The Iraqi government on Monday rejected an $8 billion Kurdish plan to fill the Nabucco pipeline with gas for Europe, a major setback to a project designed to reduce the continent's reliance on Russian energy.
Opposition in Baghdad to the deal to obtain gas from Iraq's Kurdistan region hands Russia the initiative as it races to complete its own alternative to the Western-backed pipeline and tighten its grip on European energy markets.
"We will not allow any side to export gas from the region without the approval of the central government and the Iraqi Oil Ministry," Iraqi Oil Minister Hussain al-Shahristani said, a day after EU and Arab firms unveiled their plan to pump Kurdish gas.
The European Union, which takes one-quarter of its gas from Russia, is keen to find alternative suppliers as Moscow has cut off supplies to the continent in recent years after rowing with ex-Soviet transit countries, mainly Ukraine, over price.
Russia, the world's largest energy supplier, wants to build its own routes to bypass Ukraine and has rebuked the United States and former Soviet satellite nations for backing Nabucco.
Its South Stream project, due to start by the end of 2015, moved ahead in the race by securing support from four European transit countries on Friday.
"I consider South Stream to have every chance of being realised earlier than Nabucco," Russian Energy Minister Sergei Shmatko said. "Nabucco has a range of issues which still need to be resolved: transit, the resource base and the cost of gas."
Nabucco had political backing but little gas to sell until two of its shareholders, Austria's OMV (OMVV.VI) and Hungary's MOL (MOLB.BU), joined up with the United Arab Emirates' Crescent and Dana Gas (DANA.AD) to source supply from Iraq's Kurdistan.
This project could now supply enough gas to kick-start the project and supply Europe by 2014.
"It's an important and promising development for the acquisition of a huge volume of natural gas for Turkey and for Europe via Nabucco," Nabucco Managing Director Reinhard Mitschek said of the deal, which could put the plan a year ahead of South Stream.
"The competition between South Stream and Nabucco is hot," said Agata Loskot-Strachota, energy security analyst at the Warsaw-based Centre for European Studies. "If the projections made...are confirmed, this deal gives a strong push to Nabucco."
The scheme to pump gas from Iraq's Kurdistan still needs to surmount political and operational obstacles.
"I don't think there will be a compromise between the Baghdad government and the KRG (Kurdish Regional Government) because they are a clear violation of the constitution," said Dr Abdul Rahman al-Mashhadani at Baghdad's Mutsansiriya University.
Iraq would supply Europe from another field, the Akkas field, the government spokesman said. Iraq expects enough gas from that field could be produced for export to Europe by 2014.
Iraq has criticised oil and gas contracts the KRG has signed with international oil companies, calling them illegal. The KRG, which has clashed with Baghdad over draft oil legislation, says the deals are legal and comply with Iraq's constitution.
"Any contract now signed with Iraq is very risky," said Borut Grgic of the Institute for Strategic Studies in Brussels.
There are also questions about reserves. U.S. government data shows the fields only have the reserves to pump for a few years at the 3 billion cubic feet per day the companies want to produce by 2014.
But Iraq's oil and gas reserve estimates are based on old data, and were likely to be revised up as more thorough appraisal of resources is undertaken, analysts say.
The 3,300-km Nabucco pipeline was initially planned to carry Caspian gas via Turkey, Bulgaria, Romania and Hungary to Austria. The first phase of the pipeline was to have capacity of around 1.5 billion cfd, with the second phase double that.
European Commission energy spokesman Ferran Tarradellas Espuny was upbeat on the region's potential. "We consider that in the region there is gas for more than one Nabucco," he said.
But Nabucco has itself seen squabbles between shareholders.
Transit country Turkey, a net energy importer, aims to boost its regional importance and says its strategic position between European consumers and the Caspian justifies its demands to use 15 percent of Nabucco gas for domestic consumption or re-export.
"The dispute with Turkey over transit conditions could delay Nabucco, if it is not solved soon," Bulgarian Economy and Energy Minister Petar Dimitrov told Reuters.
OMV and MOL each have a 16.67 percent stake in Nabucco. Other stakeholders are Bulgaria's Bulgargaz, Romania's Transgaz TGNM.BX, Turkey's Botas and Germany's RWE.