by Judy Dempsey

04-06-08 Nabucco, the European Union's natural gas pipeline project, designed to reduce the block's dependence on Russian natural gas, has been dealt another setback -- and this one could hit European consumers in the wallet. The project, already plagued by delays in construction and financing, said that its cost would grow by nearly 60 % because of higher steel prices.
The companies involved in the project said they were concerned that the new estimated cost of almost EUR 8 bn, or $ 12.4 bn, which is EUR 3 bn more than initially planned, will be passed on to consumers once the pipeline is completed in 2014.

Reinhard Mitschek, managing director of Nabucco Gas Pipeline International, which is overseeing the ambitious infrastructure project, said sharp increases in crude oil prices and commodities could not have been anticipated in the original price of EUR 5 bn established by a feasibility study in 2005.
"Crude oil prices have more than doubled, which consequently has also led to higher prices for all primary energy sources, also prices for steel," Mitschek said. "Steel is in high demand because of the large numbers of big projects and steel companies also capitalize on this high demand."

As a result, the 3,300-km, or 2,100-mile, pipeline that is supposed to carry 31 bn cm, or 1.1 tcf, of natural gas a year to Europe "is now expected to reach EUR 7.9 bn as of the figures of today," Mitschek said.
He played down suggestions that the competitiveness and the economics of the project would be negatively affected. Rather, Mitschek said, "high demand for energy would lead to higher gas prices and higher transportation fees," which would "make Nabucco considerably profitable."

Nabucco is being built by a consortium of Austrian, German, Hungarian, Bulgarian and Turkish companies. Aside from the spiralling costs for building the pipeline, the consortium has yet to arrange supply contracts, and more importantly, establish whether there will be enough natural gas available to fill the pipeline.
"The biggest challenge is to secure sufficient supplies to fill the pipeline," said Stephen O'Rourke, an energy analyst at Wood McKenzie, a consulting firm.

The delay in reaching agreements on supplies has become entangled in the politics of the region. Most of the natural gas the EU hopes to pump into Nabucco will come from Caspian and Central Asian countries, including Azerbaijan, Turkmenistan and eventually Iran, if the country's standoff with Europe and the United States over its nuclear program is resolved.
Azerbaijan, crucial for Nabucco's success because it will be one of the main suppliers, also wants to become a hub for natural gas from Turkmenistan that could reach Europe via Nabucco.

"The EU does not have gas commitments because of the political actors involved," said Borut Grgic, founder and director of the Institute for Strategic Studies, an independent research centre in Ljubljana, Slovenia. "The political actors are playing cat and mouse, trying to strike the best terms."
EU officials said that they remained committed to the project despite higher costs and delays.