More problems for Russo-German gas pipeline project

Energy Trade

Gazprom’s corporate report for the Q2 of 2007, released on August 14, officially puts the cost of building the Russo-German gas pipeline on the Baltic seabed, known as Nord Stream, at €6 billion.

This means a 50% increase over the €4 billion figure, on which the project was politically sold in Germany in October 2005. Gazprom then unofficially raised the cost estimate to €5 billion in 2006, but it was widely believed even then that the real figure could be far higher. Underestimating the figure seems politically expedient in Germany for the project’s initiators. The high costs and predictable overruns would probably have to be covered from government loan guarantees, as arranged at the outset by then-Chancellor Gerhard Schroeder - that is, ultimately at taxpayer expense.

According to Nord Stream’s media office, tenders for steel pipes and for one or more pipe-laying ships are to be announced before the end of 2007, This could delay the start of construction by one year at a minimum. The tender’s bid-submission deadline for steel pipes had already been postponed from January to May. Moreover, the pipeline’s proposed route has become a subject of intense controversy that planners had apparently not anticipated.

After Finland asked the Nord Stream company to shift the route farther away from the Finnish coast (a move that may give Estonia a say or even more than a simple say), Poland has demanded that the route around the island of Bornholm be shifted to the north - that is, closer to the Danish coast than to the Polish one. Moreover, Sweden has asked the Nord Stream company to give up the idea of building a compressor station near the Swedish island of Gotland.

The company is duly considering the Finnish and Polish requests; awaiting Estonia’s response by October; and in deference to Sweden has decided to build a single, if gigantic, compressor station, on Russian land at the point of origin of the pipeline. All of this will necessitate new planning, delays, and additional costs. Littoral countries along the route must now consider the implications of new Russian legislation that authorizes Gazprom, Transneft, and other state monopolies to create quasi-military units. Such units would be tasked to protect these companies’ assets and infrastructure.

The two chambers of Russia’s parliament adopted this legislation in July and President Vladimir Putin signed it on August 1. This development adds to earlier hints that the Russian Navy might seek to „assist” in protecting the pipeline or use its submarines for seabed exploration and construction. Littoral countries might ask as a minimal precaution that the pipeline be routed through waters shallow enough to preclude intrusion by submarines.

Moscow’s heavy-handed approach raises security concerns that can stand in the way of the project. Meanwhile, Gazprom’s two German partner companies in this project are coming under Russian pressure. E.ON Ruhrgas and BASF subsidiary Wintershall each have a 24.5% stake minus one share in the Nord Stream pipeline project, to Gazprom’s 51%. The same percentages apply to the Siberian gas-extraction project at Yuzhno-Russkoye, a source of the gas to be pumped through the Nord Stream pipeline.

Wintershall had to buy its entry to Yuzhno-Russkoye by consenting to share lucrative gas distribution networks in Germany with Gazprom, through a joint company (Wingas). At present, Wintershall is in discussions with Gazprom on sharing the German company’s stakes in extractive projects in the North Sea and Libya. Moreover, Wingas has already contracted for 9 billion cubic meters of gas from the future output of Yuzhno-Russkoye, despite the uncertainties involved the extractive and transport project.

In common with some other Western companies, Wintershall seems to feel hostage to its Russian investments and partnerships. For its part, Ruhrgas risks sliding from a potential hostage situation into a Trojan horse role for Gazprom in several countries. The entry of Ruhrgas to Yuzhno-Russkoye, under negotiation since 2005, has not been finalized. Gazprom demands (along the lines of the Wintershall model) shared ownership in Ruhrgas’ vast, highly lucrative gas and electricity distribution networks in Germany.

Ruhrgas, however, is offering to swap some of its assets in third countries, notably gas distribution networks in Hungary, with Gazprom for „access” to the Yuzhno-Russkoye project. Meanwhile, Gazprom wants to take over some Ruhrgas stakes in electrical power firms in Britain, as part of such a swap. According to some Ruhrgas managers speaking on background, „They [Gazprom] want more and are getting more.” Entering the British energy market and industry is a priority for Gazprom.

The British gas market is one of the Nord Stream project’s targets. In this regard, Gazprom may face a setback along the possible route in Belgium. On August 13, Belgium’s energy competition authority, CREG (Regulatory Commission on Electricity and Gas), turned down key elements of Gazprom’s project to build an underground gas storage site in that country. Gazprom had recently proposed to extend the Baltic seabed pipeline into the North Sea and use Belgium as a „regional hub” for gas transmission to nearby countries, including Britain, across the Channel.

To that end it has joined with the Belgian gas distribution company Fluxys to build the storage site at Poederlee and envisages laying a seabed pipeline from Belgium’s Zeebrugge to the English coast for Gazprom. However, on August 13 CREG ruled against the proposed 25-year duration of the storage deal and also against exclusive use of the site by Gazprom for any duration. The Commission found that such features contravene existing anti-monopoly legislation (jamestown)

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