Sofia Echo


Heating up

Author: Alex Bivol Date: Fri, May 22 2009 2936 Views
Share: share on Twitter share on Facebook Share on Google+ Share on LinkedIn
Print Send via email

For almost two years, South Stream and Nabucco have been racing each other to become the first pipeline to gas to consumers in Europe without transiting Ukraine. Russia’s latest coup in securing deals with Italy, Bulgaria, Greece and Serbia on May 15 to speed up the work appears to have given South Stream the edge, but was far from a fatal blow to its rival.

Italian prime minister Silvio Berlusconi flew to Sochi, the Russian Black Sea resort that is also the starting point of the pipeline, to oversee the signing of the package of deals with Russian prime minister Vladimir Putin.

The key provision of the addendum to the memorandum of understanding between Gazprom and Italian energy firm Eni was that the maximum capacity of the pipeline would be increased to 63 billion cubic metres of gas a year, double the initially agreed 31 billion cubic metres.

But in its eagerness to secure the deal with Eni, as well as agreements outlining the "principles of interaction between the parties in relation to the feasibility studies" with the three transit countries, Gazprom had to make a number of concessions.

With Eni, Gazprom agreed to the Italian firm’s demands for joint gas marketing, even though it initially wanted Eni to sell gas only in Italy. Eni said it would sell 12 billion cubic metres a year from South Stream in the transit countries, Reuters reported. Furthermore, Gazprom agreed to buy, at a premium, gas assets owned by Eni and Enel in Russia.

In Bulgaria’s case, Gazprom also had to drop its request to incorporate some of Bulgaria’s existing pipelines into the South Stream network. The Russian energy giant said it would allow to cut project costs, but in Bulgaria it was seen as a covert attempt by the Russian firm to acquire a stake in Bulgaria’s gas distribution network.

In the end, Gazprom said that it agreed to the demands because they made economic sense. "Activities around Nabucco are being initiated by politicians, often from across the Atlantic, because it is a political, not an economic project," the energy giant said in a statement, as quoted by Reuters.

"Some European politicians, mainly from new European Union members, are against expansion of new offshore pipelines. The genetic memories of their dependence on the USSR do not allow them to weigh all the pros and cons of such projects," Gazprom said.

Having experienced halted deliveries twice in three years because of pricing disputes between Russia and Ukraine, the EU wants to diversify its sources of gas, not only transit routes. Moscow argues that providing alternatives to the Soviet-era pipelines passing through Ukraine will be enough to improve European energy security.

The EU gets a quarter of its annual consumption of 600 billion cubic metres from Russia and the two South Stream shareholders moved to squash any fears that the pipeline would further boost Gazprom’s market share. "Most of this gas will substitute gas currently crossing Ukraine, and some new gas," Eni chief executive Paolo Scaroni said at the signing ceremony, as quoted by the Wall Street Journal.

Nabucco strikes back
Two days after Gazprom pulled ahead in the race, Nabucco’s shareholders countered with their own major leap. Austria’s OMV and Hungary’s MOL said on May 17 that they struck a deal with United Arab Emirates firms Crescent Petroleum and Dana Gas, which operate fields in the Kurdistan region of Iraq, to supply the pipeline after meeting local demand in northern Iraq and Turkey.

OMV said it would pay $350 million for a 10 per cent stake in the company developing the fields and MOL would give up six per cent of its shares in exchange for a 10 per cent stake.

MOL will give three per cent of its shares each to Crescent and Dana. In return, MOL will also take 10 percent in the joint venture.

The Khor Mor and Chemchemal gas fields in Kurdistan had enough reserves to "satisfy the requirements of local industry with substantial quantities available for export to destinations primarily Turkey and Europe via the planned Nabucco pipeline," OMV said in a statement.

"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, as quoted by Reuters.

OMV and MOL jointly own 33.3 per cent in Nabucco. The rest is equally split between Bulgaria’s Bulgargaz, Romania’s Transgaz, Turkey’s Botas and Germany’s RWE.

The pipeline was initially planned to carry Caspian gas through Turkey, Bulgaria, Romania and Hungary to Austria. The project, on which construction is meant to start in 2011 with the first gas deliveries planned for 2014, is intended to deliver 15 billion cubic metres of gas a year through a 3300km pipeline, doubling to 31 billion cubic metres at full capacity.

South Stream, with a submerged portion of 900km under the Black Sea and 2300km from Bulgaria to Greece and Austria, is scheduled to make its first deliveries in 2015.

Despite unwaivering political support and a five-year head start on South Stream, Nabucco shareholders have not secured enough gas to fill the pipeline. The deal in Kurdistan is far from a certain shot either.

"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, as quoted by Reuters on May 18.

Opposition in Baghdad and squabbles with Ankara about transit conditions may yet scupper Nabucco’s progress, as Russian officials are all too eager to point out. "I consider South Stream to have every chance of being realised earlier than Nabucco. Nabucco has a range of issues which still need to be resolved," Russian energy minister Sergei Shmatko said on May 18. "I don’t think the partners who will supply the resource base for Nabucco will be too liberal on price."

Even if it takes doubling South Stream’s capacity, Gazprom looks willing to make the gamble that would persuade potential Nabucco suppliers to chose its rival instead.

Pipe dreams
Russia and Italy’s plans to build the world’s largest underwater gas pipeline was based on shaky economics, Russian business daily Kommersant said on May 18. Looking in-depth at the scant details of the deals signed three days earlier, the daily dismissed the new estimates of the project costs – $8.6 billion versus the earlier 25 billion euro – as irrelevant. The costs cut and the capacity increase proved only that Russia was determined to leave Nabucco not even scraps.

Even the technocrats involved in the negotiations were caught unawares by Putin and Berlusconi’s decision to increase the capacity of the underwater stretch of the pipeline, the daily said, while independent analysts were surprised by the new dimension of the project.

Based on the costs announced for South Stream’s twin project in the Baltic Sea, Nord Stream, South Stream costs outside Russia would be at least $32 billion, Kommersant quoted Mihail Korchemkin, head of consultancy firm East European Gas Analysis, as saying. In an investor meeting in February, Gazprom’s own estimates were in the 19-24 billion euro range.

Gazprom had few new customers that could buy some of the added capacity, certainly not enough to justify the extra supply, Kommersant said, quoting an unnamed company source. Some of the excess capacity could be used by diverting it to boost the Blue Stream pipeline to Turkey, as agreed by Putin and Turkish prime minister Recep Tayyip Erdogan on May 16, just a day after the signing of the South Stream package.

Ultimately, the goal was to impress Europe and dwarf the importance of Nabucco, Kommersant quoted Valeriy Nestorov from investment bank Troika Dialog as saying. If Nabucco had difficulties securing supply, South Stream was likely to run into the opposite – finding enough demand – considering the number of transit contracts Gazprom already had, Nestorov said.

  • Russia starts delivering gas to Europe through Nord Stream pipeline
  • Bulgaria, Russia agree on new talks on gas, South Stream and Belene
  • Nabucco deal to be signed July 13
  • Lessons learnt
  • Gas chamber
  • Tensions about South Stream, but energy summit ‘a success’
  • To post comments, please, Login or Register.
    Please read the The Sofia Echo forum comments policy.