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Nabucco Pipeline's Fate Hinges on Azerbaijan

Two decades after Azerbaijan emerged from the Soviet Union and began striking oil deals with Western companies, it faces vital decisions on its plans to exploit another energy resource: natural gas.

The fate of the giant Nabucco gas pipeline—a central plank of the European Union strategy to loosen Russia's grip on Europe's natural-gas market—hangs on those decisions.

Azerbaijan's oil production is expected to peak in several years, so gas is the key to sustaining an expansion that has turned this capital on the shores of the Caspian Sea into a boom town. It is also crucial for Europe, whose dependence on natural gas is expected to grow following decisions by Germany and Italy not to use nuclear power, and as the Continent seeks to lower carbon emissions.

The European Commission, the EU's executive branch, has been pushing Nabucco as the only one of several competing pipeline projects large enough to deliver strategic quantities of gas to the Russia-dependent energy markets of Eastern Europe.

But the omens for Nabucco, three times larger than its competitors and designed to carry gas as far as Austria, don't look promising.

By year-end, Azerbaijan is expected to choose long-term buyers for the gas from its massive Shah Deniz II field, which lies deep under the Caspian with reserves of more than one trillion cubic meters.

At a conference in Baku in June, Azeri President Ilham Aliyev reaffirmed that natural gas from his country would go to Europe. He didn't say how.

One man with influence over that decision is a friend of Mr. Aliyev: Elshad Nassirov, vice president of the State Oil Co. of Azerbaijan, known as Socar. Socar has a 10% stake in the Shah Deniz consortium—smaller than the two 25.5% stakes held by BP PLC and by Norway's state-controlled Statoil. But Socar's vote as the government's representative is key to who will get Azerbaijan's gas: 16 billion cubic meters a year, of which 10 billion cubic meters are set to flow to Europe.

"We don't want to have a deal to pay for capacity we don't need," Mr. Nassirov said in an interview. BP, the operator of Shah Deniz, has expressed a similar view.

Socar would prefer a smaller pipeline that could be expanded later to meet additional capacity, Mr. Nassirov said. He said the state company is considering becoming a shareholder in the pipeline in order to influence transit tariffs and other key decisions.

That could favor Nabucco competitors such as ITGI, a project sponsored by Italy's energy company Edison SpA, and the Trans Adriatic Pipeline, which would offer the shortest route to Italy, cutting across Albania from Greece.

Nabucco insists its project is the most advantageous in the long run, precisely because of its size. "A large pipeline is in the long run … much more cost-effective because it will transport larger volumes and will therefore bring more revenue to suppliers and sponsors," said Christian Dolezal, spokesman for the consortium, which includes Austria's OMV AG and Germany's RWE AG, its main sponsor.

Companies are set to make concrete offers for the purchase of gas volumes by October, leaving Socar and its partners in the Shah Deniz II consortium three months to make the decision.

Socar wants to sell the gas in as many European countries as possible, and get the best price. But Nabucco is designed to carry 31 billion cubic meters of gas, and two-thirds of the pipeline will likely remain empty until another supplier can fill the gap. Empty capacity is a waste of money.

At the Baku conference in June, EU Energy Commissioner Günther Oettinger highlighted neighboring Turkmenistan as a potential source of the gas needed to fill Nabucco's spare capacity.

EU government representatives recently agreed to give him a mandate to negotiate between Turkmenistan and Azerbaijan to pave the way for a pipeline across the Caspian to allow this to happen. Yet many experts are skeptical that Turkmenistan's gas will become available soon for export to the West—in part because of opposition by Russia and Iran, which also flank the Caspian. Iraq is another potential supplier, but that prospect too looks a long way off.

In another development that has raised questions about Nabucco's future, RWE recently agreed to start talks with Russian natural-gas giant Gazprom about a joint venture to produce electricity from gas and coal.

"The memorandum of understanding between RWE and Gazprom is laying the grounds for further negotiations on a potential joint venture in electricity generation. These negotiations are in no way connected to RWE's position in Nabucco," Stefan Judisch, chief executive of supply and trading at RWE, said.

Source: The Wall Street Journal

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