III Institute for Public Policy at Rice University determines that Russia will become a shriveled supplier to the European market by 2040. Russian exports  will only comprise 13% of the European gas mix, compared to 27% in 2009. The dramatic impact, as determined by the researchers, will be the scrapping of South Stream. Europe will thwart Russia’s energy weapon by utilizing the increased liquidity in the European and global gas market. The findings suggest that the overall impact on Europe, of exploited shale gas plays, will be a more secure and more US orientated Europe.

Will energy provide the context for a new Cold War between Russia and the US?


First, it must be stated that the authors do a robust job of developing a global model that accounts for the impact of gas extracted from shale formations. The model and the scenarios they develop do well to demonstrate the impact that recent interest into shale gas can have over the long term. In addition, expanding the analysis to consider the geopolitical ramifications is commendable. However, despite using a robust model that can adjust for regional differences, they fail to be more effective at setting up the scenarios and to account for present and future regional market and infrastructure conditions. This failure leads to wrong assumptions that may influence US foreign policy in relation to promoting shale gas technology and undermines support to the Nabucco gas pipeline project.

For this short analysis I’ll state there is a significant methodological problem that  skews how shale gas will liberate ‘Europe’ from the powerful clutches of Russia, thus enabling the Europeans to become more friendly with US foreign policy.

There are three scenarios the researchers provide that ‘demonstrate’ the impact of shale gas on the geopolitics of energy. In my own words these are:

  1. Everything global, shale gas is exploited from all countries globally
  2. Life in 2005, US shale from 2005 discoveries is used and no shale gas exploited outside the US
  3. Limited US/Everything global, US environmental  regional restrictions limit US output

Developing US foreign policy advice based on these limited and constrained scenarios only extends the distorted/neglected picture that US policy makers have on Europe, and more specifically Central Eastern Europe (CEE) and South East Europe (SEE). This is where my criticism lies. If the researchers are able to account for regional variations in the US, then surely, they can also develop a scenario where regional variations in Europe are accounted for. Painting Europe with a single brush obscures regional variations. In addition, a more limited global output of shale gas should be considered in an additional scenario, as this is certainly more realistic than the first two scenarios.

The high reliance of CEE countries on Russian oil and gas supplies means defining a single European market is deeply problematic. (This reliance does not exist in Western Europe). The future does indicate the integration of the European energy network along with gas diversification through LNG. These aspects will increase security of supply in the CEE/SEE region. However, they do not exclude the need for Nabucco, as this provides another avenue for energy diversification. The authors do not present these regional variations and dependency in Europe. The extremely high gas dependency of Hungary, Bulgaria and even Poland on Russia should not be mixed with Western European countries’ ability to tap other pipelines for their sources.

Regional variation is important to consider. Nabucco is primary meant to increase the gas diversification in the CEE/SEE region – which is highly reliant on Russian gas. Therefore, if the model can account for regional US variations it should also be able to provide a scenario that accounts for European variability and the impact shale gas will have within the CEE/SEE. This would be extremely useful to have and provide a more accurate picture of the future geopolitics of energy that weighs heavily on these regions.

Shale gas is no panacea for future energy developments, as I have written before. The conclusions in this report provide some good insight into what could happen with shale gas and its global impact. However, while the authors emphasis the benefits the US can incur by the spread of the US technology, their findings are limited by neglecting more effective regional analysis in Europe and globally. More effective policy advice could be given by accounting for regional variations, particularly over Europe’s Southern Gas Corridor and the future gas relations with Russia.

Postscript: for a longer and more developed review of the study, please visit Natural Gas for Europe, where I published a more in depth assessment of the report.


Why V. Socor is wrong. Or Austrians show their small size

Following the gas sector in Europe can be exciting, particularly watching the marathon-like stamina of the backers of South Stream and Nabucco. But the emergence of obstacles, or the use of strategic moves, should come as no surprise to spectators. Wrapped up in the Great Gas Game, are geopolitics and individual tactics. Russians like to strong arm their way through, while the Europeans like to appear business like. But what happens when the participants start to draft off the backs of the other competitor? Should we be shocked? There is no rule book, so we shouldn’t be.

The news that the big Nabucco leader, OMV is establishing a joint company with Gazprom to build and operate a section of South Stream in Austria was big news. One of those remarking on this is the highly respected commentator, Vladimir Socor of the Jamestown Foundation. In commenting on this development he states,

The Gazprom-OMV agreement raises at least theoretically the possibility that the South Stream pipeline could outrun and overtake Nabucco in Austria, with Gazprom reaching Baumgarten ahead of the EU-backed project….

Gazprom’s move in Austria forms part of its general mobilization of business and political allies in Europe to stop the Nabucco project.

The explanation and the possible reasoning that Socor gives for Gazprom’s move and the potential impact that this has on one level are correct. But deeper down, the analysis falls short for three reasons. The news that a joint venture between Gazprom and a Nabucco member was established are indicative of things to come, and shouldn’t really be unexpected.

First, Despite what the European countries think of themselves, they have small companies. And in Central Eastern Europe, where the two big gas pipeline projects pass through, is it even theoretically possible that Nabucco and South Stream will be built without the participation of each countries’ main gas company? Such as OMV for Austria and MOL for Hungary. In Hungary, the Hungarian government hides behind the large state owned electricity company, MVM to play with the Russians. However, the technical studies for the joint Russian-Hungarian South Stream project company are being conducted by MOL (a Nabucco member). When it comes to expertise there is no real alternative than the ‘private’ companies that are already in the Nabucco Consortium.

Second, so far Nabucco is the commercial pipeline and South Stream is the political one. In this piece a while ago, I stated the hard decision making the Hungarians would have to make in eventually choosing South Stream or Nabucco. Will it be political or commercial interests that drive participation in ONE gas project? Because ultimately, the Hungarian government (like the other governments) is going to need to pump some money into these projects. And things are tight, so tough decisions will need to be made. Not just hand shakes and saying, “sure, let’s do lunch next week to discuss it- again.”

As I wrote before, Bulgaria is already ahead of the game, telling the EU, “if you want us to participate in Nabucco, then don’t count our government debt that we’ll have to take on to finance it.”

The third reason Socor is wrong to be paranoid about this Russian/OMV deal is – it is old news. (I say paranoid, because one of the great things Socor does, is to draw on paranoia of Russian intentions – I think he does this well, since those not living in these region do under estimate/not understand, the Russian energy moves in the region). Yes, OLD NEWS. Maybe I over estimate the knowledge that people have about these projects, but for the bankers, politicians and those in the gas sectors, the strategies and approaches of Nabucco and South Stream partners have been on display for a few years now. Those following these projects should not be surprised by some consolidation/cooperation of the projects. The Austrians and Russians are old friends, therefore, it is easier for them to go first, than the Hungarians and Russians, who currently have some strained relations (particularly over MOL/Surgetneftegaz shares).

The marathon is now turning into a grueling marathon with strong head winds. Now Nabucco won’t be operating until 2017. The necessity of participating companies and governments to begin to show a few cards should not be unexpected. Can Nabucco or South Stream really be built in Austria or Hungary without OMV or MOL? No. The finish line is a  long way off, but what is unknown is for how long the game that both of these gas pipelines will be built independently of each other will go on. In Austria, the OMV/Gazprom section is only 50 km. However, for the Hungarians both pipelines traverse large sections of the country. The choice between the political South Stream and the (somewhat) commercial Nabucco will need to be decided closer to the end. As in a marathon, if you set a quick pace at the beginning you just may be crawling to the finish. The question is will both projects being crawling or will they be standing and supporter each other at the end?

The Emergence of an EU Gas Strategy?

The emergence of an effective European gas strategy may be close to being realized. After years of deliberation and allowing private companies and member states to take the lead, the ‘new’ EU Commissioner for  Energy Günther Oettinger appears to be butting the heads of companies and governments. This strategy appears in three areas 1) pursuing third country clauses which denies the right to re-export Gazprom supplied gas to other member states (Poland-Gazprom), 2) political support behind the North-South gas corridor in Central Eastern Europe, and 3) most significantly of all, the effort to get European companies cooperating on the southern gas corridor traversing Turkey.

Commissioner Oettinger, when he joined the Commission, was derided as a vanilla kind of guy, even the US in cables released by Wikileaks describes him as  bland. Well, the thing with vanilla is it just takes a little chocolate to liven it up (ok, I couldn’t think of a better comparison than that). He may be a boring guy (according to these reports) but he may be emerging as an effective and pointed leader that can bridge the fundamental divide in the energy sector. Openly stating, “South Stream can, in the long term, be considered a rival to the Nabucco project,” Unifying the strategies and actions of the political establishment with the capital investments of the private companies. This is absolutely essential if Europe is going to diversify its gas sources, through private effort.

There are two notable events that demonstrate this effort of realizing the southern corridor. The recent Oettinger’s statement telling the project companies to get moving  and encouraging  cooperation between the two consortia that comprise Nabucco and ITGI. A gradual and sustained investment approach – without Russian involvement, appears to be emerging as the solution for transporting Central Asian and gas from the Caucuses to Europe. This approach is absolutely essential if the Commission and member states want to exclude Russian participation in the pipeline from this region.

Russia and Gazprom has been pressuring the Commission and member states to grant South Stream priority status, so that it can have access to lower financing cost and receive similar backing as Nord Stream. The lack of it to date, is indicative that the EU wants a non-Russian gas pipeline project.

In June 2010, the Russians announced that EDF would be joining their consortium, only a memorandum of understanding was signed, full partnership still has not happened. The Russian strategy is to come out with frequent political agreements and big statements to demonstrate that their project is moving ahead and is in step with Nabucco. However, if the merger with ITGI and a less ambitious and lower cost Nabucco emerges (at least in the short term), it will have a very hard time to keep up with the European backed project. Financing, access to gas (non-Russian) and continued commitment by member countries (i.e. state owned energy firms) will all work to drag South Stream into the morose of pipeline project graveyard.

In the end it may be a slow death for South Stream because it is not in the financial interest of member states to participate in two large pipeline projects. Essentially what countries have done, is to hedge their bets on which pipeline is built first. This has also allowed them to maintain good relations with Russia – but the day of reckoning has to come sometime. If all South Stream does is redirect Ukrainian transiting gas thorough the southern corridor, it will be a very expensive detour.

The EU energy strategy launched in 2009, and outlined in the second strategic energy review, along with the events and the awakening of the January 2009 Russia-Ukraine gas dispute, have all played a part in seeking ways to increase  Eastern Europe’s security of gas supply. LNG is a viable option. It remains to be seen if the CEE/SEE region can support all the planned projects on the table. These include 3 to 4 LNG facilities plus, Nabucco along with existing gas pipleline routes – in addition to large planned capacity of South Stream. In the Southern Gas Corridor survey conducted in November and December 2010 by this blog, respondents stated that the most favorable configuration would be Nabucco and two LNG facilities (I’m still working to get all the results out – sorry for the delay)

(source: Limax Energy Consulting/energyscee.com)

The ability to bridge the political and corporate divide in realizing energy projects is a main component to successful energy policy. Whether this is the promotion of competitive markets, or the effort to reduce carbon emissions, in the mix of the energy sector public-private cooperation is essential for increasing energy security of supply. The efforts of Commissioner Oettinger, go far in walking the fine line of working both within the legal parameters of his institution, and the more informal role of prompting, even egging on, the private sector to do more. Europe’s ability to diversify its gas supply rests on this cooperative relationship. It is nice to see the many components of Europe’s energy strategy fall in line. Now, let’s just wait for the next big announcement from Gazprom and how they plan to match Nabucco’s slimming down. Maybe after hibernating all winter the Russian bear will also shed a few pounds.

[postscript: after writing this the Nabucco consortium came out and flatly denied any cooperation with ITGI – from what I understand, even on the Nabucco side, there remains room for cooperation, so this shouldn’t be written off just yet]