Wednesday, 16 November 2011

Did the US just give up on Nabucco?

The US government has never championed the Nabucco project as much as Europe, for obvious reasons – unlike Caspian oil pipelines which Washington lobbied for extensively back in the 1990s, the US will receive no direct benefit from huge quantities of Caspian gas being piped to central Europe.

But the US has remained a heavyweight player in the debate, and American diplomats have been very useful to Brussels in leaning on Turkey, Azerbaijan and Turkmenistan to get things moving.

Now, with the choice of pipeline project being weighed up in Baku by the Shah Deniz consortium which will supply the first tranche of gas, Washington’s top Caspian energy specialist seems to have just delivered a major blow to the EU’s favoured project.

In Baku on 15th November, Special Envoy for Eurasian Energy Richard Morningstar said that “it is important that the Shah Deniz consortium and [state energy firm] SOCAR would choose one of the small-scale pipeline projects, in comparison with Nabucco, within the corridor, but with the possibility of expansion”.

Although Morningstar has sounded cautious on Nabucco before, on balance it has been the project most favoured by Washington, a point which he reiterated in Baku. But to tell Azerbaijani officials that they shouldn’t bother with Nabucco, whilst negotiations are going on, is a pretty damning indictment (even if he did hold out the possibility of the US Export-Import Bank helping to finance it if they did choose it).

So if not Nabucco, then which pipeline? Morningstar’s talk of expandable volumes suggests he’s thinking about BP’s proposal, a late entry to the pipeline competition. The BP plan would not be a single project so much as a patchwork of existing and new infrastructure. It would be able to accommodate Shah Deniz’s post-2017 output of 10 billion cubic metres, a third of Nabucco’s volumes.

Morningstar’s support for a smaller pipeline (the other two competitors are also around the 10bcm mark) jars with his confident backing of the Trans-Caspian pipeline to bring Turkmen gas west to Europe. The smaller pipelines would not have the capacity to accommodate both Shah Deniz gas and Turkmen volumes, so choosing one of them would make it commercially and politically much less appealing to build a Trans-Caspian pipeline.

The Shah Deniz consortium are still some way off making a final decision on which pipeline to go for, but with the US now openly counselling against Nabucco it seems that a smaller project - probably BP’s - is now leading the field. Still, Nabucco has managed to come back from the dead more times than Lazarus, so watch this space.

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