ENI: Navigating between Nabucco and South Stream

Italian energy giant ENI has come up with a proposal to transport gas in the form of CNG (compressed natural gas) by ships across the Caspian Sea from Turkmenistan to Azerbaijan.

This looks like a clever move to facilitate both the EU-backed Nabucco pipeline and its Russian-backed competitor South Stream, in which ENI has a stake.

ENI, one of the largest companies in Italy, has successfully operated many hydrocarbon projects in post-Soviet countries. Among other things, ENI is participating in the development of the giant Karachaganak gas field in Kazakhstan and in the even bigger Kashagan oil field. Last year, the company signed a memorandum of understanding with the Kazakh national oil companyy KazMunaiGas providing for new joint exploration activities in the Caspian Sea.

In 2008 ENI acquired Burren Energy, which operates fields in Turkmenistan. The Italian company has also achieved success with the Blue Stream pipeline, a joint-venture with Gazprom which takes gas across the Black Sea from Russia to Turkey.

For this reason, ENI has a strong interest in developing transport routes of gas (and oil) from the Caspian region to Europe. One way of doing is this is through the proposed South Stream pipeline, which aims to transport gas from Russia (including gas from the Caspian region flowing through Russia) across the Black Sea to Eastern Europe and on to the markets of Central and Western Europe. According to many critics, this joint-venture with Gazprom, which since June of this year also includes French energy company EDF, is risky and expensive.

The pipeline, first announced in 2007, is widely regarded as the Russian answer to the EU-backed Nabucco pipeline, for which preparations started in 2002 and which of course bypasses Russia. It is sometimes said to have been dictated by the political friendship between Vladimir Putin and Silvio Berlusconi and is now considered to be somewhat of a gamble for ENI.

However, being an experienced player, ENI is trying to find some sort of compromise between the two projects. The company has applied to the gas sellers Azerbaijan and Turkmenistan with plans that could benefit both pipelines. It has also proposed to partially merge Nabucco and South Stream.

Nabucco and South Stream are in many ways similar projects, with two big differences: budget and political back-up. They are both large projects: South Stream is to have an annual capacity of 61 bcm (billion cubic metres). It is to run from Russia through the Black Sea to Bulgaria, from which there will be a southwestern route to Greece and Italy and a northwestern route through Serbia and Hungary to Austria. It is expected to cost €19-24 billion, including €8.6 billion for the offshore section.

The planned capacity of Nabucco, a joint-venture of RWE (Germany), OMV (Austria), Botaş (Turkey), BEH (Bulgaria) and MOL (Hungary) is 30 bcm. It is to run for 3,300 km from Erzurum in Turkey via Bulgaria, Romania and Hungary to Austria and will cost €7.9 billion. The pipeline will be connected to the South Caucasus pipeline, a joint-venture of BP, Statoil, Socar (Azerbaijan), Lukoil, Total, TPAO (Turkey) and Naftiran (Iran) that runs from Baku (Azerbaijan) to Erzurum.

Both pipelines are expected to be mainly supplied from the major gas fields of Azerbaijan (Shah Deniz) and Turkmenistan (South Yoloten). South Stream will be supplied with “Russian” gas of course, but that gas is also expected to come at least in part from Azerbaijan and Turkmenistan. Both consortia have taken major steps already to secure volumes and have announced various agreements with transit countries.

Nabucco has the main advantage that it is cheaper than South Stream. It is also recognised by the EU and the US as a priority project. For Nabucco the bottleneck is that, although transport from Shah Deniz to Europe will cost €77 per 1,000 m3 as against €106 for South Stream, volumes from Turkmenistan are needed to make the pipeline profitable. These will have to be transported through the Caspian Sea if they are to avoid Russia (and Iran). Russia for its part has already directly booked 7 bcm of gas from Shah Deniz and has signed an agreement with Turkmenistan to bring forward the construction of a new gas pipeline along the Caspian coast from Turkmenistan to Russia.

Source: Hurriyet Daily News & Economic Review