CEO: Nabucco project does not fear recession

Reinhard Mitschek.jpg

In times of economic difficulties and fears of recession in Europe, overall energy demand will not increase, but the portfolio will change in favour of natural gas, Reinhard Mitschek, managing director Nabucco Gas Pipeline International, told EURACTIV in an exclusive interview.

Reinhard Mitschek initiated his professional career at the Austrian oil and gas group OMV in 1982 and since then he has carried out various functions within OMV Gas. He spoke to Georgi Gotev, senior editor of EURACTIV.

Is there a problem with Nabucco? We heard recently Energy Commissioner Günther Oettinger saying that the project was too expensive, meaning that it won't fly.

We have a good development in Nabucco. This year we developed the engineering. We deepened our discussion with the financial institutions: the European Investment Bank, the EBRD [European Bank for Reconstruction and Development] and the IFC [International Finance Corporation]. We also prepared everything for an open season to market transportation capacity.

Of course we can only fine-tune our investment figures after the finalisation of the engineering design and also after the open season, but I'm confident that – and this was shown by our sensitivity analysis – we can offer transportation services under competitive conditions.

And that's what we also underline with our offer to Shah Deniz 2 [a major gas field project in Azerbaijan] at the end of September. Nabucco's combination of a commercially competitive offer and a very stable legal framework is unique within the group of [proposed] projects. With our ratified intergovernmental agreements, support agreements and the exemptions we have in place, we can deliver to our suppliers and also to our clients the most stable project.

Indeed, the real arbiter is not the Commission, it is Azerbaijan which sells its gas via its gas company SOCAR and the Shah Deniz consortium. I imagine it's a very complicated scheme where on the one hand you have a pipeline and on the other you have the development of the gas field itself, which is an offshore gas field, costing in the billions. Could you provide an insight how such complex operations are put in place?

Shah Deniz 2 and Nabucco are indeed together a complex topic. The investment in Shah Deniz 2 is much higher than that in Nabucco. Therefore the Shah Deniz consortium partners are keen to learn more about Nabucco's conditions. That's what they received at the end of September.

So they know what they may expect from Nabucco in terms of transportation tariffs, the grid network code, the conditions and terms for the transportation. And we expect their decision relatively soon. They need it in order to fine-tune their project.

It is also one of our targets to synchronise the milestones and the timelines of Shah Deniz 2 and Nabucco because we need them and they need us. Therefore we want to synchronise the milestones and the major targets of the project in order to reduce the complexity.

You are bidding for the gas from Shah Deniz 2, but Nabucco is not the only project. However Nabucco may have a clear advantage in the fact that it plans to lay pipes all across from the gas field to Europe, including through Turkish territory. The other projects have shorter pipelines and will use the Turkish network. Do you think this is an important element in your favour?

It is an important element and it is an absolute USP [unique selling proposition] because Nabucco is the only project which can offer unified transport conditions from the eastern Turkish border to Central Europe. That is what makes us unique and that is what the markets appreciate and the countries appreciate.

The more simple and unified the conditions are and the more predictable conditions are, the more it will be appreciated by clients.

How would you describe your relations with Turkey? Are they are a predictable partner or do you expect bad surprises when it comes time to lay down the pipes?

I appreciate Turkey as a partner both in terms of politics and the professionals at BOTA? [Turkey's state oil and gas company], one of our shareholders.

The intergovernmental agreement is signed and ratified not only by the state parties and by the parliaments of the European member states along Nabucco, but also by Turkey. That is the first and only intergovernmental agreement that has been ratified by the Turkish parliament. It is a treaty with a duration of 50 years.

I appreciate the commitment in Turkey from the political groups, from Energy Minister Taner Y?ld?z and from Prime Minister [Recep Tayyip] Erdo?an, as well as the technical expertise of BOTA?. I have no doubt that we can realise the project in the constellation in which we are now.

Can you describe in simple terms the kind of assistance the European Union provides? Nabucco is seen as a project that will decrease the reliance of Europe on Russian gas and therefore the European Union is willing to support the project. But how exactly?

We receive tremendous support from the European Commission in various aspects. One has been the coordination of the negotiations for the intergovernmental agreement. That was a tremendous effort on the part of the Commission's DG [Directorate-General] Energy at that time to coordinate the five state parties involved in the negotiations and to find compromise wording for the intergovernmental agreement.

It was a perfect example of very professional support. Secondly, we received funding from the European Union on the one hand from the framework of the Trans-European Transport Network (TEN-T) funds. Secondly from the ERP [European Recovery Programme] fund. For that up to €200 million are dedicated to Nabucco and that is a big support because it is support in the very first phase of the investment.

When we start the investment, we'll have co-financing of these €200 million. This is a big support.

It's not such a big sum, but it creates confidence for additional investment from the private sector?

Certainly.

Third, DG Environment is supporting us tremendously in coordinating all aspects of the environmental and social impact assessments in the various countries: in Austria, in Hungary, in Romania, in Bulgaria and in Turkey. Because this process is slightly different in every country. The coordinating role as synchroniser, translator and facilitator of DG Environment is very much appreciated.

Fourth, [European Commission] President Barroso visited President Aliyev [of Azerbaijan] in January and signed a joint declaration: The first, very strong formal step of the European Union towards Central Asia.

And, last but not least, in September the Commission received the mandate from the 27 member states to coordinate an intergovernmental agreement between Turkmenistan and Azerbaijan for the realisation of a Trans-Caspian Pipeline. With this mandate the Commission coordinates the negotiations of these two neighbouring countries in Central Asia.

All of that is the bulk of proof of support from the Commission and from the other institutions in Europe, from the Council, from the European Parliament and from all other groups.

Indeed, President Barroso heavily lobbied but he did not lobby specifically for Nabucco, but for the 'Southern gas corridor' projects in general. He even offered Azerbaijan visa facilitation if everything goes well. However, you realise that the decision lies to a large extent with Azerbaijan's state-owned oil company SOCAR. What kind of people are your Azerbaijani partners?

The people in Azerbaijan are absolutely professionals. They know what they do. They know what they say. They are experienced in the gas industry right up to President Aliyev himself, I may say.

SOCAR is an experienced company working together with European companies in Shah Deniz. This Shah Deniz consortium consists of BP, Total, Statoil, SOCAR and some other minor shareholders.

SOCAR amongst others is a driver of the activities and I appreciate very much the negotiations with SOCAR. They are absolutely on a professional basis.

BP has its own project for a pipeline which is not widely known…

I only know that from the press. I do not know details. All I know from the press is that there is an idea of the project to combine national grids with more interconnectors to avoid big investments, etc.

That is what Nabucco had already analysed some years ago. It found out that we could construct a new pipeline because the national grids are busy with the transportation of the gas for domestic needs in the countries and therefore an investment like Nabucco is necessary to bring gas from Central Asia, Azerbaijan, Turkmenistan and Iraq to Europe.

That is all I can say but I am not involved in the details of this.

What volumes of gas are you expecting to receive from Shah Deniz?

In the first open season we expect to obtain 21 billion cubic meters at least for transportation. That is the quantity with which we will use for investment decisions and to start with construction.

I expect a very quick build-up from the 21 billion to 31 [billion]. I suspect even before we start the transportation in 2017 we will already have bookings for 31 billion cubic meters.

Thirty one bcm is basically your planned capacity. How about the other possible sources such as Iran or Iraq?

We have always said that the shareholders will be ready once the capacity is fully committed to the 31 billion cubic meters and then, if it is technically and commercially feasible, we would even expand Nabucco.

I have seen that in other pipeline projects, across Austria to Italy and to Germany, etc., we construct the pipelines and very soon the capacity had become insufficient to meet the market requirements. Then we constructed a second pipeline or additional compressor stations, etc.

And that's what we can also do with Nabucco in order to bring gas from Iraq to European countries.

Do you think this gas will find customers? Because Europe may fall into recession. Are you afraid for your project because of the bad economic climate in Europe today?

No I'm not afraid. I rely on the demand market. Last year was also not an easy year but we had a 7.5% average increase in the EU27 of the gas consumption. In Austria we had an 11% increase, an all-time high in consumption.

I believe that energy demand overall will not increase in Europe but the portfolio will change in favour of gas. Therefore we need more gas and more gas imports. It will for sure be a combination of additional energy capacities, of shale gas in 10 years' time or so, plus pipelines.

Nabucco's gas would go to Baumgarten an der March in Austria. The proposed South Stream pipeline would go to the same gas hub. Does it mean that gas will be cheaper for European customers if both pipelines coexist?

The first step will mean there will be more gas in Baumgarten. You need more than logistics to define the price. You need to know the price of alternative energies, the demand situations in the region… so there are several factors defining the prices on the market, not only the availability of capacity or logistics.

So I cannot predict if the price of gas will go down or go up or stay the same based only on logistics. That can't be forecast unfortunately.

You probably identified a price based on which the project is viable.

Yes, definitely.

Is this price a secret?

It also will depend on the pipeline's load factor, of the infrastructure. If we discuss 20 or 30 billion cubic meters of gas volumes to be transported via Nabucco, then it depends on the duration of the build-up from 21 to 31 billion.

It depends on whether the gas will be transported up Turkey's western border or to Austria or 100% to Baumgarten, because that defines the load factor along the pipeline.

It will depend on the final capital expenditure figures, future taxation of the transportation business, etc. Several factors will define commerciality, the break-even quantities and the break-even gas price.

This is also something that is not so easy to say on its own.

Europeans would like to hear that gas will not be very expensive.

Yes of course. I would also like to wish for my residential heating that the gas will always be available at cheap prices but we have to do something for that availability and pricing. We have to provide infrastructure, diversification, and choice for the clients, and that is what Nabucco will provide.

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