Sunday, February 27, 2011

BP Releases Raised Cost Estimate for Nabucco Pipeline

UPI: Nabucco Will Stand Alone, Spokesman Says
AFP: Nabucco Pipeline Still in Limbo
Bloomberg: Nabucco Pipeline May Cost $19 Billion, BP Says, Guardian Reports
Asia Times Online: Nabucco Faces Cost Surge

This week BP released a cost projection for the Nabucco pipeline that estimates the project may cost twice as much as originally estimated. If completed, the Nabucco gas pipeline would diversify the European gas market by bringing in gas from the Caspian region and the Middle East to compete with the Russian production. Europe has long been eager to find alternative gas sources because repeated standoffs between Russia and Europe over price have caused Russia to suspend Europe’s main gas supply, sometimes during Europe’s cold winter. Since 80% of Europe’s gas supply runs through Ukraine, a country with frequent political flare-ups with Russia, Europe feels held hostage by Kiev and Moscow’s control of the market. The Nabucco project, created to avoid Ukranian and Russian territory, has been progressing steadily, with Azerbaijan committing to supply 31 billion cubic meters of gas per year to the pipeline.

This recent media snag in the Nabucco project may threaten the development of the pipeline project. While the Nabucco management publicized the cost at 7.9 billion euro, BP’s cost estimate comes in at 14 billion euro. BP attributes the higher estimate to a rise in steel prices since 2010, noting that the Nabucco estimate was compiled in 2008, prior to the surge in commodity prices seen this past year. The Nabucco management was immediately critical of the BP estimate, calling it “pure speculation,” since the Nabucco management estimate was based on feasibility studies.

Some have questioned the ability of the Nabucco project to remain free from Russian influence. Gazprom counter-offers may have given Nabucco management pause, but representatives assure the public that Nabucco will not merge with other projects in the region, including a competing Russian-fed pipeline, South Stream. Due to cost and production concerns, as well as hesitation from the Turkmen gas supply, the pipeline may be on hold with management putting off final investment decisions until 2012 at the earliest. However, the European incentives for progressing on a stand-alone pipeline project from the Southern Corridor are strong, and thus the project will likely continue to work though minor setbacks like the BP cost assessment to a successful result.

Discussion Questions:
1) If gas production is stalled in Azerbaijan, will the Nabucco project be forced to turn to Russia for partnership despite the project’s goal to bypass Russian gas entirely?
2) Will rising commodity prices and production hesitation from Central Asia and the Caspian region threaten the entire Nabucco project, or are investors willing to pay more for a stand-alone pipeline that would increase competition for gas in Europe?

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