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June 08, 2007 (the date of publication in Russian)

Sergey Pravosudov

RUSSIA DOES NOT FEAR COMPETITION

Russia's interests at the European energy markets will be secure in any option of gas transit

The situation at Europe's energy market continues to escalate. EU officials are persistent in their intention to diversity sources of delivery of "blue fuel". For the last several years, the major alternative to the existing Russian transit routes was the Nabucco project, supposed to connect vast gas provinces of Central Asia along the bottom of the Caspian via Azerbaijan and Turkey and further across the Black Sea with Western Europe. However, these plans appear unrealistic. The excessive costs of construction are multiplied to tariff ambitions of the whole multitude of involved states, as well as various political tensions, particularly the debate over Turkey's entry in the EU. Before all the contradictions could be resolved, Russia managed to reach accord with Central Asia states, proposing a viable alternative of a major gas pipeline, connecting the massive gas deposits of Turkmenistan and Kazakhstan with Russia, and involving Uzbekistan into related projects.

Previously, the three mentioned countries of Central Asia were supposed to serve as the major source of fuel for the Nabucco project. Today, the Nabucco route can rely only upon the reserves of Azerbaijan. In 2006, this country extracted only 6.8 billion cubic meters of gas. Most of this amount was used for domestic needs, due to Azerbaijan's decision to refrain from Gazprom's gas imports.

Azerbaijan hopes to increase extraction from the Shah-Deniz shelf deposit. However, the present year's output is unlikely to exceed 3 billion cub. m, with a perspective to reach 8.9 billion by 2009. These amounts are too obviously insufficient even for spacefilling the recently constructed Baku-Tbilisi-Erzurum pipeline, not speaking of Nabucco. A large share from his amount is going to be used by Georgia, also due to its reluctance to depend on Gazprom's imports. Meanwhile, Turkey is not much interested in deliveries from Azerbaijan, as Ankara had signed a favorable contract on increased purchase of Russian gas along the functioning Blue Stream pipeline.

The Nabucco project, involving Austria's OMV, Hungary's MOL, Turkey's Botas, Bulgaria's Bulgargaz and Romania's Transgas, was supposed to supply Turkey, Romania, Bulgaria, Hungary, and Austria. The amounts of Azerbaijan's gas are obviously insufficient to satisfy these countries' demands, while the costs minimize transit incomes. Meanwhile, Russia is going to expand the functioning Blue Stream to Eastern and Southern Europe. Hungary's Prime Minister Ferenc Gyurcsány expresses his judgment as follows: "Nabucco is an old dream and a long-discussed plan. However, economy requires not dreams but realistic projects. By now, the only missing detail in the Nabucco story is the time by which it could be successfully used. If anybody could tell me: By this precise time, you would have gas – that would be wonderful. One can't heat apartments with dreams".

No wonder that Hungary's MOL has joined Gazprom's project on expansion of the Blue Stream pipeline network. Another key partner of the Nabucco project, OMV, also seeks partnership with Gazprom.

During the recent visit of Vladimir Putin to Austria, the two companies signed a memorandum on partnership. The sides confirmed the plans of Gazprom's involvement in the Central European Gas Center. This enterprise, today OMV's 100% daughter company, based in Baumgarten, is one of the largest distributing facilities of Europe. In 2006, it performed distribution operations with an amount of 7.7 billion cub. m of natural gas. Gazprom and OMV also agreed on cooperation in underground storing.

Next day after the memorandum was signed, Gazprom's top management participated in the opening ceremony of the Haidach gas storage. This facility was constructed jointly by Gazprom, Germany's Wingas (in which Gazprom's share is going to increase from 35 to 50 per cent), and Austria's RAG. The volume of the new storage (the first of the two) comprises 1.2 billion cub. m, the daily productive capacity reaching 12 billion cub. m. The second stage of the project will be completed by April 2011. For Gazprom, underground storages in Europe are of great importance, as they enable to avoid transit risks and increase deliveries in the winter time when gas is most expensive.

It is noteworthy that OMV is the first European company to have started purchasing gas from Russia as long ago as in 1968. Since 1991, a large share of Russian gas was sold in Austria by GVH, an equal-share joint venture of Gazprom and OMV. The presently fulfilled contract between Gazprom and OMV is valid until 2027. Since 2006, Gazprom also delivers certain amounts of gas directly to a number of Austrian consumers.

During the last year, OMV encountered strong pressure from the European Commission which kept insisting on liberalization of access to the European gas transport infrastructure. A number of companies, having no gas reserves of their own, offer their services on delivery of Gazprom's gas across Austria. It is quite understandable that the Russian corporation prefers to deal with old and reliable partners than with evanescent traders. Therefore, Gazprom and OMV signed a contract on expansion of the transit capacity of OMV's WAG pipeline by 4 billion cub. m and a contract, suggesting annual import of the relevant amount of gas till 2027. In this way, Gazprom and OMV fend off EC pressure.

Potentially, the two key consumers of gas from the South European Pipeline, a branch of Blue Stream, are to be Italy and Greece. The Russian corporation is actively boosting business cooperation with these countries. In early 2007, Italy's ENI allowed Gazprom to directly deliver a portion of its gas to a number of Italian consumers. In its turn, ENI, along with top Italian energy producer Enel, acquired gas assets, formerly owned by Russia's YUKOS, along with a 20% stake in Gazpromneft (former Sibneft), Gazprom reserving an option for buyout of these assets. It is well known that many Western politicians and media had been severely criticizing Moscow for the re-privatization of Yukos, while the former shareholders of the sunken private corporation, persecuted for gross tax evasion along with homicide, threatened to sue the purchasers of the alienated assets. Now, those former owners and their biased political backers will have to address their grudges to major Italian corporations.

The Russian-Greek cooperation has been lately developing in a similarly positive mode. In spring 2007, the sides struck a final agreement on construction of the Burgas-Alexandrupolis oil pipeline, its 51% stake to be divided between Russia's Transmeft, Rosneft, and Gazpromneft. Meanwhile, Prometheus Gas, a 50% ownership of Gazprom, is expanding its operations in Greece. In this year, the joint-stock company, along with Russia's Stroytransgaz, is going to accomplish construction of a pipeline connecting the gas transit networks of Turkey and Greece. Thus, the Blue Flow's gas would be conveniently shipped to the Balkans and further to Italy.

Even in an imaginary case of completion of the Nabucco project and Southern Europe's preference of relevant alternative deliveries, Russia’s interests would not be ignored. For instance, since the arrival of Nabucco's gas in Bulgaria, Gazprom will benefit from its transportation across the country, as Gazprom owns a 50% share in Overgaz, Bulgaria's major gas transport company which controls over 75% of local gas distribution and delivers gas to ultimate consumers.

Despite Western media’s allegations that Gazprom's business is "politicized" and serves as Kremlin's "covert weapon", the Russian corporation is ready to cooperate even in project initiated for the very purpose of "securing Europe's energy independence from Russia". For instance, Poland is using all kinds of leverage to impede construction of Gazprom's Nord Stream pipeline along the bottom of the Baltic Sea. Poland's political leadership believes that the direct Russian-German export connection would reduce incomes from transit of Russian gas along the presently functioning pipelines. At the same time, Poland is trying to reduce its own dependence from gas deliveries from Russia, negotiating during a whole decade with Norway on an alternative gas transport route across the same Baltic Sea (thus contradicting to speculations over related environmental hazards). Still, Warsaw has not managed to find strategic investors for this project. In addition, it is well recognized in Warsaw that Norwegian gas would be more expensive than Gazprom's.

Ironically, only Wingas, a co-ownership of Gazprom and Germany's BASF, proposed to assist in delivery of Norwegian gas to Poland. The Russian-German company already delivers gas from the North Sea's shelf deposits to Great Britain. A portion of those amounts may be diverted to Poland. If Warsaw agrees, Poland may join the Opal pipeline, a new project extending along the country’s border. The construction of the 480-km Opal pipeline is supposed to be started in 2008, primarily in order to transport gas from the Nord Stream pipeline to Southern Europe. Its capacity (the diameter of the pipe reaching 1.4 m) will enable to absorb gas also from other regions of extraction, including the North Sea. The government of Germany supports these plans, in order to appease Warsaw and mitigate its warring opposition to any forms of direct Russian-German energy cooperation. Now, it is Poland's turn to respond.

Sergey Pravosudov is the Director of National Energy Institute, Moscow


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