Marketplace Middle East - Blog
Signals along the Silk Road
The ancient Silk Road was arguably one of the most important trade routes with a history stretching back two thousand years, but it's today’s revitalization of those links between Asia, the Middle East and Europe that makes for fascinating viewing and deal-making.

Like the Silk Road which is going through its own rebirth, the Nabucco Gas Pipeline project came from the brink of extinction at the start of this year, to an actual signed memorandum of understanding this week in Ankara.

On Marketplace Middle East, we take particular interest because it is a classic example of how the Middle East is playing a role in shaping business and energy policies as a bridge between East and West.

For one, Turkey will serve as the key transit country for this gas pipeline, after the success of the BTC oil pipeline set up three years ago with a similar concept in mind.

Secondly, Middle East supplies will be essential for this project to get off the ground. Kurdish officials in Iraq expressed an interest in providing their energy earlier on and that was backed on a national scale by Nouri al-Maliki this week when he attended the official ceremony with leaders from five transit countries.

But this modern day Silk Road effort requires a big leap of faith to push ahead with the near $11 billion pipeline project.

"We have received clear signals from Azerbaijan, Iraq and Turkmenistan that gas will be available for European gas imports," said Reinhard Mitschek, Managing Director of Nabucco Gas Pipeline International.

If one reads between the lines, he may only be referring to Nabucco, but also to competing pipelines backed by Russia. In this large-scale game of geo-politics, no one wants to shut the door in the face of some of the major players, even if relations may be less than ideal at this juncture.

When asked if, for example, Azeri President, Ilham Aliyev was hedging his bets by supplying gas to Russia and other countries, Mitschek stated matter-of-factly they will diversify their exports to maintain, "industrial and economic relationships with Russia."

On this New Silk Road, the political winds can change direction rather quickly, so Central Asian leaders, literally squashed in between Russia, China and Europe are juggling those priorities and trying to keep all the balls in the air. Kazakhstan, the natural resource-rich state, with a bounty of oil, gas, coal and uranium, has oil pipeline connections to all three of those players.

Nabucco will launch in 2014 with up to 10 billion cubic meters of natural gas in the pipeline. Officials say about three times that amount is expected by 2020. That is when it will get even more interesting. To fill that "pipe," supplies will be needed from Iran -- which sits on the second largest gas field in South Pars.

In a recent interview on our program, European Energy Commissioner, Andris Piebalgs said with the cloud of Iran’s nuclear enrichment hanging over the economic sanctions regime in place, it is too early discuss that potential. In a game of carrot and stick, Turkey’s Prime Minister, Recep Tayyip Erdogan said he would like to see Iran’s gas as part of the Nabucco project. No date for that effort was announced.

A great deal needs to happen between now and 2020 for Iran’s gas to get the green light. Before that happens, international oil companies will have to re-engage in the country to prepare its energy sector for exports.

In preparation of this week’s Nabucco signing, I researched what the pipeline network looks like currently -- it resembles a spaghetti bowl of lines crisscrossing the terrain, and with a Russian bias.

This will begin to change with the Nabucco project, but Russian-backed pipelines are being built in parallel. One across the Baltic Sea to Germany, the Nord Stream, is costing about $10 billion. The other, the South Stream pipeline, crossing the Black Sea to Italy will cost about double that.

If you are wondering if all this new capactity will be needed, think again. According to Nabucco's Mitschek, up to 200 bcm of gas will be required from the East as production continues to drop in Europe.

This means that if all goes as planned and demand recovers along with the global economy, all three new arteries of energy will be welcomed in this new world order.

Nevertheless, as veteran energy analyst John Roberts of Platts said, "Russia has to observe the rules of the game much more closely." It is true that three years of winter gas interruptions by Moscow have forced all the players of Nabucco to get on with it.

As a result, the signals from The New Silk Road are getting the all clear. Let’s hope that geo-politics doesn't interfere in what may be a bold move in name of business.

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John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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