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Gazprom's Dream Pipeline to Europe

In northern Russia, where vast deposits of natural gas lie waiting to be tapped, Gazprom, the state-owned Russian energy giant, is hatching a multibillion-dollar strategy that would lock a swath of Europe from Germany to Britain into long-term delivery contracts, in a move that would bypass Ukraine and Belarus and anchor Russia to Europe more closely over time. Gazprom has been seeking European partners to pay for a new underwater pipeline originating near St. Petersburg and going to Germany, and then potentially continuing on to Britain whose price tag is estimated at between $8 billion and $10 billion.

Despite the enormous cost, analysts say the proposed supply line will not be big enough to meet Europe's demand for gas in the next decade. Furthermore, there is a cheaper alternative for the short term: Existing pipelines could be upgraded to allow greater capacity.

Gazprom says the new pipeline is necessary because it will ensure direct, transit-free and safe deliveries of Russian natural gas into Europe. "The pipeline will connect directly the Russian gas network with the consumer countries in the European Union," a Gazprom spokeswoman, Olga Moreva, said, in response to written questions submitted to the company.

"The pipeline should allow diversifying gas export flows," she added. "It will open a new transit corridor for Russian gas, thus avoiding transit through the countries with unstable economies. This in turn should decrease political risks that currently affect reliability of gas deliveries to Western Europe."

Analysts say there is an underlying political reason for the pipeline. Russia wants to reduce its dependence on Belarus and Ukraine, the two most important transit countries for sending Russian gas to Europe's markets. Eighty percent of Gazprom's current energy exports to Europe use Ukraine as the main transit route. "The North European Gas Pipeline is a political statement by Russia and a very expensive one," said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. "Existing pipelines are operating at undercapacity," he said, and new pipelines will only be needed starting in 2013 or 2015. Arkadiusz Sarna, an energy specialist at the government-funded Center for Eastern Studies in Warsaw, called the pipeline "a project with no economic base."

"The Europeans know this," he said. "There is more a political reason to it. Russia's relations with Belarus and Ukraine are not very good."

Gazprom's earlier experiences with diversifying its transmission routes have not been entirely successful. They have resulted in higher gas prices for consumers, who often bear the costs of building pipelines.

"The estimates for building the North European Pipeline are between $8 billion to $10 billion," said Emmanuel Bergasse of the International Energy Agency in Paris, an independent division of the Organization for Economic Cooperation and Development. "That would ultimately be paid by the consumers. This has turned out to be the case for a similar project: the Blue Stream pipeline built in 2003 between Russia and Turkey below the Black Sea for a cost of $3.2 billion. It is only used at around 10 percent of its capacity."

At a length of 917 kilometers, or 570 miles, the North European Pipeline is designed to have an annual capacity of 30 billion cubic meters, or just over 1 trillion cubic feet. According to Gazprom, European energy consumption will rise considerably over the next five years. But if those estimates prove accurate, analysts say, the pipeline would have a hard time meeting the increase.

Moreva said Gazprom delivered more than 140.5 billion cubic meters to the European market last year. "Under already operating contracts, our exports should grow to 180 billion cubic meters by 2010," she said. Bergasse says Gazprom's strategy is to diversify its export routes. "The North European Pipeline would afford Gazprom control of the pipeline from upstream to downstream. It will also be able to control the price of gas."

Furthermore, entering the European market directly could put Gazprom in a position to lock Europe into long-term contracts, a long-term goal for the company, even as energy markets open to competition across the European Union, analysts said. "Russia wants to diversify its routes and lock into the European markets before the gas markets are completely open," said Ivan Poltavets of the Institute for Economic Research and Policy Consulting in Kiev. "The fear by Gazprom is that the Europeans might try to get cheaper gas from Algeria."

Germany's biggest energy companies all of which have close ties with Russia and increasingly depend on Gazprom for natural gas recently joined a special working group with Gazprom to look at the economic feasibility of the pipeline. All the German energy companies interviewed were cautious about commenting on the viability of the pipeline. But Aleksei Miller, the Gazprom chairman, who was in Germany last month, personally lobbied Chancellor Gerhard Schroder and the energy companies to financially support the project. Schroder, who has been cultivating a close friendship with President Vladimir Putin, is convinced Germany will benefit over the coming decades if it can win privileged access to Russia's vast natural resources, senior officials at the German Chancellery said on the condition of anonymity. They said the move would also bring political benefits because it could anchor Russia to Europe.

German political and financial support is crucial for Gazprom and its majority stakeholder, the Russian state, because Gazprom has run up high debts after a spate of recent acquisitions. But in return for such support, European companies are hoping to gain a foothold in the Russian energy market despite Putin's recent drive to regain state control over the country's main assets.

"Gazprom will need partners for this new pipeline," said Bill McAndrews, spokesman for German energy group RWE, a member of the working group. He said the group would not be finished with its work for several more months. But he stressed RWE's long contacts with Gazprom, saying, "Over 28 percent of RWE's energy is bought from Gazprom, and about 28 percent of Germany's total gas requirements are met by Russia."

Some analysts suggest it would make more economic sense to expand and upgrade the two existing pipelines that cross Belarus and Ukraine. "The capacity of the Belarus line is 20 billion cubic meters," Poltavets said. "But when Russia built it, it built only one pipeline. There is room for a parallel one. That would cost between $1.5 billion to $2 billion."

Poltavets also points out that with some investment, Ukraine's pipeline could be repaired and upgraded to take on more capacity. "The potential of the pipeline is 175 billion cubic meters, yet in 2003 it was operating at undercapacity," he said. "It was dealing with 130 billion cubic meters a year." Gazprom has shown little interest in pursuing either option. In December, Viktor Yushchenko, a pro-European, was elected president of Ukraine, much to the chagrin of Moscow, which had openly campaigned for Viktor Yanukovich.

A month after Yushchenko's inauguration, Miller's high-level Gazprom delegation was in Germany to discuss how the new pipeline could be financed.

Transporting energy carried few risks in the former Soviet Union, when the Kremlin used the Soviet republics of Belarus and Ukraine as the principal transit routes for transporting its natural gas to what was then Communist Eastern Europe and on to Western Europe. Once the Soviet Union disintegrated in 1991, Russian authorities were forced to negotiate each year with the newly independent Belarus and Ukraine the cost of using these transit pipelines.

Ukraine and Belarus tried to reap some of the benefits by charging high transit fees. Yet both countries also are dependent on Gazprom for energy needs. Indeed, when Belarus in 2002 challenged Gazprom's business practices, Russia shut off supplies for several days as a warning.

The incident also pushed Gazprom to consider alternative transmission routes. These are strategic and political considerations that are reminiscent of the power games played in the 1990s over gas pipeline routes in the southern Caucasus. Russia, the former Soviet republics of Turkmenistan and Azerbaijan, Turkey, Iran and the United States have all tried to influence that region's natural gas flows to the West. Poltavets said Ukraine's new government was determined to improve its image as a reliable partner for transporting Russian natural gas to Europe. "Ultimately the new government's aim is to show the international community that Ukraine is reliable and provides a secure and safe transit route," Poltavets said. "In the past, it had a bad reputation. It was accused of stealing gas. It's now about the integrity of the state and its commitment at making those pipelines secure." Indeed, when Yushchenko addressed the Bundestag, or German Parliament, this month in Berlin, he went out of his way to convince his audience that Ukraine would guarantee secure energy supplies to Germany and Europe and that Ukraine wanted good relations with Russia.

( International Herald Tribune )

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