Azerbaijan: Contemplating Life without the Nabucco Pipeline

The recent postponement of large-scale production at Azerbaijan's Shah Deniz gas field is giving Azerbaijan more options and time to decide on the best way to export its natural gas, experts say.

Rovnag Abdullayev, president of Azerbaijan's state oil company (SOCAR), announced on March 10 that the field's Stage-2 launch would be delayed from 2013 to 2014-2015. Abdullayev linked the delay with "some objective reasons" that he did not specify. British Petroleum, the project's operator, has not commented on the delay.

Technical reasons are the most likely cause, a common occurrence in projects of Shah Deniz's scale, noted London-based independent energy expert Laurent Ruseckas. The $20-billion Stage 2 is expected to yield 10-12 billion cubic meters (bcm) of gas for Azerbaijan per year. "I cannot imagine that SOCAR would hold back the project if BP, as the operator, were ready to produce gas earlier," Ruseckas said.

With sale contracts up in the air for Stage-2, the postponement suits both the Azerbaijani government and BP, suggested Baku-based energy expert Ilham Shaban. For lack of a transit agreement with Turkey, Baku wants to keep its options open for selling the gas, and, therefore, is not pushing BP to speed up the project, Shaban noted. To date, 11 countries -- Russia, Turkey, Iran, Georgia, Bulgaria, Greece, Italy, Austria, Romania, Hungary and Israel -- have expressed interest in buying Shah Deniz gas. "The later large-scale gas production begins, the longer the country's high-earning window from the oil-and-gas sector will stay open," Shaban said.

The European Union as a whole has sent mixed signals on the proposed Nabucco pipeline project, which, if it materialized, would perhaps be a major export option for Baku. In the absence of an EU commitment, individual members Italy and Greece have stepped up their own efforts to secure gas from Shah Deniz's Stage 2.

Italy is seeking to buy up to 9 bcm of Azerbaijani gas starting in 2015, with shipment via the proposed Turkey-Greece-Italy (TGI) pipeline; Italian Prime Minister Silvio Berlusconi is expected to travel to Baku this year for "the last stage in talks" about the supply, Italian Deputy Foreign Minister Alfredo Mantika announced earlier in March.

Meanwhile, Greece has declared that it will become the first EU country to import Azerbaijani gas via the TGI pipeline. In an early March interview with the Greek newspaper Katimerini, Greek Foreign Minister Dora Bakoyannis stated that Athens wants to buy about 2 bcm of Azerbaijani gas per year, or about 45 percent of Greece's annual needs.

The $2.8 billion TGI pipeline is expected to be complete by 2013, a timeline that lends one to two years of padding for Shah Deniz's own Stage-2 production start. TGI will have an annual carrying capacity of 11.7 bcm.

Expert Ruseckas believes that TGI, along with a proposed Trans-Adriatic Pipeline, offer more realistic export options for Azerbaijan than would Nabucco. The two projects are less complicated politically since they transit fewer countries, and are smaller, so they require less gas to be cost-efficient, he noted. Their modest volume also means they are less threatening to Russian energy mammoth Gazprom, which has offered to buy all gas from Shah Deniz. [For background see the Eurasia Insight archive].

"I think it is more likely that one of these projects moves forward in the next year or two, rather than Nabucco," Ruseckas said.

Planning for the TGI and Trans-Adriatic projects, however, is less advanced than for Nabucco.

Nabucco has again been included on the European Union's list of priority projects for 2009 -- a classification that means a budget injection of 200 million euros (about $269.2 million). But the decision comes after its earlier exclusion, under German objections that the EU has more pressing concerns. The back-and-forth has created the impression that the European Union cannot decide on the issue, despite a strong show of support at this year's Budapest summit.

Azerbaijani President Ilham Aliyev has publicly endorsed the Nabucco project, and, accordingly, Azerbaijani officials continue to promote the pipeline's prospects. At a March 20 news briefing, SOCAR First Vice President Khoshbakht Yusifzade stressed that only Azerbaijan has the gas resources to allow Nabucco to operate steadily -- "more than 2 trillion cubic meters, 1.2 trillion of which are from the Shah Deniz field," he affirmed.

Expert Ruseckas agrees. "On the one hand, this factor increases Azerbaijan's importance as a gas supplier; but on the other hand, if it becomes clear that the project is not moving forward due to a lack of committed gas from other countries, then the significance of Azerbaijani gas will decline," he said.