Via Stratfor (subscription required), fresh analysis of Nabucco in light of the recent transit agreement signed by Turkey, Bulgaria, Romania, Hungary and Austria.  As the article notes, the pipeline project – which is one way Europe is attempting to diversify its energy needs away from Russia – still does not have the participation of potential natural gas suppliers, like Azerbaijan and Turkmenistan, who are delaying until they have firm support from Europe and Turkey:

“…The problem with this plan, however, has always been in locking down who would supply Nabucco with the natural gas. But without suppliers, the $10-15 billion pipeline is unlikely. Although Iraqi Prime Minister Nouri al-Maliki has offered to supply as much as 15 bcm to Turkey (enough to fill half of the pipeline), it is not clear that Iraq will have the capacity to fulfill this promise in time. That leaves Central Asia and the Caucasus as the natural alternative. However, Azerbaijan’s resourceful state owned energy company Socar may have found a solution to the problem via the TransCaspian pipeline, which would connect Baku with the suppliers in Central Asia, mainly Turkmenistan. Both Azerbaijan and Turkmenistan have implied recently that they would be willing participants in the project.

Since its inception in 2002, the idea has been that Nabucco would be supplied with natural gas from Azerbaijan and its massive Shah Deniz development offshore deposit, which has transformed the country from a natural gas importer into a major exporter. Shah Deniz I, the first stage of the field, produced 8.6 bcm in 2008 and is currently producing 9.7 bcm, while the second stage, Shah Deniz II, is expected to produce around 10-12 bcm annually when it comes online sometime in 2016, a date that has been pushed back from 2014.

The natural gas pumped from Shah Deniz I is essentially already spoken for by the South Caucasus pipeline, which takes Azerbaijan’s gas to Turkey via Georgia. In order for Nabucco to make a significant impact on Europe’s demand for energy, it would therefore have to rely solely on the natural gas from Shah Deniz II. However, Shah Deniz II’s delayed completion ensures that it will not be ready for Nabucco’s opening in 2014.

With Shah Deniz II’s postponement and development costs skyrocketing over $10 billion, Baku is thinking of alternative ways to make Nabucco a reality. Azerbaijan therefore needs to find alternative suppliers of gas, which means looking at its neighbors across the Caspian Sea via the TransCaspian pipeline.

The United States originally proposed the TransCaspian pipeline in 1996 as a way to circumvent Russian energy infrastructure through which Central Asian states are forced to ship their natural gas. The pipeline was originally envisioned connecting Turkmenistan and Azerbaijan, but later the European Union attempted to lure Kazakhstan into the project, in the mid-2000s because it was seen as much more reliable than Turkmenistan.

The project, however, has faced insurmountable financial and political hurdles. First, Kazakhstan wants nothing to do with the project. The August 2008 Russian intervention in Georgia has given pause to all of the former Soviet Union states of the Caucuses and Central Asia. But, Kazakhstan has since emerged as one of the most dependent on Russia for trade and economics, and has since become only more beholden to Moscow due to the impacts of the economic crisis which have severely rocked Kazakhstan’s nascent financial system.

The last hurdle is the cost. With Nabucco already looking to cost somewhere between $10-15 billion and TransCaspian’s costs projected at between $5-8 billion, the entire venture of bringing Caspian Sea natural gas to Europe via non-Russian routes begins to look costly. This is accentuated by Europe’s severe recession, which has European capitals looking to make deals with Russia for cheap natural gas rather than invest in adventurous natural gas projects.

Azerbaijan, however, has not given up on the idea of linking up to its cross-Caspian Sea neighbors. Its state owned energy company Socar, which has not been hurt by the financial crisis, thinks it has the funds and know-how to do it. According to STRATFOR sources, Socar has been a quick study of the major energy companies in its region and feels that they now have the technical expertise to build an underwater pipeline. Also, Baku believes that building a line directly to Turkmenistan would not be as difficult as going further north to Kazakhstan. The distance between Azerbaijan and Turkmenistan is only 124 miles, and both countries’ gas infrastructure already extends well into the Caspian, so all that is needed is another 47 miles of pipeline to connect the two countries. Baku is also proposing to keep Western investors out of the project partly to alleviate any concerns Turkmenistan has that a Western-backed pipeline would upset Moscow. Moscow has long been opposed to the TransCaspian project — even bringing up negative effects on sturgeon mating — to protest the project because it would open up an alternative energy route to the natural gas deposits of Central Asia.

Getting on Moscow’s bad side is a serious concern for Turkmenistan, which has been under severe pressure from the Kremlin not to cooperate with the West in sending its energy via non-Russian routes. However, due to the economic recession and the subsequent collapse of demand in Europe for natural gas, Russia stopped importing Turkmen natural gas in April 2009. Moscow’s motivation is to ensure that its own gas is sold, thus halting 84 percent of Ashgabat’s exports, which account for half of country’s $30 billion gross domestic product (GDP). Ashgabat is losing just over $1 billion a month due to the cut off and has been forced to start shutting down fields.

While Turkmenistan is currently surviving with a $5 billion Chinese loan, the episode has illustrated to Ashgabat the stark reality of just how vulnerable it is to Russia’s whims. Ashgabat has begun actively searching for alternatives, signing a deal on July 12 with Tehran to increase its natural gas supplies to Iran from 6 bcm to 14 bcm and then on July 13 agreeing to look into the possibility of linking up to Nabucco, which would invariably mean linking up to TransCaspian as well.

While Ashgabat’s change in tune may be encouraging news for Azerbaijan’s plans for the TransCaspian pipeline, nothing can begin until the go ahead for Nabucco is given. This is a problem, however, since the key player in the project, Turkey, prefers that the project remain at the nebulous stage, thus affording Ankara the political leverage with which to play all sides — Europe, Russia and the United States — keeping itself in the middle as the invaluable partner. Meanwhile Europe is continuing to drag its feet on how to proceed financing the project especially in light of the resistance by the potential suppliers to commit.

But potential natural gas suppliers like Azerbaijan and Turkmenistan cannot move on Nabucco until they know that Europe and Turkey are truly committed, which appears to leave the situation in a stalemate.”