Gas pipelines

Monday, June 01, 2009

The politically charged race to build a new natural gas pipeline into southern Europe is hotting up.

An agreement this month by Gazprom and Italy’s Eni to double the capacity of their South Stream project to pipe Russian gas under the Black Sea would enable it to carry a 10th of annual European Union demand. Gazprom simultaneously signed deals with Bulgarian, Greek and Serbian partners to build onshore branches to central Europe. Two days later, the rival EU-backed Nabucco project, aimed at bringing gas from the Caspian Sea and Middle East, hit back. Austria’s OMV and Hungary’s MOL, two Nabucco partners, took stakes in two gas fields in Iraq’s semi-autonomous Kurdistan.

These might yet provide enough gas to get Nabucco – which has struggled to sign up suppliers and customers – off the ground. Years-old published reserves figures suggest that the Kurdish fields are of modest size. But the developers insist latest surveys indicate they could fill half Nabucco’s annual capacity. They say Iraqi oil ministry warnings that Kurdistan can export only with Baghdad’s consent are legally unfounded. If Nabucco can add the Kurdish gas to Caspian gas from Azerbaijan it has already contracted, it might start raising its $10bn financing. But getting there will be tortuous.

South Stream, by contrast, edges towards reality. It already has supplies and customers, and Gazprom has methodically stitched together agreements with transit countries. It is cheekily suggesting Brussels should designate South Stream, just as Nabucco, a “priority project”. The EU might have to consider it; after all, several member states – including those hardest hit by Russia’s New Year gas spat with Ukraine – are backing it. Neither project, however, will be completed for years. Russia, meanwhile, is hinting at another winter showdown if Kiev struggles to pay its gas bill. Alongside its Nabucco efforts, the EU needs to invest a lot more in storage capacity and connections between gas networks to avoid more January shivers.

This story was featured on The Financial Times Website.

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