Nearing a Nabucco-South Stream Merger?

Posted: 15 July 2008

by Neil Barnett

Gazprom’s 15th birthday party last February was, by all accounts, quite a bash. Outgoing chairman and now president of Russia Dmitry Medvedev, as well as Prime Minister Vladimir Putin, were among the crowd at the Deep Purple and Tina Turner concerts given in honor of the adolescent gas behemoth.

In June, it was the turn of the subsidiary Gazpromexport to celebrate, and on the margins of the jollity there were some revealing details. According to CEPA’s source at the party, of all the foreign oil and gas companies represented, the delegation of Austria’s OMV was the most senior, comprising the greater part of the company’s board. In response to an inquiry, OMV’s spokesman said the company does not comment on such matters.

Of course, the chummy relationship between Gazprom and OMV is in itself not exactly news. Gazprom already held a 50 percent stake in the Baumgarten gas hub in Austria, and then last month the Russian company announced that OMV was joining the South Stream pipeline project as “coordinator from the Austrian side.”

This was puzzling, not to say troubling news for many observers of European energy security. The OMV-led Nabucco consortium is planning a pipeline with a capacity of 31 billion cubic meters annually (bcm/a) that will run across Turkey and Central Europe to Austria. The planned gas conduit has attracted EU and U.S. support precisely because it offers some diversification away from reliance on Russian supply and infrastructure. But securing supply has been tough, with only around one-third of capacity currently secured (from Azerbaijan). Moreover, partners are grumbling about the snail-like rate of progress in building the pipeline.

Gazprom’s South Stream will run from Russia under the Black Sea to Bulgaria, at which point it will fork, one branch heading northwest to Baumgarten, the other heading southwest to Italy. Its capacity will be similar to Nabucco’s – about 30 bcm/a.

In February, four months before the June announcement, this author suggested that a commercial and physical merger of the two projects was in the cards:

“Nabucco’s backers never tire of saying that the two projects are not an either/or proposition, and they may be right. Now there is a real possibility that the two projects will merge. From a technical and commercial viewpoint, a merger would have several merits. At a stroke it would solve the supply conundrum for Nabucco, while allowing Gazprom to tap foreign capital, expertise and political goodwill to create a new supply corridor into Europe. And Gazprom and OMV are already 50-50 partners in the Central European Gas Hub at Baumgarten in Austria, where Nabucco will terminate.” (See: “Nabucco: U.S. Confusion Plays Into Gazprom’s Hands,” Central Europe Digest, February 15).

OMV’s decision to join South Stream appears to bring us one step closer to this scenario. And sources at the Gazprom party report that the idea was discussed by the two companies’ managements. There is little evidence that Nabucco’s customers are any nearer to securing the remaining two-thirds of the pipeline’s planned capacity. With market players skeptical of Nabucco (and OMV’s quixotic bid to take over its Hungarian rival, MOL), a pipeline merger must have some appeal to the Austrians.

For the Russians it would be a win-win. Their supply monopoly would be protected and presumably a 60 bcm/a pipe could be built across Turkey on the Nabucco route, avoiding the need to build a vastly expensive seabed pipeline.

OMV, however, remains adamant that the projects will not merge. Christian Dolezal, Nabucco’s spokesman, told CEPA, “these will remain two separate projects. Nabucco is number one priority for OMV.”

The geopolitical implications of this growing Russian influence over Black Sea supply routes are troubling at a time when Russia’s actions and rhetoric towards Europe are increasingly bellicose. Not only does the state-owned company intend to ramp up control of pipelines carrying its own gas to Europe, but it is also working to secure upstream assets and pipelines in North and West Africa. Encirclement of Europe’s supply sources and routes is evidently central to Gazprom’s strategy, as is establishing ownership of such assets within Europe itself. And, as the Nord Stream project demonstrates, geopolitical considerations trump economic ones.

In such cases the company will fall back on free-market justifications. Yet Russia’s natural resources are increasingly inaccessible to foreigners. For example, it is clear that the Russian state is collaborating with Russian shareholders in TNK-BP to drive out the British company. On June 27, Gazprom CEO Alexander Miller told The Financial Times that foreign companies should invest only with government entities (Gazprom and Rosneft) if they hope to succeed: “…One rule has to be taken into account to ensure successful investments in the energy sphere – it is better to invest jointly with the state.”

This stands in stark contrast to the chaotic and fractious EU policy on energy, driven in part by some states’ commercial interest in placating Gazprom. Yet allowing Gazprom to establish further domination of supply, pipeline infrastructure, storage and distribution would be a grave error. As Zenyo Baran from the Hudson Institute testified before the U.S. Senate Foreign Relations Committee on June 18,

“Top-level U.S. engagement is essential for the establishment of the Central Asia-Europe Energy Corridor. At risk is the future of the vast space Russia considers as its backyard: the Eurasian, Black Sea and Baltic Sea regions. European Union solidarity and transatlantic unity are also in danger.”

Something, it seems is in the pipeline: it is to be hoped that OMV’s assurances can be relied upon.

Neil Barnett is an independent journalist based in Central Europe and an Associate Scholar at the Center for European Policy Analysis (CEPA).

The views expressed in this article are those of the author and do not necessarily reflect the opinions of the Center for European Policy Analysis.