The EU foreign gas policy of transit corridors: autopsy of the stillborn Nabucco project

The EU foreign gas policy of transitcorridors: autopsy of the stillbornNabucco projectopec_185 47..69

Dominique Finon

CNRS senior fellow, Centre International de Recherche sur l’Environnement et le Développement(CIRED-CNRS), 45 bis avenue de La Belle Gabrielle, 94736 Nogent/Marne cedex, France. Email:[email protected]

Abstract

In this paper, we criticise the departure of the European Union (EU) from its traditional Soft Powervein in foreign energy policy, implying a strategy of gas corridors for import diversification inan intense political competition with Russia. We analyse intrinsic limitations of the EU initiative ofpromotion of Nabucco pipeline as a merchant line along three different economic perspectives.Firstly, the competition theory perspective which shows the possibility for Russia to challenge thisproject by a competing project (South Stream) because it could preempt access to Caspian resources.Secondly, the ‘transaction cost economics’ perspective which shows why long-term commitmentsbetween producers and midstream buyers are necessary to jointly develop transport or transit infra-structures and new remote gas fields. Thirdly, the coalition theory perspective which sheds light onthe weak cohesion of the Nabucco coalition in the competition with the South Stream coalition,which has more chance of success while it offers equivalent benefits in terms of transit risk suppres-sion. We conclude with recommendations concerning the EU gas policy actions which are only rel-evant when focusing on better improved market integration, development of self-insurances andsolidarity, and diplomatic action turned towards energy markets integration.

1. Introduction

The issue of gas corridor diversification has become increasingly important in the late2000s, setting up many projects driven by political aspirations to reduce dependence onRussian gas. By helping the diversification of gas import sources, the European Union(EU) has developed a determined foreign policy which is supposed to help Europeanmarkets to reach Caspian and Middle East gas through pipelines. Since 2006, it intensivelypromotes the Nabucco project to help reach gas resources of Azerbaijan, Kazakhstan,Turkmenistan and possibly Iran, Iraq and Egypt. ‘Nabucco was the first attempt at forginga common energy policy to reduce its dependence on Russian gas. The basis of Nabuccois to bring gas to Europe from new suppliers’, remarked the EU energy Commissioner A.

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Pielbags in 2007 (quoted in P. French, 2008). Foundations of this project are indeed mainlypolitical, because it aims to overcome the Russian gas import monopoly on the Central andEastern European markets, the risk of which being rapidly compared with transit risk,clearly shown through the successive 2006 and 20091 Ukrainian–Russian gas crises.

Strong and various political motivations help to create a heteroclite coalition with theEuropean Commission, some member-states and Turkey promoting Nabucco project,yet merely ignoring gas economic fundamentals. Indeed, this political project is built onweak economic foundations because it is conceived along the business model of the mer-chant line without ex ante signed long-term contracts between producers and buyers,strongly believing that it would attract by itself new gas sources to be developed. Itunderestimates the competition to access to Caspian gas sources which are located in thebackyard of Russia. Indeed, Russia is able to respond on two levels, downstream bylaunching the competing project South Stream, which could ship Caspian and Russiangas to the same markets and also to other ones in Southern Europe (Serbia, Sloveniaand Italy); and upstream by preempting available gas of the Caspian and Central Asiaregions. Even denied by dilatory announcements of Nabucco postponement or transfor-mation, a political fiasco is resulting from the EU stubbornness, from which lessons canbe drawn.

In the second section, we described the departure of the EU from its traditional SoftPower vein in foreign energy policy with its strategy in matter of corridors diversification,which implies intense political competition with Russia. In the next three sections, weanalysed intrinsic limitations of the EU initiative on Nabucco pipelines along three differ-ent economic perspectives: the transaction cost economics perspective which shows whylong-term commitments between remote producers and midstream buyers are necessarybefore developing transit and transport infrastructure; the competition theory perspectivewhich shows the possibility for the South Stream coalition to foreclose the Nabucco entry;and the coalition theory perspective which sheds light on the conditions of the robustnessof the Nabucco coalition under the pressure of a competing coalition holding much moreeconomic trump cards. We conclude with recommendations concerning the EU gas policyactions in matter of security, which inside EU are better to be focused on internal insur-ances and improving market integration, and in the international arena are better to stay inits traditional vein of Soft Power.

2. The EU–Russia strategic game on the Caspian gas chessboard

Since 2005, a dynamic game has developed between the coalition led by the EuropeanCommission on behalf of the EU and the coalition led by Russia, to be the first to developa new pipeline with the goal of shipping gas to Central and Southern European marketsfrom Caspian and Middle East producers like Turkmenistan, Azerbaijan, Iran and

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Kurdistan for 4000 km. To each initiative of the Nabucco coalition responds an initiativeof the South Stream coalition and vice versa.

2.1. The new EU stream of foreign energy policy: from Soft Power to Hard PowerThe EU lacks the classical attributes of a state and the means of a geopolitical power,which explains its multilateral conception of international relations (Finon and Locatelli,2008). Lacking efficient governance with no majority rule in decision-making and nosubstantial diplomatic and military resources, it cannot pursue a significant foreignpolicy. The interests and ideas of member-states often diverge, and with the arrival of newmembers, differences have increased, in particular in the field of defence and relationswith the United States and Russia. In a world that is still organised in terms of a geopoliti-cal balance of powers, based on diplomatic and military power, the EU is trying to be ade facto superstate with the traditional attributes of power, despite the fact that it lacksthe means to enforce its own sovereignty. To make up for its shortcoming when it comesto dealing with other world powers, Europe resorts to ‘Soft Power’, conceptualising itsdependence in terms of interdependence. It seeks to influence reality ‘by trying to deployon as large a scale as possible norms capable of organising the world, bringing disciplineto the market place and making behaviour more predictable . . .’ (Laïdi, 2006). It projectsonto its relations with non-EU states the type of interstate relations that its own membershave succeeded in setting up with one another in an attempt to achieve integration throughthe market, which has been the only way of achieving greater political integration inEurope.

In the energy field, the European treaties do not give the EU any direct power overforeign energy policy, and member-states’ interests as well as conception are far to be con-vergent, in particular, between the major historic member-states and the new ones. Eventhe Lisbon treaty, which gives more powers to the EU in matters of energy policy, does notgive more political attribute in matters of foreign energy policy. Although the commonEU energy market was designed around a liberal market model, there were a variety of ver-sions in the member-states, with substantial capital concentration in some of them. In thepast, each country developed its own gas industry, relying on a national monopoly or onan industry leader to develop infrastructures and negotiate giant contracts for imports.Governments of some major member-states (Germany, Italy and France in particular) stillprefer to rely on these incumbent operators to develop long-term supplies arrangementswith foreign producers, backed by their political support. They continue to back theirhome-based gas companies that develop long-term contracts with different exportingstate-companies and engage in joint ventures with international oil companies in order todevelop liquefied natural gas (LNG) infrastructure and new fields, and finally to secure gasimports by diversification of sources. And they are not really confident that EU energyforeign policy will be undertaken with a single voice.

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Besides this internal context, the EU typically acts outside the EU territory by ex-erting influence on the institutions of other countries so as to promote homogenousregulatory areas.2 At the beginning of the 1990s, it was the EU that took the initiative ofsetting up the Energy Charter Treaty in order to harmonise laws on investment in theenergy sector and market rules in order to have access to infrastructures and resourcesin the former Soviet bloc countries, Russia in particular. This was to be achieved byfacilitating the installation of foreign companies, securing investments and organisingtrade in energy products by liberalising access to transport networks (Percebois, 2008).In general, the EU set conditions for partnership and cooperation agreements withneighbouring countries, requiring gradual changes in their legislation to bring them intoline with the rules in force within the European community. This foreign policy whichconsists into influencing institutions is viewed by the Commission as a way of regulat-ing the gas supply conditions to Europe.

Yet after the successive Russo–Ukrainian crises in 2006 and 2009, the EU decidedon two orientations: an internal policy aiming both to limit the effects of eventualinterruptions for each member state and to improve solidarity between member-statesEuropean Commission (EC, 2008), and also a determined foreign energy policy focusedon gas vulnerability and on the EU relationship with Russia. It orientates the EuropeanCommission foreign policy action on gas security by combining both measures oftraditional Soft Power and the great game of Hard Power, an absolutely true innovation,as if the EU would be a geopolitical power able to compete with Russia seeing itself an‘energy superpower’, jealous of any exterior initiative in its ‘Near Abroad’ (Stern, 2005;Locatelli, 2008).3 Beyond the ‘Single Voice Speaking’ rhetoric, the EU has launched itsNeighbourhood Policy towards transit countries, with action plans concerning theenergy sector and its market liberalisation. The EU aims to consolidate the energy rela-tions with neighbouring countries and to promote a single energy market at the scale ofthe continent, in particular by the integration of Ukraine, Turkey and Moldava in theEnergy Community treaty signed in October 2005.4 Russia and the EU are competing toexport gas from the Caspian region, and in 2004, the latter has launched the Baku initia-tive, an energy dialog associating the EU and the Black Sea/Caspian countries. Thestrategy with Central Asia, in which hydrocarbon development is one of the main points,was adopted by the Minister Council of Ministers in June 2007.5

By the so-called Policy of Priority Projects, the European Commission directly pro-motes projects for transit in order to help diversification towards new sources. It is withinthis foreign policy framework that the Southern Corridor Initiative including Nabucco hasbeen decided in 2006. And after the Second Strategic Energy Review (European Commis-sion, 2008), an initiative was taken to encourage European companies in developingcommon ventures with Caspian companies so as to expand gas and oil fields, the so-calledCaspian Development Corporation.

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2.2. The EU in the great game: the promotion of Nabucco projectThe main transit project in the European priority projects consists in building the €8 billionNabucco pipeline (31 Bcm/y capacity), which will connect Central European markets(and Baugmarten hub at the Austrian–Slovak frontier) to Central Asian gas, via theBalkans and thenTurkey.6 A complementary pipeline, the $8 billion underseaTransCapianPipeline (TCP) would have to be built to connect Turkmenistan to the new South Cauca-sian pipeline known as the Baku–Tbilissi–Ezerum pipe (BTE), which exports Azeri gas toTurkish market.7 It was backed by the different transit countries: Austria, Hungary,Romania, Bulgaria and Turkey, and their national gas companies, the Austrian OMV asproject leader, the Hungarian MOL, the Bulgarian Bulgargas and the Romanian Transgazon the European side and the Turkish Botas as a major partner on the other side. RheinischWestfälisches Elektrizitätswerk (RWE) entered the scheme in 2007, its interest beingpartly linked to its control on the historic gas company in the Czech Republic, and partly toits gas supply business in Germany. After this entry in the consortium, each partner holds16.7 per cent stake.

As previously underlined, Nabucco was supposed to attract the gas of the Western andEastern Caspian countries and later of Middle East gas-rich countries. No long-term con-tracts have been signed by gas producers and European members of the Nabucco consor-tium. To be economically viable, the project, which is a high upfront cost project of€8 billion, needs an annual flow of at least 20 billion Bcm as soon as it starts up.At the origin,promoters of the project bet first on theAzeri gas from the existing Shah Deniz 1 productionand the futureShahDeniz2project tobedeveloped in2011,andwhichcanbeshippedby theBTE pipe and second on the Turkmen gas. In 2005, European optimism seemed to be con-firmed.That year, theTurkmen government halted sales to Russia, stating that its price wastoo low when compared with the price that Europeans were paying for Russian gas. A yearlater, the BTE pipeline was finished, apparently enabling the construction of Nabucco.

The EU has put this project on top of the priority projects’ list. It will benefit from theexemption of the third-party access provision for gas infrastructure projects for half thecapacity, as well as the support of a guarantee funds of 200 M€ and of preferential loansfrom the European Investment Bank (2 billion € out of the 8 billion project cost).8 After anagreement on the transit fee was reached in 2009 between Turkey and other Nabucco part-ners, a signing ceremony was organised in Ankara on July 13, 2009 between the presidentof the European Commission and the government leader, which gave formal backing to theproject by all involved countries.

2.3. Russian competing answersAlong with the €10 billion Nord Stream project under the Baltic sea promoted byGazprom and German companies strongly backed against their respective governments,the sister project South Stream, initially of 30 Bcm/y capacity, was launched in 2007 by




Gazprom allied with the Italian company Ente Nazionale Idrocarburi (ENI), in order todiscourage the Nabucco project. It is also a costly undersea project of 800 km under theBlack Sea from the Russian gas system to a landing in Bulgaria with two arms: the north-ern one crosses Bulgaria, Hungary and possibly Austria; the southern one crosses Greece,Serbia, Slovenia to reach Italy. Between 2007 and 2009, Russia and Gazprom signedagreements with Bulgaria, Hungary on the Northern arm and with Greece, Serbia andSlovenia for its Southern arm, for both location and coinvestment of the national sectionswith 50–50 per cent shares (Fig. 1).9 That means that some of the governments committedin Nabucco, Bulgaria and Hungary in particular, also commit in the South Stream project,despite the apparent conflict of interests with their Nabucco commitment. Finally, Turkey,which has different trump cards, signed an agreement with Russia in August 2009 aboutthe crossing of its territorial waters by the South Stream pipe.10

Thanks to the new cooperative relations Russia established in 2005 with CentralAsian countries after the post-soviet conflicting period (Olcott, 2006; Sabonis-Helfen,2007; Stern and Bradshaw, 2008), Gazprom greatly succeeded in attracting the WesternTurkmen gas by a long-term agreement. It was at a cost: Gazprom agreed to pay a high

Figure 1 New corridors from Russia and Caspian region to European markets. Source: BBC News,http://news.bbc.co.uk/2/hi/europe/7195522.stm

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price toTurkmenistan ($150/1000 cubic metres).The agreement signed in 2007 deals with80 Bcm/y (this volume covering only partly the 35 Bcm-volume resold to Ukraine thatGazprom usually contracts as a broker for supplying Ukraine), and the transportation canbe held by reinforcing infrastructures along the Eastern Caspian shore which were devel-oped in the successive border countries under the Soviet era. In parallel, Russia signed suc-cessive agreements with Azerbadjian in 2008 and 2010 in order to buy part of the ShahDeniz gas in increasing quantity (0.5 Bcm/y increased to 1 Bcm, and then 2 Bcm) andexplicitly was a candidate in 2009 to buy the future Shah Deniz 2 production (planned toreach 14–16 Bcm/y by 2017) (Abbasov, 2009), while this gas could be contracted by Euro-pean buyers and shipped via the new BTE gas pipe to Nabucco. Admittedly, this strategycould be perceived as limited because Turkmenistan as well as Russia are not very reliableas contractors because the 2007 contract referred previously has been implicitly canceledafter the explosion of April 2009 on the Centre Asian pipeline and the dramatic reductionof gas trade during 2009 before a new signed agreement on reduced quantity at fixed priceat European-like level.11 In the same vein, Turkmenistan appears to be prompt in turning tothe first which could reach its resources by installing pipeline to join the Turkmen systemand offer a good price as it does with China after the building of a $8 billion, 30 Bcm pipe-line, by signing up an agreement on a 10 Bcm/y volume coming from the Turkmen easterngas fields.12 But in any case, the goal of Russia was reached from this moment, namely thedisqualification of any prospect to rapidly fill Nabucco by Turkmen gas to be shipped toEuropean markets.

Finally, after the second Russia–Ukraine crisis of January 2009, Gazprom announcedin June 2009 the doubling of South Stream capacity from 31 to 63 Bcm/y, which meansthat if this capacity is effectively developed in the future, the transit capacity by NordStream (55 Bcm/y) and South Stream (63 Bcm/y) would help to avoid any transit byUkraine. Later in September 2009, Electricité de France (EDF), the French historic elec-tricity company (which is present in gas business in Italy via its subsidiary Edison, thethird Italian gas supplier), takes a share of 10 per cent in the South Stream consortiumrelated to gas volumes which will be contracted in the future.This entry helps to rub out theSouth Stream image of an anti-European project (Gente, 2009).

In any case, South Stream appears to have a good chance to be realised even if threenew elements appear in the game which could make its realisation more difficult: the newpeaceful relations between the new Ukrainian government elected in January 2010; theGazprom revenues decrease with the contraction of the European demand, which will con-straint its capacity of financing during the next years; and the temporary LNG glut on theNorth Atlantic basin resulting from the development of non-conventional gas in the USmarket. Indeed, it must be observed that Russian government has been definitively con-vinced to suppress transit risk because the high cost of the last Ukrainian crisis estimated ataround $2 billion (€1.45 billion), without estimating the cost of Gazprom’s credibility




loss.13 Gazprom’s credibility as a reliable supplier in the future will, to a considerableextent, rest on being able to demonstrate that it will not be dependent on its relationshipwith Ukraine as a transit route. Moreover, Gazprom is allied with deep pockets Europeancompanies (ENI, EDF) to overcome the financial barrier as soon as it decides to developthe project. And finally, Central and Eastern European markets are precisely the lesspropitious to be reached by gas from LNG trade on the other side.

2.4. New EU actions to preserve the Nabucco projectSuch a competition between the EU’s and Russia’s projects generated a context of increas-ing misunderstanding, suspicion and mistrust. The investment climate, viewed as a diffi-cult matter for foreign energy companies in Russia, the Russia’s withdrawal from theEnergy Charter treaty (with implication on third party access to the gas system), as well asthe creation of a reinforced forum of Gas exporting countries and its control on CentralAsian gas, were perceived as a threat. Therefore, in response, the EU’s third liberalisationpackage pressures on barriers for Gazprom to move downwards; it includes a provisionforbidding foreign-producing companies to own part of transit and transmission compa-nies stock in the 2008 Gas directive (the so called ‘Gazprom provision’), despite theEnergy Charter Treaty principles.

South Stream was pointed by the European Commission and the Nabucco promotersas an anti-EU project. As for Nord Stream, the European partners’ entries in South Streamwere pointed as the demonstration of the Russian party’s power to divide the Europeaninterests. The battle becomes juridical. In coherence with the provision of the 2009 gasdirective restricting the foreign producers’ shareholding in transport pipelines in the EU,the European Commission asks Gazprom, as well as its partners, to sell their shares in theconsortiums Nord Stream and South Stream, but in vain by that date.14

Concerning gas commitments to be shipped by the pipe, the Nabucco promoters tryto avoid the deadlock resulting from the Russian strategy with the Caspian republics. Atthe origin of the project in 2005, Azerbaijan was associated to its organisation, but in factit rapidly appears that only 5 Bcm/y of Azeri gas could be anticipated and shipped byNabucco before 2018, best-guessed horizon of possible shipping of volume for the newShah Deniz 2 production. So, initiatives are developed to promote development of new gasfields in the Central Asia region with European partners in the framework of the Bakuforum (see previous). A consortium of European companies led by RWE with OMV andMOL negotiates withTurkmen government. It agrees to a Memorandum of Understanding(MoU) signature in April 2009 for the creation of the Caspian Development Corporation(CDC), the purpose of which is the development of Turkmen gas fields by acting as thefuture single gas buyer for fields to be developed. In any case, the $8 billion TransCaspianpipeline would be necessary to connect this gas with the TBE pipe towards Turkey andNabucco connection. It would not only be costly and technically risky, but also subject to

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objections from Russia, given the absence of legal agreement on the Caspian sea maritimeboundary issue.

Another option was to be taken into account in June 2009 when a European consor-tium composed by the same European firms (OMV, MOL and RWE) announced an $8billion plan to extract gas in the Kurdish region of Iraq, with the backing of the same CDCas in Turkmenistan. Gas would be shipped via the Nabucco project which, the Iraqi primeminister said, could be filled by half by the Iraqi gas (The Economist, 2009). A comple-mentary pipeline would have to be installed across Syria toTurkey. But at the present stage,the credibility of such announcement is low. Projects with Iran and Egypt are also evoked.But all these alternative supplies remain completely fictitious: for Turkmenistan, becauseof the costly pipeline under Caspian sea with many uncertainties on cost and legal issue;for Iraq (and its Kurdistan gas), because of the very uncertain political situation ofKurdistan and Iraq and the necessity of building a complementary pipeline; and for Iran,because of its present position on the international arena.

To conclude, despite denial of the respective parties on the exclusiveness of the twoprojects, there isafierceeconomicandpoliticalcompetitionbetween the twoprojectswhichaim at completely symmetrical objectives (Table 1): to limit the Russian gas dependencefor the Nabucco promoters on one side; and to definitively erase the transit risk for theRussian promoters of South Stream in order to preserve their credibility. The realisation ofeach of them will depend upon the credibility of perspectives to rapidly fill each of them forreaching a normal payback. In this respect, it depends on their capacity to reach gas produc-tion upstream and market downstream. Contemplating this complex game, different theo-retical economic perspectives allow anticipating the chance of the respective projects.

3. The transaction cost economics perspective

The perspective of transaction cost economics (TCE) sheds light on the need to comfortcontractualisation, not only to share risks but also to guarantee the credibility of pro-ducers’ and buyers’ commitment which is needed to trigger the installation of large-scale equipment with large-sunk costs. TCE refers to difficulties met in contractingwhen equipment to be invested are specific to transactions between parties, i.e. withoutpossibility of redeployment to other markets downstream or to different input marketsupstream, in case of geographical or technical specificity. This theory identifies the condi-tions allowing long-term credible commitments from buyers which should contract withproducers (and transporters) on long term to help the latter ones to invest in equipmentwithout the possibility to redeploy either their production towards other outlets, or theirtransport infrastructure towards other input sources (Williamson, 1985). TCE also con-cerns contracts which are established between an industrial producer and a fuel supplierwith geographical specificity of coal or gas field and transportation infrastructure assets




specific to the associated transactions (Joskow, 1988). Now we proceed to Nabucco andSouth Stream projects.

In a complete contradiction with its political nature, the business model of Nabuccoproject is the merchant pipeline, which means that the pipeline will be built only on thebasis of anticipated gas flows and revenues emanating from an unregulated shipping price.The owners are not related to gas producers aiming to ship the gas volume of new remotefields. In other words, gas producers, which could export to European markets by Nabuccoshipping, are not committed in the project. The owners which are gas buyers might not inprinciple reserve capacities in the regulatory scheme of a merchant line. By comparison,the South Stream project will be developed (for its submarine section) under the much less

Table 1 Comparison of Nabucco and South Stream projects

Nabucco South Stream

Capacity(and length)

31 Bcm/y (2700 km in Turkey) 63 Bcm/y (800 km under Black Sea)

Achievement(official dateend 2009)

2014 2015

Cost estimation €8–€9.7 billion Between €19 billion and €24 billionwith:

Black Sea section: €9–€13 billionCountries involved Turkey, Bulgaria, Romania,

Hungary, AustriaRussia, ItalyFor the Northern European link:

Bulgaria, Hungary, AustriaFor the Southern link: Greece,Serbia, Slovenia, Italy

Companies involved OMV (Austria) 16.4%, MOL(Hungary) 16.4%, Transgaz(Rom.) 16.4%, Bulgargaz (Bulg.)16.4%, BOTAS (Turkey) 16.4%,RWE 16.4%

Gazprom (45%) ENI (45%) EDF(10%) for the Black Sea section.

Gazprom 50% and respectivenational companies 50% for eachnational section

Gas sources access At maximum 5 Bcm/y up to 2018–2020 (Azeri gas) Azerbaijan

Indirectly Eastern Caspian gasDirectly Russian gas

Institutionaland contractualorganisation

Merchant line with TPA exemptionon half the capacity on 25 years

‘Ship-or-pay’ access to South Streamcapacity by the gas owner(Gazprom)Open season procedure on the

remaining capacity

Sources: Nabucco consortium website, South Stream project website and EurActiv (2010b) forrecent Nabucco cost.

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risky ‘ship or pay’model in which the gas exporter reserves all the capacity (or a very largepart of it) on a long period, given that it must deliver its gas at the gas system frontier of itsfirst geographical buyer.

The merchant model is based upon premises of a textbook market economics and itstransposition in mature gas systems for the access of new producer to midstream anddownstream buyers and for the development of new infrastructure without ex ante con-tracts.This business model is operatory in a mature gas market but not for a transit pipelinetowards new remote gas fields in geopolitically unstable regions. Nabucco project isconceived as if Caspian and Middle East productions and European gas markets arecompletely integrated within a regulatory jurisdiction of the EU-type market orientedlegislation. In such a mature market regime there is no need of ex ante relation betweengas producers and gas suppliers by long-term contracts. But this view ignores the basiceconomics of gas field and infrastructure development in a non-mature gas system. Theupstream part of Eurasian gas market space is not mature. The development of gas fields inremote regions with long distance transportation to consuming regions by pipeslines orLNG chain needs large specific investment to be connected to mature gas system of down-stream markets.15 Nabucco is supposed to open the potentialities of access to different gasresources. If it is built without ex ante relations to the development of Caspian fields,Nabucco would have to be redeployed towards new sources if the best options are capturedbecause Azeri or Turkmen potential sellers have opportunistically preferred to sell toother buyers than the shareholders of Nabucco. And this pipeline asset could be hardlyredeployed towards other sources as some Middle East ones in Iraq, Iran or Egypt before2020–2025.

A long-term contract with take-or-play clause and price indexation clause on a com-petitive commodity market allows sharing the risks of an investment (volume and pricerisks in particular) in a specific equipment, here the gas field installations and the export/transit pipeline infrastructure (or LNG chain) for the transportation to the buyers’ gassystem (Nissen, 2009). TCE introduces the dimension of the counterpart’s opportunismwhich is a risk endogenous to the relation investor-buyer, the so-called ‘hold-up risk’.TCEconsiders that, because firms do not behave cooperatively in any case, safeguards areneeded in the long-term relations, given this endogenous risk. In the Nabucco case, if weimagine a hypothetical situation where it is built without ex ante gas commitment to beshipped, anticipating important Azeri and Turkmen gas shipments, Azeri and Turkmen gascompanies which are well advised to let Nabucco to be built so as to widen their optionscould well end up choosing to contract with another buyer than European gas companies,all the more because there already exists transportation infrastructure to the markets sup-plied by this buyer. Azeri gas could be sold to the Russian gas company with a long-termcontract, provided that the fixed price would be higher than the price offered by the Euro-pean buyers who should shipped the gas by Nabucco. Turkmen gas could be sold to




Gazprom which is in a position to resell it to Ukraine and to European buyers. Part of itcould also be sold to China which presently buys 10 Bcm/y by using its new pipe able toship up to 30 Bcm/y. Seizing one of these opportunities by Azerbaijan or Turkmenistanafter Nabucco development is conceptualised as ‘passive opportunism’.

An important condition for the credibility of the counterpart’s long-term commitmentis the existence of contractual guarantees which limit its opportunistic behaviour: inupstream gas development in gas fields and infrastructures, these guarantees are offered bycommon ownership of assets and/or fixed annual remuneration of the investment whichact both as hostages on one hand, and indexed value-based pricing on the other hand, whichmeans that sellers have no incentive to defect when market values increase (or converselyfor buyers when market values decrease sharply). Take or pay contracts with such pricingprovisions offer these needed guarantees because it balances risk sharing on priceand volume. For the infrastructures’ investment, bilateral commitment secures post-commitment incentive compatibility, required for funding. In the matter of gas transport,limited shipping option by ship-or-pay provision reduces defection temptation with ship-ping control, usually by seller. So, the combination of take-or-pay provision in the gas saleagreement and ship-or-pay provision in the shipping contract is both an insurance mecha-nism upstream for the producer; an incentive to efficient use of gas downstream for thebuyer; and a guarantee for the transit pipeline (or the LNG chain which would be the samecase) which should be built in partnership with producers’ and buyers’ commitment.

This contractual model of gas production development and infrastructures has provento be efficient for the development of the gas system in NorthAmerican markets up to theirmaturity, as well as in the European markets to be linked to external producers (NorthAfrica, Norway, Russia, etc.). It is only when a certain stage of maturity of a regional gassystem is reached with knitted networks of trunk lines and storage capacities and numer-ous entry and exit points that geographical specificity of investment in new gas fields,interconnectors and transit infrastructures vanishes, and that a new regulation can definenew property rights on transport capacity with different market exchanges for flexibility,balancing and storage needs. Transmission contracts can be separated from commoditycontracts. Investment in new transport pipeline can be decided without ex ante contractson the commodity and without commitment of gas producers or midstream buyer as forthe merchant pipeline, because investors could anticipate a stream of revenues.

In the TCE perspective, a merchant line which has to be established without ex antetrade agreement between remote gas producers and gas buyers and without involvement ofthe same gas producers in the development of the transit capacity is not economically andfinancially viable. Only the former contractual model for new remote gas field and relatedinfrastructure development is valuable. Partnership from wellhead to consumers intro-duces mutual commitment. It is this model which is adopted de facto for the South Streamproject related to the different ways for Gazprom to compete and supply its gas on the

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European markets. The conditions to realise a ‘specific investment project’ are respected:the involvement of the producer Gazprom in the pipeline; its involvement not only in theSouth Stream undersea section but also in the national sections in the European countries;and the involvement of the two largest Italian buyers in the South Stream stock (ENI andEdison, via EdF involvement), while the Italian market could be the major outlet of theSouthern European gas market.

4. The competition theory perspective

Competition theory can throw light on the probable outcome of the competition betweenthe Nabucco project and the South Stream project as if it is a competition between twofirms to buy inputs from the same sources, to transform them in a same product and to sellthis product on the same set of geographic markets. The peculiarity of the competition isthat these two firms have to decide an investment in large-scale and indivisible equipment,and they also have the option to ex ante contract with input producers before buildingit. There are two levels of competition between the two firms: upstream for accessing toCaspian sources or other sources, and downstream for accessing to markets in Central andSouthern Europe.That means that competitors will have to anticipate what they will lose ifthey install their equipment or not, while the situation upstream or downstream couldchange in their disfavour.

As any imperfect competition game with entry (see for instance Dixit, 1980; Tirole,1989), the dominant player has the possibility to deter entry in three ways: first, overinvest-ing (in a pure economic competition, in fact the ‘South Stream firm’ assimilated to Russiadoes not need this costly undersea pipeline to export its gas towards Europe given theexisting pipes, but, as being the incumbent, it could decide to invest in order to deter the‘Nabucco firm’ to invest); second, obliging entrant to overinvest and increase its costs(Nabucco would need to link its entry with an investment in the €8 billion TCP to be con-nected to the main source in East Caspian); and third, taking control of the main inputsource (here, by buying all the available Turkmen gas). In this strategic game, the twoplayers have to anticipate their gains and losses in relation to the likely strategies plannedby the other player. We consider the different advantages of the two projects in the point ofview of accessing first to market downstream, then accessing to sources and finally linkingcompetition downstream and upstream next.

Downstream Nabucco has some few advantages on South Stream. Namely, its share-holders are the historic companies in Bulgaria, Romania, Hungary and Austria whichwould use half of Nabucco capacity for transporting gas to their own markets, given theTPA exemption on half of the capacity. The remaining capacity would be for gas trade onthe Baugmarten hub at the Austrian–Slovak frontier near German market. This had beenconsidered as an advantage on South Stream which, at the origin of the project, had no




clear position on the downstream markets for accessing to national markets. Now, the dif-ferent national gas companies and their governments accept to finance half of the cost ofthe national sections on the northern part of South Stream in Bulgaria, Hungary, Austria,or to integrate some existing pipes in the scheme, but they are not investors on the mainpart of South Stream under the Black Sea. It is partly compensated by positive develop-ment on the downstream branch of South Stream in Serbia, Slovenia and opening oppor-tunities on the Italian market with the entry of EDF which controls Edison, the third Italianenergy supplier. Moreover, Gazprom, with the South Stream project, is building an advan-tage on the downstream side. It has signed an MoU with OMV for developing the Baum-garten hub and related storage infrastructure. Moreover, it has a network of its own gascompanies or joint ventures (e.g. Panrusgaz in Hungary or GWH and Centrex in Austria),selling Russian gas directly to final consumers in Central European markets.

But the main game is in fact to be set upstream. For access to gas sources, as previouslymentioned, the likely sources available to fill up Nabucco pipe on a horizon compatiblewith the investment cost recovery period are Azerbaijan and Turkmenistan. It has quicklyappeared that Azerbaijan will not have enough gas in the next 15 years to contract quanti-ties with European buyers that will fill Nabucco at least up to 20 Bcm/y, the level neces-sary for the fixed cost recovery. Turkmen gas became the only solution for filling Nabuccoand making it profitable.

Secondly, upstream resources must not be pre-empted by an agreement with Russia,and indirectly by the South Stream project. This Nabucco competitor benefits from theGazprom ability to control multiple sources of supply inside Russia, as well as in theRussia’s ‘Near Abroad’. For gaining agreement with Turkmenistan, Gazprom accepts tochange its trade relations with Turkmen gas company, and to pay to it at a European rate.Present attempts from the ‘Nabucco coalition’ to create alternatives to initially hoped-for Turkmen gas quantity in the framework of the so-called CDC are not credibleenterprises on the time scale of the cost recovery period of the project, all the more sothat even if new Turkmen gas fields should be developed by the CDC, the gas to betransported to European markets would need the TCP installation beside Nabuccorealisation (Roberts, 2009).

Finally, we consider the game between the two competitors in its vertical dimensionincluding upstream gas access and investment decision in the large upfront cost equipmentin relation to their respective competitor-anticipated strategy. For the Nabucco coalition, itwill be a sunk cost with no chance to be recovered in due time if it is built without ex antecontractualised gas, because no quantity will be available during 2010 at the exception ofquite small Azeri gas volume before 2018 to 2020. This situation will be the same even ifSouth Stream is not built because all the Western Turkmen gas, which is accessible in thenext 15–20 years for the European markets, is effectively or potentially contractualisedeither with Gazprom or the Chinese importer. It is not because Nabucco will be installed

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that the advantage of gas source diversification as well as the gas transit risk reduction willbe gained for the partners, through lack of gas to fill it in the near and long term.

Symmetrically for Russia/Gazprom and the South Stream coalition they lead, therewould be no cost in relation to the commitment to buy Turkmen gas for controlling thesales of Eastern Caspian gas to Europe, if the pipeline is not built. Indeed, for the Turkmengas volume which will be sold to Gazprom, and which besides has already been reduced bythe 2010 Russia–Turkmenistan agreement, Gazprom could find other outlets by substitu-tion with its own gas and other corridors to reach the European markets.

But in economics term, the non-realisation of South Stream should have an oppor-tunity cost for Russia which would then lose possibility to definitively eliminate theUkrainian transit risk, as well as for the buyers of gas transported by South Stream. If thelatter will be costly to build, in particular for Russia and Gazprom, which are heavily con-strained by the financial crisis and sales reduction on the European market in 2009 to 2010,the economic value of transit risk reduction could be seen as justifying the investment.This value could be estimated at $2 billion, the amount of Gazprom losses during theJanuary 2009 Ukraine–Russia and the 3-week gas shipment interruption to European mar-kets.16 It would allow Gazprom not to seek a high return on equity on its own capital funds,that it would invest in the undersea section of South Stream in project financing with 80%of debt (roughly €1 billion on the €5 billion to be financed by the Russian part).

5. The coalition theory perspective

The coalition theory perspective is relevant when applied in international relations to agame of political entities which are not bound by a legal agreement or submitted to acentral authority in a world of self-interested agents. The coalition theory in internationalrelations is mainly focused on strategic interactions between players, based on the gametheory with description of zero-sum games. Its premises are inspired by the economictheory of cartel (see for instance d’Aspremont and Gabszewicz, 1986) and by Axelrod’stheoretical development on cooperation in repetitive game (Axelrod, 2006).17 They statethree characters on a coalition to appreciate its stability. Firstly, a coalition is solid if it isnot composed by too many parties and if the benefit to belong to the coalition is superiorto the one to be outside, either to free ride or to enter in another competing coalition.Secondly, for guaranteeing a certain stability, a high punishment must deter players notto respect entente rules or to leave the coalition, so that the benefit to cheat or to leaveshould be lower than the penalty. Thirdly, the game becomes more complex when anothercoalition competes, because this allows permanent comparison of advantages to stay inone coalition rather than in another one.

The Nabucco project as well as the South Stream project can be considered as twocoalitions of different States; gas companies backed by their national governments and




supranational bodies (the European Commission).18 There is no exclusive right of mem-bership, and no enforcement with a penalty rule. So in the two cases, nothing impedes tobelong to the two collations, in particular during the step of preparation, given that theentry ticket is quite cheap (€10 million). In the Nabucco coalition, the European Treatyand the gas security directive do not create any obligation for partners to be bound by acommon foreign gas policy. It includes four member-states (Austria, Hungary, Romaniaand Bulgaria), with their national gas companies group relying on an alliance with Turkeywhich is not bound by any European membership. The Nabucco coalition also acts in anenvironment of competition and political rivalry with two other coalitions gatheringRussia and at least one major member-state, the South Stream coalition including Italywith ENI, and less directly the Nord Stream coalition including Germany and some of itsmajor energy companies.

The fragility of the Nabucco coalition, or at least its lack of cohesion, comes first fromthe absence of converging interests inside the EU. Nothing in fact forbids EU member-states, which are external to the Nabucco coalition, to establish a competing project withan external EU player, even if this player acts against their interests. The member-statesoutside the project, which are supposed to endorse it as an EU project, are in fact notobliged to assume the implications of the Nabucco’s statute of European project. The lackof cohesion of the EU members when it comes to foreign relations and the EU’s lack ofdiplomatic powers limit any advantage for the large state-members to relinquish part ofsovereignty to the EU on issues such as foreign gas relations. In fact, they are pleased toback their national gas companies when they establish gas contracts and have developednew gas infrastructures with producers. This explains fundamental diverging interests anddifference in priorities between the Western EU members and the Central and EasternEuropean ones, beyond their difference about Russian gas dependency.

The second weakness of the Nabucco project comes from the fact that participants toNabucco are not bound by any agreement which stipulates their non-participation in othercompeting projects, and would not be submitted to any penalisation. Indeed, Bulgaria,Hungary and Austria are involved in the South Stream project for the northern section.Governments agree for the location of the pipeline, and the respective national companieswill cofinance with Gazprom, the section on their territory, and will benefit from sometransit fee. The European Commission or any Nabucco partner cannot punish a participantfor getting interests in the competing coalition, even if they could cover him withEuropean opprobrium. Moreover, for the Eastern and Central European partners, the non-realisation of Nabucco because of the South Stream construction would be at no cost interms of gas vulnerability, because the latter will allow to alleviate the transit risk that theyare seeking anyway. Perhaps it will not be recognised as such because transit risk iswrongly assimilated to the so-called Russian risk. Anyway, we could easily anticipate thatthe sole fact that South Stream appears to be achieved in the next 10 years will change the

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perception of the Russian risk inasmuch as it will be increasingly dissociated from thetransit risk inherent to the lack of credibility of any Ukrainian commitment.

Thirdly, Nabucco coalition is fragile because Turkey could play the different trumpcards it holds in its hands as a main transit country for the gas coming from Western andEastern Caspian countries, and also for the Russian gas via South Stream for the Centraland Southern European markets. Turkey has already used the stake of its eventualEuropean integration to exert pressures on the EU about the transit fee of gas shipment byNabucco (Wirow, 2009). The non-realisation of Nabucco will be at little cost for Turkey inits transit function because it has other opportunities from other transit rent with thecompletion of 13 Bcm/y ITGI project (Interconnector Turkey-Greece-Italy) combinedwith reinforcement of the section Ankara–Bosphorus of internal BOTAS gas system,which could connect Azeri gas to Greek and Italian markets and to a mosaic of existingand developing interconnections to the Balkans if IGB project (Interconnector Greece–Bulgaria) is realised (Euractiv, 2010b).

Fourthly, when the Nabucco coalition looked for allies upstream as Azerbaijan andTurkmenistan in the Caspian region, we then notice that these countries would not haveany scruple about looking for other outlets than European markets.They have signed long-term contracts with Russia for their gas in the case of Azerbaijan and Turkmenistan, orwith China (and with Iran on a shorter-term basis) in the case of the latter. Political reasons(new political entente for both exporting countries), as well as economic reasons (highergas price to be paid by other buyer than an eventual European buyer who should pay in netback, installation of pipeline to other markets being paid by new gas buyers), might at anytime contradict the goal of the Nabucco coalition to be extended to producing countries inCaspian and Middle East regions. These countries are definitively opportunistic and theirlack of credibility affects the Nabucco coalition more than South Stream coalition whichbenefits from the access to the Russian gas resources.

6. Conclusion

Whatever the future of South Stream project is, the Nabucco future is gloomy. Few gasexperts would bet on its achievement in its present shape (as those quoted by J. Bush,2009). The E.C. Energy Commissioner, Guenther Oettinger, admitted in March 2010 thenecessary postponement of Nabucco start-up from 2014 by 2018 (Euractiv, 2010a). Muchless costly alternative projects branded by the European Commission as a Nabucco projectcould be a useful substitute which could avoid the EU and the European Commission towithdraw it. It is particularly the case of the ITGI currently promoted by Edison, the thirdItalian energy company, and DEPA, the Greek gas company (with its complement ofreinforcement of the BOTAS system between Ankara and the Bosphorus), could be madeprofitable only with the Azeri gas (and could make the Azeri gas profitable to be




exported to Europe at a much cheapest cost than with Nabucco).19 The Nabucco story isnot yet finished, and numerous announcements will probably occur to believe that ‘theproject is still alive’,20 that banks are ready to finance it (Euractiv, 2010b) or that the projectcould be usefully merge with ITGI (Elliott, 2010).

Whatever will be its beginnings, this story may imply some lessons about the ways theEU defines its common external energy policy and considers its ability to act within theframework of this policy, in particular by its priority projects policy. They are not viable ifthey are wrongly worked out because of the lack of knowledge about the gas infrastructureeconomics to reach remote regions. The development of a gas transit project towards aremote and unstable region is very demanding in terms of economic arrangements andpolitical backing with cooperative agreements between concerned countries. The case ofNabucco shows at least the necessity to coordinate actions of potential buyers and transitcountries with potential gas producers by long-term contracts before deciding the construc-tionof thepipelines.SouthStreamhas themerit tobepromotedfirstbyaproducerwhocoulduse it to ship its own gas or eventually the one he could buy to neighbouring countries.

The Southern corridor policy also suffers from the traditional European Commissionmarket approach of gas infrastructure development as if the regional gas market includingexporters to Europe was mature and European gas regulation extendable to export coun-tries and remote gas fields and associated infrastructures. South Stream is also a politicalproject which will certainly be costly for Russia, but it has more economic grounds, suchas gas to fill it, reachable markets to develop outlets and European deep pocket allies toshare an increasing part of the cost. Behind the Hard Power exercised by Russia, there is aregional monopoly and dominant gas market player which could absorb the Caspian gasand resell it to the European markets.

The Southern corridor policy can be interpreted as a head-on confrontation withRussian Hard Power without distinction between transit risk and Russian gas dependencyrisk. It appears to be aimed at diversifying at any cost, as reflected in the followingcomment by a pro-Nabucco influential expert: ‘If South Stream beats Nabucco to con-struction phase, the EU has to press ahead and build it anyway. Without Nabucco, we willnever even have a chance of getting diversification from Russian gas supply’ (AndrewNeff, 2008).21 At the end, there would be a political cost if, despite lack of gas, the Nabuccoproject is carried out anyway only for the sake of showing European determination,because economic fiasco from this stubbornness will demonstrate the European geopoliti-cal powerlessness in foreign gas policy. Even when it comes to ensure security of Centraland Eastern European gas markets which is what this European policy is supposed to actfor, there are other solutions to reduce vulnerability of these markets. EU is best whenacting internally by encouraging better integration of markets, thanks to the developmentof new interconnectors and reverse flows systems by developing crisis preventionmechanisms at the EU level, by inciting each member-state to improve its protection

Dominique Finon64



against supply interruptions (the so-called n-1 standard) and by developing rules of soli-darity through regional emergency plans as suggested by Van der Linde (2008) and Noël(2009). The new EC Regulation on Gas Supply Security (European Commission, 2009)should be encouraged in this direction.

In short, the potential contribution of external energy policy to dealing with Russiangas has been overestimated. The EU should rather stay in the Soft Power vein by carryingon the influence game to enter in the post-Energy Charter era, improving the treaty intaking into account new elements brought up by the Russian government around theMevdevev new Conceptual Approach proposed in April 2009. It could lead to acceptthird-party access to transit pipeline in Russia, in particular for transiting Caspian gas toEuropean countries.

In fact, another lesson drawn from the Southern corridor policy fiasco is that economiccompetition theory should not be completely forgotten in a Hard Power game. Reflectionsmust also be developed on the rationales of European Commission’s direct initiativesaiming to encourage European companies and Caspian governments to expand joint ven-tures on new gas and oil fields development, as the Caspian Development Corporation is,if economics of projects will run aground on the routes issue.

But the lessons could not be drawn because there are too many subjective premisesamong the European decision-makers and their advisers, which distort their perception ofthe reality concerning gas dependence risk. As they point out Russia as the opponent to bedefeated, there might be regrets that diversification of sources do not occur when reachingnew gas sources from Caspian and Middle East with the help of new corridors. But is it soproblematic, even for EU as a whole and more precisely for the Eastern and Central Euro-pean markets? On one hand, dependency from Russian gas will not increase in the futurebecause of the development of LNG imports (Noël, 2009). On the other hand, the transit riskwill be alleviated by the possible South Stream or the ITGI realisations, allowing Ukrainebypass which appears unable to gain in credibility in its commitments as a transit country.

Notes

1. It also received the support of the US Administration which develops an oil and gasmulti-pipeline diplomacy in the Caspian Region in order to help former Soviet republics toget out from the Russian sphere of influence. As it succeeds for the oil pipeline,Baku–Tbilissi–Ceyhan started in 1996, which finishes on Mediterranean Sea, and the gaspipeline Baku-Tbilissi-Ezerum started in 2005, which can bring Azeri gas on the Turkishterritory since 2008, one common opinion was that strong politics is the key factor to thesuccess of the pipeline installation in the region, despite its cost.

2. The EU has some powers to manage some foreign energy policy issue within the frameworkof the trans-European Networks policy, financially assisting the establishment of major




transit and import facilities that contribute to greater diversification, justifying a coordinatingrole in this issue.

3. The foreign energy policy is defined in 2007 in a communication of the Commission to theCouncil and to the European Parliament ‘A European Policy for Europe’ COM (2007) I final,January 10, and accepted by the Council on March 2007. Both documents have contributed toimproving this foreign gas policy concept.

4. A treaty has been signed with them in October 2005. It aims to gather the EU and itssoutheastern neighbours. It is in an extension of the Athens process launched in 2002 andaiming to better integrate Balkan states and EU energy systems.

5. The EU and Central Asia: strategy for a new partnership, COREPER, 31 May 2007.6. Initially at €5 billion cost, the project cost evaluation reaches €7.9 billion in 2008 (Gutlederer

(2008).7. So it would be for connecting Nabucco to gas fields in Middle East countries (Iraq, Iran)

which cannot be credibly involved in the project during the next decade, or in Egypt which istoo far to being involved at the present stage.

8. In September 2010, the Nabucco consortium signed an agreement with European InvestmentBank (EIB), European Bank for Reconstruction and Development (EBRD) and theInternational Finance Corporation (IFC) of the World Bank group, according to which thebanks will conduct due diligence for a financing package of €4 billion. Up to €2 billion willbe signed by the EIB, up to €1.2 billion by the EBRD and up to €800 million by the IFC.Nevertheless, their agreement will be conditioned to perspectives of large shipments. Theremainder of €4 billion will be financed by shareholders’ equities and loans from privatebanks (EurActiv, 2010b)

9. Formal agreements have been signed by Bulgaria, Hungary and Serbia in 15 May 2009 byGazprom CEO, Alexis Miller in Sotchi.

10. The signature of this agreement on August 2009 in Ankara by the prime ministers of Russia,Turkey and Italy was a political answer to the Nabucco agreement signature in Ankara on 13July 2009.

11. Russia was looking for a reduction of off-take quantity because of the drop in the Ukrainiandemand and in the Western European market, while the Turkmen party wanted a quite highprice. (HIS, 2009)

12. It is noteworthy that in 2009, Turkmenistan has opened a second line to Iran, increasingexport capacity to 14 Bcm/y. But by that date, there was no new long-term contract with Iran.Gas trade increases from 5.8 Bcm in 2005 to 8 Bcm in 2010.

13. Just after the crisis, Gazprom estimated the direct cost to $1.5 billion (Stern et al., 2009).The $2 billion cost of the crisis is estimated as follows: the loss of revenues because of thelack of sales during the 3 weeks of the crisis for two reasons: (i) the quantities that buyerscommitted in take or pay contracts have preferred not to off-take because theyare confronting to a reduction of their sales during the same period; and (ii) the largedifference of gas price between January 2009 ($500/1000 m3) and July 2009 ($125/1000 m3) when the gas companies decide to off-take the rest of quantities which was notdelivered on January.

Dominique Finon66



14. These partnerships conflict with the competition principles in the light, for instance, of thedemand addressed in June 2007 by the Commission to Gazprom to resell the totality of itsinterests (51 per cent) in Nord Stream, given its function of dominant seller. The Spanishenergy regulator addresses a similar demand to Sonatrach to limit its share in Medgas to20 per cent, unless it accepts very stringent conditions to raise its stake at 36 per cent(Gas Matters, July 2007).

15. It needs two conditions: a long-term commitment between producers and buyers for gaspurchase with take or pay contracts to share risks, and an involvement of gas producer inexport infrastructure and the two parties in transit infrastructures. The take or pay clauseprovides an incentive for the buyer to take all the gas it can absorb when use of this gas iseconomically efficient, while curtailing the risk from the producer to make this gasunavailable upstream.

16. See note 11.17. In a repetitive game, Axelrod (2006) shows that the stability of the cooperative game depends

first on the choice of cooperation by player when each one is confronted the first time with theprisoner’s dilemma, and second with the punishment the players are able to inflict onto theone who chooses the non-cooperation strategy in t-1 and then with the forgiveness when hecomes back to a cooperative strategy.

18. The same could be said about the Nord Stream project.19. We should mention also the Trans Adriatic Pipeline project promoted by Statoil and the Swiss

energy company EGL, boosted in March 2010 by the Energy On entry in the consortium.This 10 Bcm pipeline would cross Greece, Albania and the Adriatic Sea to Brindisi in Italy,with possible reverse flow from Italy to South Eastern market. But this project is much lesspolitically supported than Nabucco or ITGI in Brussels.

20. We could quote the revealing title of a paper from Wall Street Journal and Dow Jones team inBrussels on 8 September 2010: ‘Nabucco to Europe: We’re alive’, when Nabucco promotersrecognised the danger coming from the new competitor ITGI.

21. A. Neff is a well known specialist of gas geopolitics as senior energy research analyst atGlobal Insight. He is quoted by P. French (2008).

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Documents

The EU foreign gas policy of transit corridors: autopsy of the stillborn Nabucco project