Houston, 28 July 2009 

With European Union nations looking for ways to diversify gas supplies and reduce their dependence on Russian gas, two deals in recent weeks have provided them with some hope. 

The first was the signing of an agreement to build a multi-billion dollar pipeline to take Nigerian gas across the Sahara to the Mediterranean. The second is the initiation of the Nabucco Intergovernmental Agreement that sets out the terms and conditions under which gas can be exported from the Caspian Sea and the Middle East to the EU and Turkey. Could these be the developments that loosen the EU's energy reliance on Russia?

The two schemes have been mooted for a number of years. However, there had been little in the way of actual progress, with both projects having little to show beyond “talk.” This had led to much scepticism, with some believing that the projects would never get off the ground. Some of these doubts have been lifted with the recent positive movements, but that is not to say that that the path for these pipelines is now clear. This is very much the end of the beginning; rather than the beginning of the end for these projects.

The idea of piping gas thousands of kilometres across the Sahara was first dreamt up more than 30 years ago, but the project has remained on the drawing board for a number of reasons. This included the need for a concrete agreement between the neighbouring states, as well as a clear funding plan. It seems that these are now being put in place.

The necessary agreement for the pipeline was signed by Nigeria, Niger and Algeria at the beginning of July. And comments from the petroleum and energy ministers of the nations—Rilwan Lukman of Nigeria, Chakib Khelil of Algeria and Mohammed Abdullahi of Niger—following the signing, underlined the strong commitment to get the project up and running. It is viewed as an important and integral part of their energy and economic expansion.

The project is expected to run for over 4,000 km across the three countries. The huge enterprise, which will cost an estimated $13 billion, aims to deliver up to 30 billion cubic metres of gas per year to the European market. While no date was announced for the start of construction, the first delivery of gas is scheduled for 2015.

Bringing on board international partners and financing is the next step, but given interest in the development, this may not constitute a major challenge, although the finer contract details can clearly sometimes be troublesome. France's Total, Anglo-Dutch firm Shell and Russia's Gazprom have all expressed an interest in investing in the scheme.

While the EU will obviously view the recent agreement as positive, it will probably also take note of Gazproms's possible involvement. In fact, Gazprom only recently signed a $2.5 billion deal with Nigeria's state operated Nigerian National Petroleum Company, to invest in a new joint venture to build refineries, pipelines and gas power stations in Nigeria. Some analysts see the group's keen interest in Nigeria as an attempt to maintain its grip on the EU's natural gas supplies. It will certainly be an interesting development to monitor.

This, however, is not a problem for the three host countries. Their main concern is making sure they secure mutually-beneficial partnerships to help overcome the huge technical, commercial and security challenges—the pipeline will traverse some volatile areas—of pumping gas from Nigeria's Niger Delta to export terminals on Algeria's Mediterranean coast. In many respects, the easy part is this initial agreement, although it has taken many years. The hard part is yet to begin.

The trans-Sahara pipeline agreement was swiftly followed by news of the Nabucco Intergovernmental Agreement. Once completed, the 3,300km Nabucco natural gas pipeline will bring up to 31 billion cubic metres of gas a year from the Caspian and the Middle East, with the pipeline running between eastern and southern Turkey and Baumgarten in Austria. It is due to be opened in 2014.

This is a project that has been continually pushed by the European Commission and comments from Commission President, José Manuel Barroso, following the signing, reiterate just how much importance has been placed on the initiative. “The Nabucco project is of crucial importance for Europe's energy security and its policy of diversification of gas supplies and transport routes. The signature will show that we are determined to make this pipeline a reality as quickly as possible,” he said.

The agreement was signed by four EU countries—Romania, Bulgaria, Hungary and Austria—and Turkey. The Commission, which acted as a facilitator for all sides, said that the agreement had taken six months of intense negotiations, building on many years of patient technical work.

This development is obviously a fillip for the EU, but it is apparent that much still remains to be agreed upon—not least who will get what gas from the pipeline and where the gas will actually come from. It has been widely reported that the Commission and Turkey are still at loggerheads over Turkey's take from the pipeline. And although there is no shortage of potential gas sources (the Caspian and Middle East regions contain the largest gas reserves in the world), the expected main source of Nabucco, Azerbaijan, has recently agreed to sell some of its gas to Russia. Again, it is evident that Russia may have some impact on this pipeline's future. Iran, Iraq, Kazakhstan, Turkmenistan and Egypt are also considered potential suppliers to Nabucco in the longer term.

The signatories hope that the legal framework for construction of the pipeline and capacity contracts can be agreed upon by the end of the year. These capacity contract commitments will underpin the financing of the pipeline.

There is much for the EU to warm to in these recent developments. There is plenty of gas in the offing and the projects do offer a diversification in supplies. However, challenges remain for both projects, albeit ones that can be overcome, and for the EU, it is also interesting to note that in both projects, Russia seems to be involved in one way or other. With Russia already supplying the EU with a significant percentage of gas, and planning two new pipelines of its own—Nord Stream, from Russia to Germany under the Baltic Sea, and South Stream, from southern Russia under the Black Sea to Bulgaria—the EU-Russia energy dependence may only grow stronger in the years ahead.

Ends--

By James Griffin, Utilipoint