Monday, 21 February 2011

Nabucco cost rises amid merger speculation

The ill-starred Nabucco project has taken yet another setback. According to a private BP cost assessment, the cost of the project, which would bring gas from the Caspian and the Middle East to Europe, has almost doubled from previous estimates. The consortium of European energy firms making up Nabucco’s shareholders insist that it will cost around €8 billion (itself an increase from earlier estimates), but the BP assessment obtained by The Guardian anticipates a price tag of around €14 billion.

The increased cost is largely due to soaring commodity prices, making the construction of the pipeline itself more expensive. The cost of iron ore, essential to steelmaking, has recently hit an all-time high of around $190 per tones, on the back of tightening supply from India and rising Chinese demand. It is not expected to decrease any time soon.

It is unclear whether the BP cost assessment also took into account Nabucco’s continuing confusion over suppliers. The consortium is rapidly realising that Iraqi rather than Iranian gas will be essential to filling the pipeline; however, running a line to the Iraqi border or upgrading the existing pipeline between Turkey and Iraq could increase costs even further. Nabucco Managing Director Reinhard Mitschek told AFP on 20th February that a line to Iraq would add an additional 550 km to the project’s already considerable length, and additional costs.

Perhaps alarmingly for Nabucco supporters who see the project as a means to diversify European gas away from Moscow, Mitschek also expressed a willingness to include Russian gas in the project. This position has been previously taken by Turkey, which is keen to become a regional energy hub, but has provoked bafflement amongst many in Brussels.

Aware of the need to get Nabucco moving, European energy officials have been pushing the consortium to merge with smaller rival projects, the Interconnector Turkey-Greece-Italy (ITGI) would use existing Turkish pipelines and thence through Greece and on to Italy. The shorter Trans-Adriatic Pipeline (TAP) would run across the southern Balkans and across to Italy. Neither project is anywhere near as ambitious as Nabucco and a merger could make sense, for instance by increasing the size of the pipeline across Turkey and jointly using it or by including the link to Greece and Italy as a subsidiary spur of Nabucco’s original route northwards to Austria.

Officials from all three projects have been cool on the idea of a merger, however. Underpinning their reluctance is that there are simply not yet supplies confirmed on the table, reducing the spoils over which to cooperate. Until sufficient suppliers are guaranteed, all the projects will remain hypothetical. However, the spiraling cost of the projects will be a powerful incentive for collaboration and, perhaps, an eventual merger.

Sources: Reuters, Financial Times, AFP

For more news and expert analysis about the Caspian region, please see Caspian Focus.

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