South Stream pipeline capacity to be doubled

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.

Uchenna Izundu
OGJ International Editor

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.

Earlier this week, Russian Energy Minister Sergei Shmatko told reporters, "I consider South Stream to have every chance of being realised earlier than Nabucco." Gazprom has denied that Nabucco is a competitor because it has its own market and partners, and according to its forecasts, Europe will require a minimum of 100 billion cu m of additional gas by 2015.

Gazprom has also pushed South Stream's 2,000 km development by signing deals with transit states Bulgaria, Greece, Serbia, and Italy for the construction of the €8.6 billion line. The agreements with the Bulgarian Energy Holding Co., Greece's Desfa and Serbia's Srbijagas outline preinvestment cooperation and the need to set up joint ventures to design, build and maintain the pipeline in their territories. The JV will carry out feasibility studies in each state focusing on detailed assessment of all technical, legal, financial, environmental, and economic factors.

Gazprom will hold 51% in the joint venture with Serbia while Srbijagas will hold 49%. With Bulgarian Energy Holding, each company will have independent investment decisions on South Stream based on the results from their feasibility studies.

Gazprom Chief Executive Alexei Miller said the pipeline would be launched on Dec. 31, 2015, but efforts would be made to start earlier if possible. Russian Prime Minister Vladimir Putin and his Italian counterpart Silvio Berlusconi were present during the signing of the agreements. According to press reports, Russia is willing to buy all the gas from the Shah Deniz project in Azerbaijan to underpin its projects.

Nevertheless other challenges also surround South Stream such as the multibillion investments required to develop Russia's huge gas reserves, the majority of which in the remote Yamal region of northern Siberia. The economic downturn has made it very difficult to determine future gas demand and the gas liberalization process in the EU also raises complications.

Gazprom's profits have been affected by the slump in gas demand and gas prices and finding money to develop South Stream could now be especially problematic.

Gazprom and Eni have established a joint venture to construct the pipeline that will be laid under the Black Sea to Bulgaria, Greece, Serbia, Hungary, and Italy. Putin told reporters that he hoped Russia's relations with other European countries would be favorable like that it had with Italy.

Contact Uchenna Izundu at uchennai@pennwell.com.

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