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Nabucco is still alive

In a 1955 essay in The Economist, British historian C Northcote Parkinson formulated the now well-known "law" forever after eponymously associated with him, that work expands so as to fill the time available for its completion. Another of his aphorisms, less well known but still more cogent, states that delay is the deadliest form of denial. While the European Union was for years up until a May summit in Prague threatened with this latter lesson, it may now be Turkey that needs to remember it.

Nearly two months ago, Turkey and the EU finally overcame two outstanding problems regarding the transit of Azerbaijan's natural gas to Europe across Turkey: that is, the price to Ankara of the Nabucco pipeline and the legal framework for domestic Turkish regulation of the venture (see Nabucco starts to shape up, 15 May 2009). That gas would come from the second stage of development of Azerbaijan's large offshore Shah-Deniz deposit. Overcoming these problems set the stage for a signing ceremony in Ankara for the Nabucco project, to be held on June 25. That date has come and gone, without the ceremony and without the signatures.

An agreement was, however, signed this week between Baku and Moscow for the sale of offshore Azerbaijani gas to Russia's Gazprom. Appearances to the contrary, this was not a dagger at the heart of Nabucco.

It is true that Russia signaled last year to Azerbaijan its readiness to purchase the country's entire natural gas production into the indefinite future, an offer that would have killed Nabucco (see Euro-Caspian energy plans inch forward,27 November 2008). However, Baku declined this "commercial" offer (that is, it took the world market as a basis for setting prices) explicitly for geopolitical reasons.

Nevertheless, due to the then diminishing hopes for overcoming the Turkey-EU disagreements over Nabucco terms, the State Oil Company of the Azerbaijani Republic (SOCAR) in March this year signed a memorandum of understanding (MoU) concerning the supply of gas to Russia at market prices. At the time, the MoU only set the opening of negotiations over the conditions of delivery and price (see Azerbaijan can look the other way, 8 May 2009). It is those negotiations that have now eventuated in the most recent bilateral agreement.

The terms of that agreement provide for sale of 500 million cubic meters of gas per year as from January 1, 2010, with the gas coming from Shah Deniz One, the first stage of development of the offshore Shah Deniz deposit, gas that Azerbaijan had been looking to sell to Turkey but which it could not justify doing so at the present contractual price of US$180 per thousand cubic meters (tcm).

The price of the identical gas going to Russia under the new agreement will be nearly twice that at $350/tcm. That this agreement is not a killer, however, is evident from the projection that Shah Deniz One will produce no less than 9 billion cubic meters per year (bcm/y) as from 2010.

Some concern in Europe should be raised over remarks by Gazprom's chief Alexei Miller to the effect that Gazprom has been assured priority in the purchase of gas from Shah Deniz Two. This is the deposit's next development stage, on which Europe is counting to fill the Nabucco pipeline. Shah Deniz Two is projected to come on line in 2014, the year that Nabucco will begin pumping if construction begins as now planned in 2011, with annual volume of between 10 bcm and 15 bcm. Azerbaijan is unlikely, however, to commit so much to Russia that it cannot transit important supplies to Europe. This "assured priority" seems to be something less than "first refusal".

Yet the confirmation this week that Germany's former foreign minister Joschka Fischer has been co-opted into the Nabucco project as a consultant charged with accelerating the negotiations with the Turkish government does not inspire the greatest confidence in the transit itself. To say this is not to denigrate Fischer's diplomatic abilities but rather to raise the question why they are required.

When Fischer was in office, he was an articulate advocate of Turkish membership of the EU; and Turkish Prime Minister Recep Tayyip Erdogan succeeded earlier this year, against the preferences of the present German government, which favors the alternative North Stream pipeline, in linking progress on the Nabucco project with progress in unfreezing the accession negotiations. The question then asks itself: Why would Fischer's intervention be necessary if there were no fundamental political problems underlying the details of the immediate Nabucco negotiations themselves?

Nabucco's gas is designed to reach Germany following transit through the Balkans and other lands of the former Austro-Hungarian Empire. Despite disclaimers on all sides, it is a direct competitor with the Russian-Italian Black Sea-routed South Stream project and an indirect competitor with the Russian-German sub-Baltic Sea North Stream project (in which project former Germany chancellor Gerhard Schroeder plays a key political role in the international energy diplomacy).

Last month, press reports claimed that Russia's Prime Minister Vladimir Putin had offered to Erdogan to reconvert the South Stream pipeline project back into the Blue Stream Two project.

The South Stream is a Gazprom-Eni (that is, Russian-Italian) project, still on the drawing boards, to pipe gas from Russia under the Black Sea to the Balkans and Europe. The Blue Stream Two project refers to the extension of the existing Blue Stream, a Gazprom-Eni project that takes gas from Russia, then also under the Black Sea, to Turkey and making landfall at Samsun. This latter project would extend the Blue Stream pipeline from Samsun, on the one hand to Bulgaria and through southeast Europe to western Hungary, and on the other hand to Ceyhan on the Turkish Mediterranean coast, whence to Ashkelon in Israel and perhaps beyond.

Turkish circles now refer to the second of these two extensions of Blue Stream Two as the Medstream (for "Mediterranean") project and distinguish it from the first extension that would go towards the Balkans. In fact, the projected line of the South Stream project, which was once planned as an undersea branch off from Blue Stream One, now would go under the Black Sea from Russia directly to Bulgaria.

When press reports mentioned that Putin and Erdogan were discussing the reconversion of South Stream into Blue Stream Two in Sochi in mid-May, it is therefore possible that this was an observer's misunderstanding, moreover since taking South Stream and Medstream together obviates any further reference to the former Blue Stream Two project properly speaking.

This notwithstanding, the Turkish newspaper Hurriyet has recently reported that the Erdogan government raised again lately the 15% "netback" demand, meaning it wishes to purchase 15% of the gas at a low price for domestic consumption and re-export the rest to Europe (see Azerbaijan can look the other way, Asia Times Online, May 8, 2009). The newspaper quoted William Ramsay, formerly at the International Energy Agency and now at the French Institute of International Relations, as explaining that "Turkey needs to set more transparent rules for its transit regime" and that "once [this] is done, the gas would flow".

The difference in approaches may come down to a question of organizational culture: how private companies construct their business plans differs from how governments construct theirs. Reports suggest that not all members of the Turkish leadership have fully understood how increasing transparency with its eventual partners promotes the predictability necessary for the private sector to have confidence in the business environment.

Even with the resolution of these questions in principle at the Prague summit in early May, problems may still arise from the degree to which Turkey perceives such transparency as an imposition of the EU's acquis communautaire (body of law) in the energy sector (for example, details concerning national energy strategy and plans to increase energy efficiency).

Thus, the Turkish leadership may not fully appreciate the need to regard such agreements as a manifestation of a strategic alliance rather than a mere project partnership. Strategic alliances in industry must shares goals, risk, control and decision-making, through clearly defined processes. They are more open-ended than partnerships, which are of limited duration with specific objectives.

To be sure, the present difficulties in EU-Turkish negotiation exhibit the four difficulties typical of attempts to establish strategic alliances: instability due to changing strengths and weaknesses of partners over time; difficulty of arriving at an objectively agreed evaluation as a basis for negotiation; identifying unambiguously the common interests to be pursued; and reaching ultimate solutions.

Turkish sources maintain that the delay in the planned June 25 Nabucco signing ceremony is due to the time required by participating states to obtain parliamentary authority to make the necessary commitments. Despite the ruling Justice and Development Party's majority in the Grand National Assembly in Ankara, Turkey could be one such state. Whether this represents a genuine lack of party discipline, the difficulty of drafting the legislative language, or a further negotiating ploy on the part of the leadership, remains to be seen.

One consolation is that Azerbaijan has no such problems. Its national company, SOCAR, pioneered the formation and implementation of strategic alliances in the Caspian Sea region energy development 15 years ago through its participation in the Azerbaijan International Operating Company that successfully developed the Azeri-Chirag-Guneshli ("Contract of the Century") oilfield and was a driving force behind construction of the Baku-Tbilisi-Ceyhan (BTC) main export pipeline.

This experience and the organizational learning from it by all participants is a key yet often unremarked element behind the further successes of developing the Shah Deniz offshore gas deposit and constructing the South Caucasus Pipeline (SCP) that takes that gas through Georgia into Turkey.

Significantly, no Turkish company has had important participation in either of these ventures, despite the cooperation of Turkey's state-owned BOTAS with AIOC in constructing the BTC pipeline and the formal membership of the Turkish Petroleum Corporation, a state enterprise, in the AIOC proper.

It could be most constructive for Turkish negotiators and decision-makers to approach the current issues around the Nabucco negotiations by sharing wisdom with their Azerbaijani colleagues and taking into account the aforementioned "strategic [industrial] alliance" experience of the latter, with whom they have deep fraternal relations and no reason to suspect any ulterior motives.

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URL:  http://www.robertcutler.org/blog/2009/07/nabucco_is_still_alive.html
First published in Asia Times Online, 3 July 2009.

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