European Pipelines: Austria to Azerbaijan

Sources:
The Economist: The Abominable Gas Man
IFC News: EBRD, EIB and IFC Start Appraisal of Nabucco Pipeline
Trend: Managing Director: Nabucco Conducts Works to Attract International Financial Institutions’ Iinvestments
UPI: Europe Eyes Norwegian Gas Supplies

One of the main threats to European stability is Europe’s dependency on Russian natural gas. In January 2009 Europe experience an energy shortage when Russia turned off the gas on a pipeline that went through the Ukraine. Ukraine and Russia had a price dispute, and Russia responded by stopping the flow of gas to Ukraine. As Europe learned, having 80% of Russia’s gas flow through Ukraine leaves Europe vulnerable. Europe’s main solution to decrease dependence on Russian gas is the Nabucco pipeline, officially backed by the European Union.

Construction on the Nabucco pipeline is slated to begin in 2011 when the piping will be laid 2,000 kilometers from Turkey to Baumgarten, a province in Austria. In 2014−15, the second and final phase of construction will be completed when the pipeline is built through Turkey to Iraq, Azerbaijan, and Turkmenistan. About 75% of the Nabucco line will use existing piping, which considerably lessens the effort needed to connect with Turkmenistan. Gas should start flowing in 2015 with a target of 31 billion cubic meters (bcm) a year.

Building the Nabucco pipeline is a massive effort that will require both public and private funds. The European Investment Bank (EIB), the International Finance Corporation (IFC), a subsidiary of the World Bank, and the European Bank for Reconstruction and Development together gave the project $5 billion in loans. The five billion dollar commitment is less than the previously considered package of €4 billion by about half a billion dollars.

In addition to simply financing the endeavor, the $5 billion loan makes companies more comfortable in investing in the Nabucco pipeline. Six companies have the rights to the pipeline, each with a 1/6 stake. Although there is still hesitancy about investment in a slow growing economy, only two of the six have postponed their contributions in Nabuccountil next year when private-sector lenders will have made formal commitments.

Although the Nabuccu pipeline is the biggest pipeline in development, there are other projects to diversify Europe’s sources of natural gas. One of the projects is to develop the Tyrm natural gas fields in the Norwegian North Sea. The EIB is loaning DONG Energy, a large energy group in northern Europe, $210 million to develop the Tyrm oil fields. The money will be for drilling and expanding underwater pipelines. The rise in natural gas prices in recent years has made it profitable to develop the fields.

Discussion:
1. Iraq is going to be a major source of natural gas for the pipeline. Was this one of the goals of the American invasion of Iraq in 2003?
2. The pipeline must pass through all of Turkey to get to Azerbaijan and Austria. How will this increase Turkey’s bargaining position in its effort to enter the E.U.?
3. Is there any credibility to Russian (or Iranian) claims that the United States and Europe are conspiring to decrease their reliance on Russian natural resources by initiating wars in Iraq and Afghanistan?

Sweden’s ‘Saab’ Story

New York Times; Financial Times; Financial Times

The Swedish government recently announced its decision to refuse the nationalization of iconic automaker Saab after reports of impending bankruptcy surfaced last February. General Motors has decided to phase out the carmaker by 2010 as part of its pitch to win a loan from the U.S. Treasury and keep itself afloat. Yesterday marked the original deadline for GM to demonstrate its solvency as a condition of that government aid, but the deadline was extended by 60 days and the aid predicated upon an agreement with the United Auto Workers union.

Saab recorded $343 million in losses last year. The company has long been known for its innovative engineering, but with pressure from GM and consumers to focus on economy and volume, the brand has lost its edge over the competition. Unless Saab can quickly find a private buyer, an estimated 15,000 Saab workers will be laid off in the next year. According to Saab representatives, 6 investors, both Swedish and not, have expressed serious interest in buying the company but no names have been released.

Saab finds itself the first large-scale victim of Sweden’s policy shift away for the traditional Nordic socialism to free-market economics since the election of the new right-leaning government in 2006. The Swedish model of nationalizing and recapitalizing businesses, from banks to carmakers alike, had long been criticized as protectionism by the United States; curious considering that the latest congressional plans have outlined nationalizing both industries.

World governments have endorsed various loan, bailout, and takeover plans for the auto industry. Germany, France, and England are lending the most aid to failing carmakers, though in March, they clarified that the numbers would be much less than they originally pledged. Yesterday German chancellor Angela Merkel announced the establishment of a task force to negotiate the future of GM's European subsidiary, Opel.

Discussion:
Since the EU was formed as an economic union, should the bailout policies for automakers in Sweden and Germany be aligned? Should Sweden reconsider its denial of state aid to Saab? What will this news mean for other Swedish brands such as Volvo and Ikea?