Russia And Serbia Follow Up South Stream Agreement, Hungary Joins Gazprom Project

Russia And Serbia Follow Up South Stream Agreement, Hungary Joins Gazprom Project

Russia and Serbia on 25 February further cemented the January deal giving Gazprom 51% of Serbia’s state-owned gas company Nafta Industrija Srbija (NIS) with an agreement to form a joint venture company to build a 400km extension to Gazprom’s proposed South Stream gas pipeline. Gazprom said the joint venture should be established within three months, with a feasibility study identifying the pipeline’s route taking another 18 months. Construction should begin within 24 months after completion of the feasibility study. Gazprom plans for the €10bn South Stream, which will carry 30 bcm/year of Russian gas 900km across the Black Sea to Bulgaria, to be operating in 2013.

Many Western observers see South Stream as an attempt by Russia to pre-empt the Nabucco gas pipeline project, which was proposed specifically to lessen European dependence on Russia by shipping gas produced in Azerbaijan and Middle Eastern states through a 3,300km pipeline beginning in Turkey and terminating at the Central European Gas Hub (CEGH) owned by Nabucco project leader, Austria’s OMV. However, as it became increasingly clear that Nabucco was having difficulty securing sources of gas, consideration was given to shipping Russian gas via the €5bn conveyor. The US, which supports Nabucco, and the EU, which has appointed a special coordinator for the project, have repeatedly sought to persuade Turkmen President Gurbanguli Berdymukhamedov to join the project and endorse the construction of a trans-Caspian gas pipeline to connect Turkmenistani gas fields to the functioning South Caucasus Pipeline (SCP) that is delivering Azerbaijani Shah Deniz gas to Turkey. Compared to a project like South Stream, a trans-Caspian pipeline is technologically simpler, but politically more complex. However, President Berdymukhamedov continues to flirt with the prospect.

Gazprom announced the 30 bcm/y-capacity South Stream project last June in partnership with Italy’s Eni. The two companies teamed up for the 16 bcm/y capacity Blue Stream gas pipeline across the Black Sea, which opened in 2003 (MEES, 6 January 2003, 28 October 2002). In recent weeks, Gazprom has gained a strong foothold for the project. It agreed with Bulgaria to form a joint venture to construct an onshore section of South Stream through Bulgaria. That was followed by a similar agreement with Serbia and the purchase of more than half of the NIS (MEES, 28 January). Then came Gazprom’s 50% purchase of the CEGH from OMV (MEES, 4 February).

Hungary Signs Up

On 25 February Hungarian Prime Minister Ferenc Gyurcsany met in Budapest with Dmitry Medvedev, the Chairman of Gazprom and Russia’s First Deputy Prime Minister, and announced that Hungary would form a 50:50 joint venture company to build a section of the South Stream pipeline. The deal, signed in Moscow on 28 February, provides Gazprom with a thoroughfare through Southeast Europe that will route South Stream from the Black Sea coast, through Bulgaria, Serbia and now Hungary. The new accord will leave only an agreement with Austria for a pipeline from the Hungarian border to the Baumgarten CEGH to complete the northern branch of South Stream. Gazprom has yet to announce deals with other countries in the region to build a southern branch of the pipeline, but Greece has expressed an interest.

While in Budapest, Mr Medvedev, who is expected to become Russia’s president in March, said that for Russia the diversification of gas pipeline routes was important – in contrast to the EU view that diversification of supply was the crucial issue. Hungarian opposition parties and members of Prime Minister Gyurcsany’s coalition questioned the wisdom of the agreement with Russia, arguing that it would jeopardize the Nabucco project. While this concern is growing as Gazprom begins to connect the dots, not all EU officials agree. EU Energy Commissioner Andris Piebalgs told MEES in December 2007 that demand for gas in the EU warranted the construction of both the 31 bcm/y capacity Nabucco gasline and South Stream, as well as Russia’s planned Nord Stream gas pipeline through the Baltic Sea (MEES, 24 December 2007).

Nabucco Construction Delayed To 2010

The Managing Director of Nabucco Gas Pipeline International, Reinhard Mitchek, on 21 February said construction of the €5bn pipeline had been postponed by a year in order to synchronize with a gas field in Azerbaijan and conduct further environmental and social impact studies. The Azerbaijan field is Shah Deniz, Stage 1 of which came on-stream in late-2006/early-2007 and is geared to produce 8.6 bcm/y. The gas goes to Azerbaijan, Georgia and Turkey, and a small portion to Greece. Stage 2 development is scheduled on-stream in 2013. Baku puts Shah Deniz reserves at 1.2 tcm. Last November, operator BP reported a “potential significant” gas discovery lying more than 7,000ms below the Shah Deniz gas layer now under development which is being evaluated (MEES, 19 November 2007).

For Nabucco to prove viable, the EU may have to rethink its position on importing natural gas from Iran, the head of OMV, Wolfgang Ruttenstorfer, said on 27 February. Nabucco needed 10 bcm to make a final investment decision, he told Reuters: “It should be feasible to raise this quantity, but it is not easy. “It’s a challenge, that’s for sure.” Last December the EU said Iranian gas would not be necessary for the successful operation of Nabucco (MEES, 3 December 2007).

Copyright MEES 2008.