UPDATE 1-EU pushes strategic gas pipelines to merge

Thu Feb 17, 2011 7:08am EST

Related Topics

* EU seeks alternative to dominant gas supplier Russia

* Azerbaijan to decide by June on where to export new gas

* EU officials want Nabucco and ITGI pipelines to merge

(Adds quotes, detail, background)

By Pete Harrison and Sylvia Westall

BRUSSELS/VIENNA, Feb 17 (Reuters) - European Union officials are pushing for a merger of two strategic gas pipeline projects to help secure supplies from Central Asia to the world's second-biggest gas market, industry sources say.

Vying to transport gas from Azerbaijan are the Austrian-led Nabucco consortium and the Interconnector Turkey-Greece-Italy (ITGI), as well as the Trans Adriatic Pipeline (TAP).

Officials at the European Commission are urging ITGI and Nabucco to enter talks about merging their operations, EU industry and political sources said.

"It's more straightforward to start with a small-volume pipeline like ITGI, and I know that these negotiations are ongoing because the Azeris are considering all options," said Jennifer Coolidge, at CMX Caspian and Gulf Consultants.

"The commercial reality is that either ITGI or Nabucco, or both together, but phased, could be feasible."

The European Union, home to 500 million consumers, has long been seeking to reduce its reliance on Russia, which provides about a quarter of EU gas needs, fearing that Moscow could hold Europe to ransom in any future political disputes.

Those fears were heightened by the 2008 war in Georgia and by a three-week gas crisis in 2009 after Moscow clashed with Ukraine, which transits Russian gas to Europe.

The EU's main means of diversifying its suppliers is by tapping into the Caspian region's massive gas fields, initially in Azerbaijan.

The consortium controlling the next wave of Azeri gas, from the Shah Deniz II field, co-led by BP (BP.L) and Statoil (STL.OL), is expected to decide on a buyer and transporter for its gas by June.

Europe's grab for Caspian gas gained traction in January, when the EU's energy commissioner Guenther Oettinger secured a major political agreement with the Azeri government to work together on the project.

TWO-STEP APPROACH

One option could be to start off with the low-cost ITGI pipeline plan, estimated at $3.4 billion, compared to Nabucco's $10.7 billion price tag, and then expand at a later date, one industry source told Reuters on condition of anonymity.

That implies downscaling the project with a low level of gas flow initially, but the parties are also considering ways to increase the size of the planned pipeline across Turkey, and to share it, to keep costs down.

Azeri resources besides Shah Deniz II might be coming on stream after 2015, fields such as Nakhichevan and Absheron.

The project might be launched in two phases: "Southern Corridor Phase I" would carry gas to Greece and onwards to Italy; the later "Southern Corridor Phase II" would create a spur from the main pipeline and follow Nabucco's original planned route northwards to Austria, an industry source said.

A spokesman from the Vienna-based Nabucco consortium said there were "no concrete talks" with ITGI about cooperation.

"There is an ongoing discussion on a political level ... but there is no discussion in the consortium about it," Christian Dolezal said.

Nabucco is backed by the EU, but any strategic changes would have to be agreed by its six shareholders -- Austria's OMV (OMVV.VI), Hungary's MOL (MOLB.BU), Romania's Transgaz TGNM.BX, Bulgaria's Bulgargaz, Turkey's Botas and Germany's RWE (RWEG.DE).

A senior executive at ITGI shareholder Edison EDN.MI suggested on Tuesday his project might be able to work together with Nabucco, but did not give precise details. [ID:nLDE71E233]

TAP, the lowest cost option at 1.5 billion euros, is not currently involved in any possible Nabucco merger scenarios, industry sources say.

But TAP is betting that its low price tag could work in its favour as Europe's economic crisis clouds attempts to forecast future gas demand.

"We have always said we are open to cooperation and for other shareholders to join TAP," said a spokeswoman. "Any possible cooperation would of course have to be commercially realistic." (Reporting by Pete Harrison in Brussels and Sylvia Westall in Vienna; editing by Rex Merrifield and James Jukwey)

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