- June 14th, 2011
European Natural Gas Pipelines Plagued by Uncertainties
Could the plan to build the world’s most expensive natural gas pipeline turn out to be an elaborate bluff?
South Stream, backed by Gazprom, the monopoly exporter of Russia’s natural gas, would run underneath the Black Sea and deliver large amounts of fuel to the European Union, sometime in the second half of this decade.
Despite years of promotion, the cost and even the exact route for South Stream are still unclear. Nevertheless, the plan already has served a valuable purpose for Russia by casting further doubt on the viability of rival projects that would loosen Moscow’s grip on the European market. It has also weakened the bargaining power of middlemen like Ukraine that have sought to cash in on their strategic location.
“More than ever South Stream looks like an implausibly huge and risky investment,” said Christian Egenhofer, an energy expert at the Center for European Policy Studies, a research group in Brussels. “But the more that South Stream appears real, the more that Russia can beguile Europe into thinking that alternatives to Russian gas are unnecessary.”
The European Union relies on Russia for about 25 percent of its natural gas, and that dependency is likely to increase unless it secures alternative supplies.
In 2006, after Russia turned off the flow to Ukraine in the dead of winter, the European Commission cranked up plans developed a few years earlier to build a pipeline, called Nabucco, that would deliver gas to Europe from the Caspian region and bypass Russia.
A year later, Gazprom and Eni, a major Italian energy company, introduced plans for South Stream. At the same time, Russia also has sought to deny Nabucco vital gas supplies in Asia and woo away its customer base in the West, in a contest that has been compared with the intricacies of a chess game.
In one instance in 2007, Vladimir V. Putin, then the president of Russia, agreed with the leaders of Turkmenistan to build a new pipeline north, to Russia, depriving Nabucco of potential supplies of gas.
Two years later, Mr. Putin traveled to Turkey to secure an agreement allowing Gazprom to carry out environmental and seismic tests necessary for building South Stream, just one month after European governments signed a transit agreement with Ankara for Nabucco.
It is no surprise, therefore, that both projects remain plagued by uncertainties. One big reason for skepticism is the cost.
The South Stream bill is estimated to be at least 15.5 billion euros, or $22.3 billion. That is about double what Nabucco was expected to cost, at least initially, largely because Nabucco would not run under such a large body of water as the Black Sea, and because Nabucco would carry less gas.
Many analysts say that they expect Gazprom, the most important backer, to revise South Stream’s price tag upward this year, as the prices for necessary commodities like steel and cement climb.
At the same time, new sources like shale gas and liquefied natural gas are putting downward pressure on natural gas prices, making it harder for potential investors to forecast adequate returns.
Nabucco will have to deal with similar pressures. But it also would have public backing, including exemptions from European Union rules requiring it to share its infrastructure, as well as financing from the European Investment Bank.
Marcel Kramer, the Dutch-born chief executive of South Stream, denied during a recent interview that his pipeline was little more than Moscow’s attempt to squash Nabucco.
“To do such a major exercise as a sort of defensive move would be highly irrational,” Mr. Kramer said. “There is no doubt that this is very serious, and money is being spent — considerable amounts of preparatory money is being spent — by Gazprom itself.”
Mr. Kramer emphasized that a growing number of blue-chip European energy companies including EDF, the French utility that is Europe’s largest electricity company, and Wintershall, a German oil and gas unit of BASF, were already expressing support for South Stream, showing that it was a “project of European interest.”
The main question for Europe, however, is the source of the gas, not who owns the pipeline.
Disputes between Russia and Ukraine — long the established route for sending Russian gas to Europe — have led Gazprom to cut supplies in the past five years, leaving downstream parts of Europe without enough fuel to heat homes in winter.
Since then, European leaders have made finding non-Russian sources a priority.
Nabucco has been plagued by one delay after another, however, largely because the consortium of energy companies behind it has no firm supply contracts lined up. That makes it more difficult to secure financing.
Reinhard Mitschek, the managing director of Nabucco Gas Pipeline International, said last month that gas should start flowing in 2017, three years later than was originally planned. But he did not announce any firm deal with a supplier. Talks with the Azeri government to obtain gas from the Shah Deniz II field in Azerbaijan, for example, have so far not yielded a solid commitment.
In fact, Russia has long held influence in the Caspian region and wants to tap natural gas there, too. Iraq also could choose to export its gas in liquefied form to world markets rather than sending it through pipelines to Europe.
South Stream is already serving to “sow doubts among central Asian countries about the viability of Nabucco,” said Mr. Egenhofer, the energy expert.
South Stream’s backers say that Europe needs to reinforce its access to Russian gas at a time when Europe’s domestic production, in areas like the North Sea, is falling and unrest in the Arab world is raising questions about reliability from sources there.
Countries like Germany also may end up driving demand for gas higher by shuttering nuclear power plants in the wake of the nuclear disaster at the Fukushima Daiichi plant in Japan, countering suggestions of possible oversupply.
“There are several reasons to think the market will tighten again,” said Paolo Scaroni, the chief executive of Eni, the joint-venture partner with Gazprom in South Stream, speaking last month in Brussels at a promotional event for South Stream.
Yet despite reporting a profit of around ¤19 billion in 2010, Gazprom faces its own financing challenges.
Gazprom and the Russian government are pressing the E.U. authorities to relax rules requiring operators like South Stream to open up pipelines to competitors, saying that would affect its rate of return and make the project extremely difficult to carry out.
In the meantime, Gazprom still needs to lock in its European partners.
EDF is looking at the “technical feasibility and viability” of South Stream, Bruno Lescoeur, the head of gas for southern Europe, said in Brussels last month.
Stefan Leunig, a spokesman for Wintershall, said his company was still negotiating the precise amounts of gas it would take from South Stream as part of a deal with Gazprom that could lead to an investment of 1.5 billion euros or more to help build the offshore part of the pipeline.
Sven Pusswald, a spokesman for OMV, an Austrian energy company that is also working with Nabucco, said a definitive study on the cost and the route of the pipeline was necessary “before we’re able to proceed” with South Stream.
With neither South Stream nor Nabucco beginning operations anytime soon, some experts say the real danger for Europe may be continuing to focus on new pipelines rather than improving existing routes.
“Frankly, neither of these pipelines make economic sense,” said Massimo Di Odoardo, a senior global gas analyst at Wood Mackenzie, an energy consulting firm. “It would be much cheaper for Russia and Europe to accept their interdependence and get to work making Ukraine an even more reliable gas corridor.”
Romano Prodi, the former president of the European Commission and former Italian prime minister who turned down an appeal in 2008 by Mr. Putin to lead South Stream, said a decision like that was ultimately one for European leaders.
There was still the possibility that shale gas could “completely disrupt the market,” he said, reducing the need for imports over all. But during an interview, he underlined that reserves of shale gas in Europe — and the public acceptance of the environmental impact of extracting shale gas — were still in question.
The same applies for new pipelines.
“They are not out of reality,” but would require great political will to push either through, he said.
Andrew E. Kramer contributed reporting from Moscow.