The negotiations on the EU’s Nabucco pipeline project have been completed. A deal is expected to be signed on 13 July in Ankara. The Financial Times has a useful analysis of the pipeline and its potential difficulties today.

The pipeline will go from the gas fields of Azerbaijan and Iran (in itself providing an interesting foreign policy complication), potentially back into Central Asia, through Turkey and thence into Italy via Greece/Albania and into Central Europe through Bulgaria, Romania, Hungary and Austria.

The Heads of Agreement

In one eventual swoop, Nabucco is supposed to siphon off a chunk of Central Asian gas from monopoly control by Russia and ensure that South-Eastern Europe loses its current near-total dependency on Russian gas.

The importance of Iran is clear in terms of its natural proven gas reserves but Turkmenistan is probably of equal importance in practical terms. The full pipeline will comprise 3,300km of new route.

Turkey has been demanding 15% of the gas as its price for transit and a compromise has been necessary to ensure that the intergovernmental agreement could be signed. The next problem is for the governments on the consumption side to ensure that their utilities back the project.

This may raise some very interesting questions about free market choice – this is a geo-strategic security-driven investment with not a great deal of short term commercial sense behind it on paper.

In addition to the engineering, there will have to be an environmental impact assessment which will certainly add to costs, given the somewhat precious approach of European electorates to green issues.

Two key customers of the pipeline (Austria and Germany) have just removed export credit guarantees from the Ilusu Dam Project in South-Eastern Turkey under severe environmentalist and human rights pressure. Central Europeans will push hard for the highest standards of environmental protection.

Supply Contracts & Funding

Deals with supplying countries will have to be agreed. Iran might be ignored for a while yet (though it is hard to see the point of doing so) and Azerbaijan and Iraq are moderately clean nowadays on the human rights front, but the pipeline does not work without more supply from further to the East.

This will raise some fascinating human rights policy issues in regard to Turkmenistan if Iran is still not acceptable or even talking to the Europeans. And then the thing has to be paid for …

The European Commission is handing over Euro200m or so to get it started but that is a fraction of the estimated requirement of Euro8bn, placing it very much in the super-league of strategic security projects alongside mid-sized state nuclear weapons programmes.

The European Investment Bank will finance up to 25% of the project but this leaves nearly three quarters to come from somewhere else with the probability, as in every project, of cost over-runs.

The general view is that once the supply contracts are fixed, commercial funding will be secured because gas transit fees are fairly reliable.

The negotiating boots are thus very much on the feet of the four smaller gas players (Turkmenistan, Iraq, Kazakhstan and Azerbaijan), especially as long as the Iranians are inclined to follow the Russian lead in placing their own pressure on Europeans telling them how to run their affairs.

Interesting Geo-Politics

This is where it gets interesting in geo-political terms. Suppliers are generally (most of all Turkmenistan) going to be concerned to do commercial deals without political strings attached, yet Europeans electorates may turn their attention to the style of governments with which they do business.

There is a classic internal contradiction here between popular sentiment and harsh industrial reality, between soft power and hard power. To pre-empt this, European diplomats will be spending yet further funds trying to get these suppliers into line as essential strategic partners.

European resistance to Russian domination will drive EU policy while the Russians will be encouraging these same suppliers to work with them in cartelising gas in order to increase their revenues (thereby increasing Russian dominance in many ways, not just in control of gas supply).

This sucks Europe into the northern Middle East and raises questions about its treatment of Turkey, Turkey owes the Europeans no favours at this time and presents the same transit scenario as Ukraine to the north.

European industrial survival (a German interest) now seems to depend on two unstable but modernising states, with volatile populations and an ambiguous relationship with the West, acting as intermediaries with supply nations who have little to do with Western values other than the one about making money.

In the short term, things should go smoothly. If the gas can be secured by the end of the year or early next year, then the Europeans can commit to the pipeline in early 2010 and start construction. In the long term, it could be an expensive way of reducing the Russian stranglehold on Europe.

The pipeline is likely to pay its way but it also pulls the European ‘empire’ further to the East along paths last anticipated in the 1940s and well into territories contested by the US, China and Russia.

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