EU supports new Caspian gas pipeline bypassing Russia

Energy ministers from Austria, Hungary, Romania, Bulgaria, and Turkey signed a declaration of support in Vienna for the Nabucco project. Investors, each with a 20% stake, include Austria's OMV A.G. (OMV.VI), Hungary's MOL (MOL.BU), Turkey's state-run Botas, Bulgaria's Bulgargas (BGAS.YY) and Romania's Transgaz S.A. Medias (TGZ.YY).

Governmental approval for such cross-border projects is crucial in reducing investment risks, said Peter Ramasy, an analyst at Petroleum Argus, a London-based energy publication. It will end Russian state-owned natural gas monolith Gazprom OAO's (GSPBEX.RS) monopoly for supply to all of southern and eastern Europe.

"This clears up any doubts on the part of the investors. It's saying we're committed," added an European Commission official.

The European Union has been looking to diversify its energy supply since Gazprom halted sales temporarily this past winter to Ukraine over a price dispute. Gazprom provides about half the gas consumed in the 25-nation bloc.

The 3,400-kilometer pipeline, costing $5.8 billion, will supply Europe with gas from countries such as Azerbaijan.

Russia is unhappy. The pipeline will give Turkmenistan and Azerbaijan direct access to the European energy market, reducing Russian political leverage in Central Asia.
In order to pry away Nabucco investors, analyst Ramsay says the Russians have proposed they study extending its Blue Stream pipeline with Hungary's MOL, one of the pipelines' five investors.

In addition, Gazprom has unofficially been offered a stake in E.On AG's (EON.XE) Hungarian unit Hungaria Zrt., once part of MOL.

While MOL asserts that they "are very much in Nabucco," the Hungarian company acknowledged it is exploring other options with Gazprom. "For Nabucco, we are still at the drawing board," said Denis Monorovic, a MOL spokesman. The final investment decision could be made sometime next year.

The five investors have asked the European Commission to grant them an exemption from regulated prices for the sale of gas from the pipeline. Commission spokesperson Ferran Tarradellas Espuny said such an exemption could be possible.

The Commission will examine how to build additional pipelines along the same Nabucco route. Eventually, it hopes that the Caspian region will supply 10% to 15% of European Union's demand for gas by 2025.

Construction on the Nabucco is scheduled to begin only in 2008 and finished around 2011.

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