South Stream pipeline capacity to be doubled

Uchenna Izundu writes for Oil and Gas Journal

 LONDON, May 21 -- Eni SPA and OAO Gazprom plan to double the capacity of the South Stream pipeline to 63 billion cu m/year. The line will deliver Russian gas directly into Europe by December 2015 under a new agreement.

The original capacity was slated at 31 billion cu m/year and signifies their commitment to diversify gas supply routes following Gazprom's price spat with Ukraine earlier this year which stopped flows into Europe (OGJ Online, Jan. 2, 2009).

Although the European Commission is keen to promote supply diversity, its preference lies with the proposed 31 billion cu m/year Nabucco pipeline, which would bypass Russia, and is slated to come onstream in 2014. However, there is no firm gas production committed from the Caspian and Middle East and financing is another key challenge. The European Commission has been earnestly trying to garner the necessary political support from the transit countries, including Turkey (OGJ Online, May 14, 2009). Only Azerbaijan has agreed to support Nabucco and Kazakhstan, Turkmenistan, and Uzbekistan—owing to political pressure from Russia—have declined.

Iran is another potential gas supplier, but tensions between Washington and Tehran over Iran's nuclear program, means that it is difficult for Europe to pursue this option.

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Here is how Moscow sees the issue:

Problems in the pipeline

Ed Bentley

The new Great Game in energy politics - the race between Gazprom's South Stream pipeline project and the European Union's planned Nabucco route - is escalating as countries are increasingly being pushed to take sides.

In the latest developments, Italy's Eni agreed to double South Stream's capacity and Gazprom offered to buy Azeri gas in a deal that would be a major blow for Nabucco, while a tentative EU-backed deal to pump gas from Kurdish-controlled northern Iraq faltered after Baghdad vetoed the plan.

The $8 billion deal with Kurdistan could have seen Nabucco pumping gas by 2014, a full year before Russia's rival South Stream project.

Alexander Medvedev, deputy CEO of Gazprom, told Bloomberg television that it could buy all the gas from the Shah Deniz-2 field, which many had previously thought would be used for Nabucco. However, the reasons for the Russian monopolist's interest in Azeri gas remain unclear as it would be unlikely to make a profit on the Caspian Sea field.

"We believe that Gazprom would buy this gas with the main aim of providing trouble-free gas supply to Europe," said Natalya Milchakova, senior oil and gas analyst at financial company Otkritie. "Nevertheless, we do not rule out that the government, as Gazprom's controlling shareholder, could force the company to adopt such a decision in order to offset the potentially competing Nabucco project."

Gazprom is losing around 20 per cent of its income on gas from Central Asia as it is paying more than the export price to Europe and has also had to cut back on highly profitable domestic production due to the decrease in demand.

"Azeri gas is too expensive to be sold domestically, so it can only be re-exported," Mikhail Korchemkin, managing director of East European Gas Research, wrote in an e-mail. "To re-export Azeri gas, Gazprom needs to cut down exports of Russian gas, the main source of its profit."

Gazprom has denied that the offer is connected with Nabucco, stating that it is a long-term plan to increase the reliability of its deliveries and diversifying its export portfolio.

"Russia and Azerbaijan are connected already with a developed gas-transport infrastructure," Gazprom's press office wrote on Thursday in an e-mailed response to questions. "The contract negotiations about purchasing Azerbaijani gas are a logical step not connected with the project Nabucco and directed towards the development of bilateral cooperation in the field of power."

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