OREANDA-NEWS. September 08, 2010. The EBRD, the EIB and the IFC signed a mandate letter marking the start of the appraisal and due diligence process for the Nabucco pipeline project. The signing is an important step towards the potential financing by these IFIs of the pipeline, which would link gas fields in the Caspian region and Middle East to central Europe, reported the press-centre of EBRD.

Riccardo Puliti, Managing Director of the Energy and Natural Resources group, discussed how Nabucco fits in with the EBRD’s commitment to energy security and how the Bank aims to minimise the pipeline’s environmental and social impact.

What is the significance of the signing of the mandate letter?
Riccardo Puliti: The mandate letter sets out the framework for the due diligence process and determines how the expenses for the consultants carrying out the due diligence are going to be paid. Whether the EBRD eventually decides to invest in Nabucco depends on the outcome of the due diligence investigation, which should clarify what the commercial, environmental and social risks are and how they can be mitigated.

Nevertheless, the signing marks an important step. This is the fruit of the work started in 2007 when we were first approached by the consortium behind Nabucco. It is the result of a lot of effort by governments, the European Commission, the EBRD, the EIB, the IFC and the consortium to reach a structure that we could potentially finance.

Why is the EBRD interested in financing the pipeline?
This deal is part of a broader context. It fits in with the work that the EBRD’s Energy and Natural Resources group has been doing on the issue of energy security in Europe.

Europe has very important needs in terms of natural gas. The North Sea reserves are declining and Europe is increasingly reliant on imports, from Russia and Algeria especially but also from Nigeria and Qatar, which export significant amounts of liquefied natural gas. The vast majority of the gas imported by central and eastern European countries comes through pipelines that originate in Russia and travel westwards through Ukraine and Belarus.

The Nabucco pipeline would diversify the sources of natural gas for Europe and the routes by which imported gas arrives. It would allow countries in the Caspian Sea area and northern Iraq, which are not currently major exporters to Europe, to set up a direct flow of natural gas to central Europe, passing through Turkey and south-eastern Europe.

Not having to rely on just a few sources of gas or on pipelines travelling through one geographic area will boost the continent’s energy security. This issue became more important after the contract re-negotiations between Russia and Ukraine in January 2009 which triggered important disruptions to supply and created substantial difficulties in many of our countries of operations.

What else is the EBRD doing to boost energy security in the region?
We have invested some €400 million in underground gas storage projects in Hungary, Croatia and Serbia with one more project in Bulgaria set to be completed in 2011. The flow of natural gas is very seasonal: it flows very heavily during winter and demand weakens considerably during the summer. Storage facilities create commercial and strategic reserves that help to stabilise the flow of gas, especially in case of disruption to supply.

How important will environmental and social considerations be to the due diligence process?
They are key. These issues cannot be secondary: there must be a thorough due diligence with adequate public consultations. Everyone must be heard and the environmental and social impact of the Nabucco pipeline must be determined and properly mitigated.

This is an area where the EBRD clearly has the lead: all the meetings on Nabucco’s social and environmental due diligence that have taken place since late 2009 have been held at the EBRD and have been led by our Environment and Sustainability Department. Our expertise is widely recognised.

The EBRD developed very important know-how in this field when it financed the Baku-Tbilisi-Ceyhan pipeline. That project showed the importance of conducting early due diligence to identify any problems and of mitigating them as soon as possible. It also demonstrated the importance for the early involvement of IFI’s in multinational projects where different legislations need to be taken into account.

Given that the EBRD is considering financing just a small percentage of Nabucco’s total project costs, how much influence will it have over controversial issues such as environmental or social impact?
The EBRD is very listened to thanks to its recognised expertise in these kind of projects, not only from the social and environmental viewpoint but also from the viewpoint of financial structuring. The amount we are considering financing allows us to have our voice heard without taking excessive risks.

What happens next?
In co-ordination with the other IFIs, we will start hiring consultants and advisers. Under our supervision they will start the due diligence process, which we hope should lead to financial closing of the Nabucco project by late 2011 or early 2012. If all goes well, the first gas could flow in 2015.