August 16, 2022

News Analysis: European Natural Gas Pipelines Plagued by Uncertainties

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.

That same year, 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.

Article source: http://www.nytimes.com/2011/06/14/business/energy-environment/14pipeline.html?partner=rss&emc=rss

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