The Nabucco Project TCA TURKISH COMPETITION AUTHORITY Mustafa Oguzcan Bulbul Senior Competition Specialist Turkish Competition Authority 5th Emerging Europe Energy Summit October 21th 2009, Prague (Thank you very much for your kind introduction) DISTINGUISHED GUESTS, LADIES AND GENTLEMAN! I would like to greet you on behalf of Turkish antitrust Authority and myself. It is my pleasure to be here this afternoon and share my thoughts about the Nabucco Project.

Agenda TCA What is the Nabucco Project? TURKISH COMPETITION AUTHORITY TCA Agenda What is the Nabucco Project? Technical Details of the Nabucco Project The SWOT Analyses of the Nabucco Project Conclusion I WOULD LIKE TO GIVE YOU BRIEF INFORMATION ABOUT THE CONTENT AND TECHNICAL DETAILS OF THE NABUCOO PROJECT. THEN, I WOULD LIKE TO MAKE A COMPACT SWOT ANALYSES AND WRAP UP MY PRESENTATION WITH A SHORT CONCLUSİON

What is the Nabucco Project? TURKISH COMPETITION AUTHORITY TCA What is the Nabucco Project?

TCA TURKISH COMPETITION AUTHORITY …A project which all, including the European Commission and politicians, seem to accord priority to, but which never seems to acquire enough momentum …A project which is much more than just about gas …A project which might be the glue that keeps both Europe’s energy policy and Europe’s engagement with the states around the Caspian Sea together THIS IS A PROJECT WHICH INCLUDES A PIECE OF EVERYTHING FROM BEING THE BIGGEST EAST-WEST CONTEST SINCE THE FALL OF THE USSR IN 1991 TO THE SUPPLY SECURITY OF THE EU GAS MARKET THEREFORE, IT IS ONE OF THE MOST DIFFICULT PROJECT TO DESIGN IN TERMS OF PROJECT FINANCE, SUPPLY OF RESOURCES AND SUPPLIER COUNTRIES

TECHNICAL DETAILS OF THE NABUCCO PROJECT TURKISH COMPETITION AUTHORITY TCA TECHNICAL DETAILS OF THE NABUCCO PROJECT

STRATEGIC GOALS OF THE PROJECT TURKISH COMPETITION AUTHORITY TCA The Nabucco project represents 3,300 km gas pipeline connecting the Caspian region, Middle East and Egypt  via Turkey, Bulgaria, Austria, Romania, and Hungary with the Central and Western European gas markets According to market studies the pipeline has been designed to transport a maximum amount of 31 bcm/y Estimated investment: 7.9 billion Euro STRATEGIC GOALS OF THE PROJECT Opening a new gas supply corridor for Europe Enhance the transit role of the participating countries along the route Contributing to the security of supply for all partner countries, and also for Europe as a whole. Strengthening the role of the gas pipeline grids of all Nabucco partners in connection with the European gas network Nabucco Gas Pipeline International GmbH, was established on June 24, 2004 Headquarter of the Company is in Vienna. The company is directly owned by the Nabucco Partners and is responsible for the marketing of the pipeline capacity

THE SWOT ANALYSES OF THE PROJECT TURKISH COMPETITION AUTHORITY TCA THE SWOT ANALYSES OF THE PROJECT

TCA TURKISH COMPETITION AUTHORITY Strengths Weaknesses Opportunities Political support from the European Union (EU) and the United States (US) Russian-Ukraine dispute High demand growth potential Declining production Russian gas fields Lack of finance Lack of coherent strategy of the US and EU Ambiguity about the sources of gas to feed the pipeline Opportunities Threats Major incentive to solve the problems between Turkmenistan and Azerbaijan Reconfigure the Eurasia continent which is neither controlled by OPEC nor Russia Alternative Pipeline projects Divergence of interests and different priorities of the European decision-makers Absence of reliable agreement between the EU and Russia

(1) Political support from the EU and the US TURKISH COMPETITION AUTHORITY TCA STRENGTHS (1) Political support from the EU and the US Despite historical positions, the US and EU must accept the necessity of using their political and economic influence to prevent or ameliorate threats to the supply security of the EU; the market alone will not address energy security concerns. In this regard, the US has demonstrated its commitment in supporting the Nabucco Project politically like they did for Baku-Tiflis-Ceyhan (BTC) oil pipeline project in the past in order to create and alternative route to Russian pipelines While the US has demonstrated dedication to the further development of the Nabucco Project, the EU has been indecisive and demonstrated little political willingness to realize the Nabucco Project up until the Russian-Ukraine crisis in 2006 and 2009

TCA TURKISH COMPETITION AUTHORITY After these crisis, the EU Energy Commissioner discussed the Nabucco project during his successful visit to Turkey in November 2008 Turkey and the European Commission jointly developed an initiative to set up a joint venture to be known as the “Caspian Development Corporation” The first Intergovernmental Conference to discuss Intergovernmental Agreement was held in Brussels on January 22-23, 2009 The Nabucco Summit held in Budapest on the 27th of January 2009. Following up with these strategic steps, another meeting about the Nabucco project took place in Vienna on 5-6 February, 2009 The EU then signed an agreement in early May, 2009 with Azerbaijan, Georgia, Turkey and Egypt to revive the pipeline talks Finally, the leaders of five partner nations of the project signed a breakthrough intergovernmental agreement about the Nabucco project on July 13 2009 in Ankara

(2) Russian-Ukraine Dispute TURKISH COMPETITION AUTHORITY TCA (2) Russian-Ukraine Dispute The 23rd EU-Russia summit on May 22, 2009, held in the Russian Far East city of Khabarovsk, brought no solution to the transit problem as Russia refused to give any assurance to the Europeans, while President Dmitry Medvedev’s idea that the EU provide more credit to Ukraine to help with the transit costs met rejection from the Europeans Meantime, Gazprom’s Alexey Miller noted that if Ukraine’s Naftogaz was unable to make gas prepayments in full, it would “get as much gas as it pays for and there was no question of cutoffs” However, since Ukraine and Russia have not developed a mutually-agreeable payment solution for gas purchases, and none of the three parties have made a bona fide effort to resolve the transit problem, future gas cutoffs are inevitable. Thus, the Nabucco project has recently become more valuable than ever from the EU’s supply security point of view

(3) High Demand Growth Potential TURKISH COMPETITION AUTHORITY TCA (3) High Demand Growth Potential The EU, with a population of 500 million and enlarging economy, has had one of the largest gas markets in the world in the past decade. The EU will become more dependent on imported energy over the next 25 years as it grows, and the burden of meeting its growing energy needs is likely to fall on natural gas. According to Stratfor, Europe’s projected increase in natural gas imports is currently set to quadruple from 200 billion cubic meters (bcm) in 2002 to 850 bcm by 2030 The most significant reason for an increase in natural gas use is environmental. Power generation is the main driver of energy demand in the EU and the largest source of its greenhouse gas emissions. Thus, bounce in expected natural gas demand of the EU will come largely at the expense of declining coal usage, but will also result from projected declines in the use of nuclear power and oil consumption in electricity generation

(4) Declining Production of Russian Gas Fields TURKISH COMPETITION AUTHORITY TCA (4) Declining Production of Russian Gas Fields An important side-effect of Russia’s cap for foreign ownership in the energy industry is a neglect of long-term foreign investments into its energy infrastructure. In consequence, most of the Russian fields today are underinvested and with the partial exception of Siberia’s large Zapolarnoye-field, 13 the large gas-fields in Western Siberia of Degoy, Nadim, and Purtazowskoy have all reported stagnating or declining production

WEAKNESSES TCA TURKISH COMPETITION AUTHORITY (1) Lack of Finance The main factor determining whether the project will get off the ground or not, is if its investors decide that Nabucco’s commercial value warrants the associated risks of the project Risks associated with clarity is the most important part of financing efforts and it is being greatly hindered by the lack of supply and Iranian supply problem between the EU and US. Therefore, useful lessons could here be learnt of how a politically-driven and risky BTC oil pipeline project in the end turned out to be a commercially sound project by a coherent strategy and a joint push from important actors of the project. In this regard, nothing precludes the Nabucco pipeline project from a similar financing structure and implementation as BTC European Investment Bank has already committed to finance up to 25% of the Project during the Budapest Summit on the 27th of January 2009 In addition to that, European Commission allocated 250 million Euros to help launch the construction of the pipeline's first stage.

(2) Lack of coherent strategy TURKISH COMPETITION AUTHORITY TCA (2) Lack of coherent strategy The US’s primary concern with developing the East-West corridor in the first place was to assist Europe to diversify energy away from Russia. On the other hand, European policy-makers have shown little appreciation while Gazprom has strengthened its dominance over Europe’s gas supply. Hence a fundamental change in Europe’s strategy seems long overdue. Another reason hinders the trans-Atlantic cooperation is the Iran’s participation to the Nabucco project. While the US has vehemently opposed Iran supplying the project with gas, EU is still holding Iran in the potential primary suppliers list of the project which has caused strains on the trans-Atlantic relationship. It is a paradox that the Nabucco project’s postponement and Iran’s participation largely is the result of a non-issue. The consequences are also uniformly unfortunate for all actors involved. It has both caused a trans-Atlantic rift over the issue while US-Turkey relations have deteriorated. Technically, in the short and medium term, underinvested Iranian fields could not be an alternative supplier for the Nabucco project Thus, in order to have quick progress in the project, the single most important factor is that the Europe and the US pursue a coherent strategy, involving some degree of new thinking to realize the joint interests of both sides.

(3) Ambiguity about the sources TURKISH COMPETITION AUTHORITY TCA (3) Ambiguity about the sources The construction of the Baku- Erzurum gas pipeline and the development of Shah Deniz have made Azeri supplies more attractive in the short run. Azerbaijan is the only country which has concluded an agreement on supplying the Nabucco. The Shah Deniz field will thus fill the first phase of the project For the second phase, sources of supply are more uncertain At this point, Turkmenistan, has emerged as the most likely candidate in filling the Nabucco next to Azerbaijan, if the demarcation dispute is to be resolved and the supplies can be piped across the Caspian or from Turkmenistan’s off-shore fields.

(3) Ambiguity about the sources TURKISH COMPETITION AUTHORITY TCA (3) Ambiguity about the sources Even though, Turkmenistan and Azerbaijan expressed their wish to jointly explore the Kapaz/Serdar field, Turkmen President Gurbanguly Berdimuhammedov, at a cabinet meeting on 24 July 2009, announced that Turkmenistan would be taking Azerbaijan to the International Court of Arbitration. Should the Caspian Sea conflict (somehow) be resolved, Kapaz/Serdar has the potential together with Turkmenistan’s off-shore Block 1 field to fill the Nabucco. Other actors interested in taking a share of the Nabucco today include Egypt, Iraq, Libya, Iran, and Saudi Arabia. However, the lack of infrastructure (or in Iran’s case, lack of gas and the US sanctions) impedes these states from filling it. The Arab Gas Pipeline (AGP), via an extension through Syrian border, could potentially connect with Turkish grid. However the scant 2-4 bcm per year that AGP could contribute is relatively insignificant. In this regard, the main focus of the EU and the US should therefore be on Azerbaijan and Turkmenistan.

(1) Solving the problems between Azerbaijan and Turkmenistan TURKISH COMPETITION AUTHORITY TCA OPPORTUNITIES (1) Solving the problems between Azerbaijan and Turkmenistan The division of the seabed among the littoral states is one of the most contested questions in Caspian Sea The point of divergence is: How to draw the median line, dividing the shelf in a satisfactory manner between Turkmenistan and Azerbaijan At the heart of this question are at least three major oil and gas fields. The way the median line is drawn will determine the legal ownership of these fields (Serdar/Kyapaz; Omar/Azeri; Osman/Chirag) The resolution process of the disputed offshore field in between Turkmenistan and Azerbaijan will likely be accelerated with the joint efforts of EU and the US during the construction phase of the Nabucco project.

(2) Reconfiguration of Eurasia TURKISH COMPETITION AUTHORITY TCA OPPORTUNITIES (2) Reconfiguration of Eurasia The natural gas reserves of the Caspian Sea region is estimated to have amount to 84 trillion cubic meter of natural gas reserves (EIA) With regards to oil, proven reserves are estimated at 40-50 billion barrels (EIA) The comparatively small domestic markets of the Caspian littoral states, combined with high productive capacity, have led them to be attractive options for diversification. Cumulative gas reserves of Kazakhstan, Turkmenistan, and Azerbaijan are estimated to add up to Russia’s total export capacity alone Also, Caspian gas and oil is controlled neither by OPEC nor Russia. This makes it one of a few sources of energy located both in proximity to Europe and outside of the control of these two dominant players. Consequently, not only would EU’s and the US’s engagement with this region have political benefits, but it would also make commercial sense.

(1) Alternative Pipeline Projects TURKISH COMPETITION AUTHORITY TCA THREATS (1) Alternative Pipeline Projects No dominant market actor ever gracefully relinquishes its pre-eminent position, and Gazprom is no exception. To counter the Nabucco project Russia has skillfully split the EU with a counterproposal: the South Stream project. Additionally, Gazprom has signed an agreement directly with Germany (the EU’s single largest consumer of natural gas) to build yet another natural gas pipeline, the North Stream, which would bypass Ukraine and bring gas directly to Germany. In addition to avoiding future disputes with Ukraine, Russia is undoubtedly calculating that it can undercut market support for financing the Nabucco project if Gazprom can lock up Germany’s gas market in a long-term gas arrangement via the North Stream project. All of these moves are designed to lock competitors out of the lucrative EU market, lock in Russian control over Caspian gas reserves, and increase the EU member state reliance on Russian gas for the future.

(2) Divergence among the EU TURKISH COMPETITION AUTHORITY TCA THREATS (2) Divergence among the EU Ultimately, conflict of power and competing interests as well as different energy security definitions among the EU members hinder the process of the Nabucco project Despite EU efforts, many EU member states have continued to tolerate, or even promote, large incumbents in the gas markets such as Gaz de France, or Germany’s E. On Ruhrgas. These companies have shown a propensity to strike mutually profitable deals with Gazprom designed to continue their market dominance and ensure profitability. For Russia, a fragmented regional European energy market like this seems the best guarantee for Russia to implement the “divide and rule” strategy to be able to stay as a monopoly supplier of European gas market. Without the Nabucco, a united and liberalized EU gas market and global competitiveness will hardly been realized If the Nabucco-pipeline cannot be implemented, the new EU member states in Eastern Europe will largely remain dependent on Russia

(3) Absence of Reliable Agreement Between Russia and the EU TURKISH COMPETITION AUTHORITY TCA THREATS (3) Absence of Reliable Agreement Between Russia and the EU EU’s key international tool of energy security has been the 1994 Energy Charter Treaty, which entered into legal force in 1998. The Charter attempts to provide a mechanism to regularize interactions between foreign investors and host countries, to promote international transit of energy, and to provide a dispute resolution mechanism. Although this may sound useful, in practice Russia’s status with the Energy Charter is ambiguous. Russia is a member pending ratification, having signed the Treaty in 1994 but never having ratified it. While this means that Russia has agreed to apply the Treaty’s provisions to the extent that they are compatible with Russian law, it is unclear what practical effect the Treaty would exercise over Russia in the event of a serious crisis. The EU, in the absence of a reliable international agreement to provide energy security, must take unilateral security-promoting measures including realizing the Nabucco project

CONCLUSION TCA TURKISH COMPETITION AUTHORITY In barring Western investors from strategic industries, demanding access to controlling the upstream and downstream gas markets across Europe and exerting its leverage upon CIS states, Russia has created appreciable concern among European policy makers about being a reliable trading partner or not. Therefore, after taking into account the insufficient and declining indigenous natural gas production of EU, it is evident and inevitable that EU need to import more natural gas from supplier countries but also diversify its supply sources. The Nabucco’s viability mainly depends on the ability of the Central Asian nations, mainly Azerbaijan and Turkmenistan, to supply the pipeline There are no easy solutions for diversifying natural gas supply to the EU and there are certainly political and economic risks involved in directly opposing Russian control of natural gas given the EU’s current level of reliance on Russian gas. Nevertheless the EU should look to the U.S.’s successful efforts to assist the design and construction of the BTC oil pipeline, which broke the Russian Black Sea chokehold on oil, and which demonstrates that with sufficient political will, a positive outcome can be achieved

CONCLUSION TCA TURKISH COMPETITION AUTHORITY What the EU needs most of all in the coming years is to have the common political will of all EU members including the major partner’s of Russia such as Austria, Germany and Italy, to implement all the decisions they have agreed upon strongly and assertively In this regard, unless the EU can liberalize its own markets and introduce true competition internally, Gazprom will be able to continue to exploit the EU’s market-based system EU unity is necessary in order to aggressively support the southern route gas pipelines, such as the Nabucco, to bring them to fruition and keep them outside Gazprom’s control.

THANK YOU! TCA TURKISH COMPETITION AUTHORITY M. Oguzcan Bulbul Senior Competition Specialist Turkish Antitrust Authority Email: mobulbul@rekabet.gov.tr Phone: +90-312-291-4558 Fax: +90-312-266-7955