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Severe delays and rising costs hamper Baltic Sea gas pipeline

A landmark Gazprom pipeline project intended to bring vital new supplies of Siberian natural gas into Western Europe and, ultimately, Britain is suffering severe cost inflation and delays.

The first gas was expected to flow through Nord Stream by 2010, but completion and testing of the 746-mile (1,200km) pipeline, which runs the length of the Baltic Sea, has been delayed until 2011 and costs are rising fast. Gerhard Schröder, the former German Chancellor, who heads Nord Stream, has said that the cost could be several billion euros higher than the budgeted €5 billion ($7.3 billion). “We are talking €8 billion of investment here,” Schröder said last month.

Europe’s need for more gas infrastructure is critical: demand is expected to increase by a third by 2015 and imports are set to rise from 57% to 75% as North Sea reserves are depleted. Gazprom is struggling to deflect criticism that it has neglected to develop new reserves needed to meet growing domestic and export demand for gas. Last week the Russian utility said that it would invest almost $29 billion (£14.7 billion) this year, raising its capital spending program by 40%, to speed up the development of new gasfields and pipelines. However, Gazprom told Japan recently that it would fail to meet a contract to supply liquefied natural gas from its Sakhalin2 project by the end of this year. Sakhalin Energy, which had agreed to start shipments in the Q3 of 2008, said that it would not complete the project until the end of this year, with first deliveries scheduled for the Q1 of 2009. Sakhalin2 was led by Shell until Gazprom acquired control last year after a lengthy campaign against the Anglo-Dutch company’s management of the project.

Nord Stream is expected to publish details of its construction costs shortly. Laying of the sub-sea pipeline was to start this summer, but Nord Stream said in November that it had been pushed back by a year and that the first gas would not be shipped until the spring of 2011. The project has been beset by complex negotiations with Baltic coastal states over permits to lay the pipe. In September, Estonia denied permission for sub-sea surveys, forcing Nord Stream to abandon a southerly route. The pipeline, from Vyborg in Russia to Greifswald in Germany, was meant to reduce dependency on countries, including Ukraine and Belarus, with which Gazprom has been in conflict over gas contracts and control of infrastructure. The pipeline will carry 27.5 billion cubic meters of gas per year.

A second line, originally scheduled for 2012, would double capacity, representing about 10% of the European Union’s present consumption. Germany has a big stake in Nord Stream, with E.ON and BASF each owning 24.5%. Gazprom retains 51%. Most of the gas will come from Yuzhno-Russkoye, a huge gasfield in Western Siberia in which Wintershall, a BASF subsidiary, has acquired a 25% share in return for a bigger stake in the German pipeline operator Wingas.

Another vital Russian export project, the East Siberia-Pacific Ocean oil pipeline, is also threatened with severe delays and cost overruns. Trasneft, the Russian oil pipeline monopoly, said last week that there would be a nine-month delay in completion of the 2,700km first phase, which links Taishet, an oil hub in eastern Siberia, to Skovorodino, a rail-hub on the Chinese border. The second phase ends at a Pacific port near Vladivostok. Transneft had planned to complete the link to the Chinese border in 2008, but contractors have been accused of using inadequate equipment to cope with the harsh environment. The project cost has soared from first estimates of $6 billion to $12 billion. (Times Online, UK)