by Kaweh Sadegh-Zadeh

This article is based on a paper published in OGEL’s special feature on Energy Security in November 2007.
Kaweh Sadegh-Zadeh is currently a Russia, Central Asia and Caucasus analyst with Wood Mackenzie. The views expressed here is that of the author and should not be taken to represent the position of Wood Mackenzie.

In Russia’s energy strategy Europe is described as the single most important energy market in the coming 20- 25 years. However, the problem with gas exports to Europe is that gas pipelines have to cross the territory of transit countries. Recent gas conflicts with Ukraine and Belarus have convinced Moscow that it needs to decrease its dependency on transit countries as much as possible and diversify export routes. To reach this objective, Moscow has began involved in building and planning several transit-avoiding pipelines. These so called ‘surplus pipeline capacities’ will enable Russia to switch gas export routes and limit the leverage of transit countries. The construction of the Yamal-Europe and the Blue Stream pipeline were the first steps towards that objective. Currently Gazprom is involved in two other major pipeline projects: the Nord Stream and South Stream pipelines.


NORD AND SOUTH STREAM PROJECTS
The Nord Stream pipeline is scheduled to be finished by 2010 and is a joint venture between Gazprom and two German companies, BASF and E.ON. It will stretch through the Baltic Sea from Russia’s Vyborg to Germany’s Greifswald with an initial capacity of 27.5 bcm/year and the possibility to add a second parallel pipeline increasing the capacity to 55 bcm/year by 2012. Most of the gas will be supplied from the Yuzhno-Russkoye field in the Nadym-Pur-Taz region,which has proved reserves of over 700 bcm. Supplementary gas can be supplied from fields in the Yamal-Peninsula and Ob-Taz bay region as well as the Shtokman field in the longer term.
In addition to the Nord Stream, Russia is considering an additional South Stream pipeline to be laid under the Black Sea. In June 2007, plans emerged for a new pipeline with a capacity of 30 bcm emerged as Italy’ ENI signed an agreement with Gazprom to undertake a feasibility study. The companies plan to pump Russian gas produced by ENI and Central Asian gas bought by Gazprom into Europe. South Stream is anticipated to be 3,200 km long running from southern Russia 900 km under the Black Sea to the Bulgarian coast. From Bulgaria it could take either one or both of two routes: 1,000 km to Greece and then to Italy or 1,300 km north to central European markets. The estimated costs of the project are as high as $13 billion and are likely to be even higher. As with Nord Stream, the South Stream has a political dimension with a key aim of decreasing Russia’ dependency on transit countries. There are also some economic advantages. Transit fees are minimised due to the fact that South Stream will connect Russia directly to EU territory. Secondly, by avoiding transit countries with a history of unauthorized gas extractions it will curtail the risks of illegal siphoning. The South Stream route is commonly perceived to be in direct competition with the Nabucco project. Nabucco was planned by European energy companies headed by Austria’s OMV as a transit avoidance route of a different nature. The idea was to establish a new pipeline route connecting Europe with Caspian and Central Asian gas resources but bypassing Russia. However as ENI and Gazprom plan to realise their South Stream project in less than three years, the Nabucco project was unlikely to prove competitive. More so as the Kremlin already signed agreements with Serbia, Greece, Bulgaria and Hungary. But the Nabucco project has not moved beyond its initial planning stage and therefore is not really in serious competition with South Stream. Even by mid-2008 it remained somehow unclear where Nabucco – with a planned capacity of 30 bcm – would get its gas from and which markets it would serve. In contrast to that South Stream has established access to both: gas resources and markets.


GAZPROM'S DOWNSTREAM MARKET EXPANSION
As well as diversifying export routes and adding surplus pipeline capacity to its most lucrative market, Russia is keen on acquiring downstream assets in Europe. Gazprom has made clear that it does not want to be limited to sell gas to European energy companies but is strongly interested in reaching the consumer market directly. By selling gas to the end user Gazprom hopes to raise its profits two to three fold. The company has already been engaged in deals with BASF, E.ON, Gaz de France and ENI allowing the company to reach the end consumers in the respective countries. Gazprom’s investments have remained quite modest even though they have caused some critical reactions from European journalists and politicians who fear that these investments will adversely affect Europe’s energy security.


CONCLUSIONS
Russia’s energy strategy has caused anxiety in Europe about its strengthening grip on European gas supplies and downstream assets. Growing concerns over Russia’s reliability as a gas supplier have encouraged political support for pipeline routes to carry gas from the Caspian Region to Europe and bypassing Russia. Russia’s pipeline strategy has been successful and resolute, undermining European efforts to diversify. President Putin has pointed to its pipeline strategy as proof of Russia’s commitment to European energy security. Nevertheless, it has re-kindled fears of aspirations to exert greater control on its European consumers. This fear has been exacerbated by Gazprom’s plans to expand into the European downstream sector.
Whilst Russia’s strategy has proved successful so far, the dynamics of the situation could change even now, if the European Union is sufficiently determined to promote and support diversification plans.