Russia May Lose Its Monopoly on Gas Supplies to Europe

Late July officials from six countries met in Turkey and signed an agreement to build the Nabucco pipeline. The pipeline will run from Turkey’s eastern border through Bulgaria, Romania, Hungary and a key gas terminal would be located in Baumgarten, Austria. Germany is also a partner in the deal and it is backed by the U.S. as well.

Russia currently controls the existing network of pipelines that supply natural gas to Europe, but Nabucco would break that hold and provide an alternative for gas delivery.

The idea for the Nabucco pipeline (named after a Verdi opera) began in 2002 but the plans languished amid disagreements among consortium partners and lack of commitment from natural gas producers. However, the plan got a boost after Russia turned off the gas to Europe in January because of a series of price disputes with the Ukraine.

Big hurdles still remain for the project. Consortium members must raise the estimated 7.9 billion Euros ($11 billion US) for the project. Construction has not even begun and gas is not expected to be pumped through until 2014. Furthermore, Turkey originally insisted on retaining 15% of the natural gas passing through the pipeline for consumption and export which the European partners rejected.

Natural gas commitments must also be procured from suppliers. Gas from Azerbaijan’s Shah Deniz 2 field will be a crucial component of the project. As a positive sign, the energy minister of Azerbaijan was expected to attend last month’s signing of the deal. European officials hope that other gas producers, such as Iraq and Turkmenistan, might also contribute to the pipeline.

Industry analysts are calling July’s intergovernmental agreement a significant development and it should be clear by the end of the year that the Nabucco pipeline will be built.