Europe’s new energy silk road faced a significant test on 13 July when all governments along its 3,300km length sat down to sign the formal agreement, giving the Nabucco gas pipeline project the green light.

With the promise of winning energy security for the countries involved by bringing gas from the Caspian region all the way to Austria, everyone hoped for the smooth completion of the pipe’s construction. The Nabucco pipeline’s history is anything but smooth, however, as the project has been dogged by investment problems. It was vital for the transit nations of Turkey, Bulgaria, Romania, Hungary and Austria to give fresh impetus and credibility to the project.

While internal struggles have dominated the project’s past, other groups have been planning gas pipelines of their own. It is doubtful whether all will come to fruition but, with so much plotting, the network of pipes below Europe’s terrain has become the focus of much attention.

First off is Iran, which is no longer content with sitting on vast oil reserves that it ships no further west than its Turkish neighbour. In response to the EU-backed project it seeks to construct its own Persian pipeline into Europe, in addition to its other project venturing eastwards into the Indian subcontinent.

Add to the mix Russia’s proposed South, Blue 2 and White Stream pipelines, as well as the Interconnector Turkey Greece Italy (ITGI) and the Trans-Adriatic Pipeline (TAP), and the ground in the southern gas corridor starts to look rather full.

“Iran has a lot of money to raise and a lot of gas to sell from South Pars.”

Independent Iran?

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By GlobalData

Independent oil depletion analyst Richard Miller says that Iran’s pipeline problems are twofold. “The first is political, because Iran is under sanctions, which will prevent overt western finance, western engineering and western markets. The second is competition with Russia, another gas giant owner and already an exporter,” Miller says.

But not even restrictions to stop foreign companies investing in the project, put in place while questions are raised about its nuclear programme, will prohibit the development, Iran’s Deputy Oil Minister Akbar Torkan has previously said. Instead, Iran will build the pipe up to its borders and meet with its international partners there, he maintains.

On 30 May Iranian Embassy head of economic affairs Ahmad Noorani said that work had begun on a pipe to carry gas from the South Pars field, which has an estimated 436tn cubic feet in gas reserves, to the city of Bazargan at the border with Turkey, according to Iranian media reports.

Director of corporate finance and broking house HansonWesthouse Malcom Graham-Wood says that although Iran would like to export gas from South Pars, which also crosses into Qatar’s domain, an international project would come up against many hurdles. “[Iran] has a lot of money to raise and a lot of gas to sell from South Pars. They will in due course want to create a market for that but coming into the west is fraught with difficulties.”

Miller says that in time these difficulties will probably be overcome – but that will not happen any time soon. “I personally do not doubt that if or when the need is sufficient, the west will swallow its principles and trade for Iranian gas, but that time is not yet here,” Miller says.

Iran is now looking east and, on 9 July, reports circulated that it was seeking $42.8bn in investment from China for refineries and a pipeline. Whether China is willing to fund the projects having recently completed a China-Kazakhstan oil pipeline – and whether it can offer the level of technical expertise found in companies such as Royal Dutch Shell and Total – is another question.

In short, Iran has two options – to complete its own Persian pipeline into Turkey (and then through to Greece, Italy and possibly divide to France or Switzerland) or supply gas to the Nabucco line. “The success of either option depends on Iran finding a concord with the west, otherwise the market will be closed,” Miller says.

Relentless Russia

With possible suppliers to Nabucco including Azerbaijan, Turkmenistan and, in the longer term, potentially Kazakhstan, Iraq, Egypt and Russia, the project does not appear to need Iranian gas. Turkey, Bulgaria, Romania, Hungary and Austria are the transit countries, with Poland set to become involved, and RWE in Germany also driving the project.

“The Nabucco pipeline is attractive to everyone as it is backed by the EU and has the US seal of approval.”

“The Nabucco pipeline is attractive to everyone as it is backed by the EU, it has the US seal of approval and it makes us less dependent on Gazprom,” says Graham-Wood. And many view its independence from Russia as the most important pull factor.

“We are familiar with the Russian gas supply problems that have arisen regularly in Europe since 2005, when supplies were interrupted during the continuing Russian dispute with Ukraine over gas consumption and payments,” says Miller. “Russia appears to have no qualms at using European gas supplies as a political weapon.”

Although all the projects have prospects to link to or alternatively compete with one another, it is almost certain that supply fundamentals will prevent some from going ahead. Europe has a big gas supply problem; the region consumes more than 500bcm/year, yet its production level is less than 300bcm/year. “The question is whether European demand would climb sufficiently by 2015 or so to absorb all this, and I suspect it might not,” says Miller. “Russia will not want to see competition – it might be able to sidestep Nabucco by becoming a supplier of Nabucco gas, but an Iranian line would threaten it.”

While top-down politics will have a big influence on the EU’s pipeline players in the coming years, governmental opinions will be strongly shaped by market forces – “particularly if the lights go out in Europe next winter,” Miller concludes.