Decision time for BP-led group on route of Caspian gas pipeline into Europe

It's crunch time for one of the EU's most ambitious infrastructure projects, as a crucial decision looms on the route of a new pipeline to bring gas from the Caspian to the heart of Europe.

By the end of the month, a BP-led consortium developing a massive gasfield off the coast of Azerbaijan called Shah Deniz II must choose how the gas will be delivered to Europe.

They must decide between two rival projects: one going to Austria, called Nabucco West, and the other ending in Italy, called the Trans-Adriatic Pipeline, or TAP.

But behind those dry facts lies a long, combustible saga of geopolitical intrigue, bitter corporate rivalry and intense debate about the future of Europe's energy needs.

It has been a hard-fought battle in which some of the continent's largest energy companies have devoted vast resources to complex commercial negotiations, delicate great-power diplomacy and intense lobbying from Brussels to Baku. And the outcome is too close to call.

"I think it's a toss-up between the two," says Laurent Ruseckas, an analyst at consultancy IHS CERA and an expert on the Caspian. "It will be down to the wire."

The decision will mark a crucial milestone for the EU as it struggles to improve its security of supply. It will bring it a step closer to tapping a brand new source of natural gas, at a time of declining indigenous production and forecasts of rising demand as the continent turns its back on polluting coal.

But it is still only the starting gun. The gas is only expected to begin flowing in 2019.

"It's taken a decade and a half to get to this point and we haven't even built the damned thing yet," said an executive of one of the rival pipeline projects.

It is a bold, and expensive, endeavour. The whole venture will cost upwards of $40bn - $25bn for the development of the Shah Deniz II field itself and at least $15bn for the delivery system, including a huge new pipeline called Tanap that will pass through Turkey. Though neither TAP nor Nabucco West has disclosed a price tag, analysts estimate that each could cost as much as $5bn.

And yet there are big doubts as to how much difference the new pipeline will make. Shah Deniz II will provide Europe with 10bn cubic metres a year of gas - equating to just 2 per cent of total European demand. Gazprom, the Russian gas giant, will supply Europe with more than 15 times that amount this year. Privately, Gazprom managers dismiss the Azeri gas as "just about enough for a barbecue".

But others say that misses the point: that once the pipeline is built, more supplies will come. Azerbaijan itself has made some big additional gas discoveries in the Caspian Sea in recent years that could feed into it.

"It will be quite straightforward to put more gas in from places like [Iraqi] Kurdistan and Turkmenistan," says Mark Rowley, oil and gas partner at law firm Baker Botts. "So there's potential there for some pretty substantial supplies."

The duel between the two rival projects is one between a long-established heavyweight and an upstart. Named after a Verdi opera, Nabucco was first conceived back in 2002. At the time, the EU was actively exploring options for a "southern corridor" that would bring gas from Central Asia and the Middle East and reduce the continent's dependence on Russia: so Nabucco quickly won strong backing from Brussels. TAP, a much slimmer project, came later.

Nabucco's managing director Reinhard Mitschek says the issue of diversification is crucial. "If you look at south-eastern Europe and the western Balkans, the countries in this region are at least 50 per cent dependent on Russian gas," he says. That is not the case with TAP's target destination, he says. "Italy is quite a diversified market."

But some analysts say that argument is no longer relevant. In the past few years, Europe has invested heavily in interconnectors that link up the gas grids of EU member states, in part to prevent future supply disruptions.

"The strategic importance of Nabucco has been reduced because of the flexibility of the European gas market," says John Roberts of Platts, author of "Pipeline Politics: The Caspian and Global Energy Security".

Indeed, if the EU's opinion counts for anything, it might work in TAP's favour. Many in Brussels support it because by passing through Greece it could give a big boost to the country's crisis-hit economy, providing jobs, transit fees and cheap gas.

TAP has other advantages, too: "It allows you to access virgin markets such as Albania, Montenegro, and possibly Kosovo," says Michael Hoffmann, TAP's head of external affairs. He also says TAP can hook up with other pipelines that would potentially extend its reach into Austria and even the UK.

Ultimately, the decision will be based on commercial considerations alone. The Shah Deniz partners are talking to buyers along the routes of both pipelines to see what they are prepared to offer for Azerbaijan's gas. Analysts say there are indications of greater appetite along the TAP route than along Nabucco West's.

An executive with one of the partners says the key point is to put all "strategic" and "geopolitical" considerations to one side. "Let's not have any flights of fancy," he said. "If we're too grandiose we'll end up empty-handed."

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