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Analysis & Opinion
27.04.10 Southern Comfort
By Tom Balmforth

Prime Minister Vladimir Putin’s trademarks were on full display on his three-day tour of Europe, as he put in an appearance at the European judo championships in Vienna and caught up with his Italian counterpart and good friend Silvio Berlusconi for some signature macho banter. But top of Putin’s agenda was advancing Russian gas interests, and the premier made significant headway on the South Stream project on his visit to Austria on Saturday. There are good economic and political reasons for Russia to push the Gazprom pipeline, often seen as Moscow’s bid to torpedo its Western-backed Nabucco rival, but some analysts still question the logic behind it.

On April 24 Russian Prime Minister Vladimir Putin and Austrian Chancellor Werner Faymann signed an agreement for Austria will join the South Stream gas pipeline project. The move continues Gazprom’s rapid progress on the pipeline, which in expected to pump 63 billion cubic meters of Russian gas to Europe a year. Gazprom head Alexei Miller repeated that the pipeline would be operative by the end of 2015 and said that “the conclusion of [South Stream’s] technical and economic assessment is planned for February 2011,” RIA Novosti reported.

“Today is an important day in the history of South Stream,” reads a Gazprom statement posted on its Web site. “Austria became the seventh country-participant in the land section of the project, confirming its commitment to the idea of creating additional transport routes for Russian gas into Europe.” The 900 kilometer pipeline is meant to run across the bed of the Black Sea from Russia to Pleven in Bulgaria, where it will split in two, one branch snaking south through Greece, across the Adriatic and into the heel of Italy, and the second going north up into Austria, where it will terminate.

Securing the Austria signature was crucial for the pipeline. “Because of its location, Austria is a key junction in the pipeline system from Eastern Europe and the Trans Caspian,” said Chris Weafer, chief analyst at UralSib. “Austria is basically the crossroads for pipelines in that sense, so getting the Austrians on board is a very significant step forward in the South Stream project, and also deals a serious blow to Nabucco,” he said.

The Western-backed Nabucco pipeline project, which seeks to “make a significant contribution to natural gas supply security for Turkey, South-Eastern Europe and Central - and Western-Europe” by diversifying sources away from Russia, is supposed to begin construction at the end of 2011 and be operational by 2014. A Nabucco press release on April 23 reiterated this start date, and announced that the beginning of Nabucco’s “prequalification tender” for pipelines and relevant equipment which “paves the way for construction.”

But Nabucco’s press statement was eclipsed by South Stream’s more conspicuous progress. Putin drew attention to the lagging rival project at a press conference given after his meeting with the Austrian head of state. “Before constructing something, one should sign supply contracts. Construction of the pipeline without contracts is dangerous and makes no sense. Name me just one contract for Nabucco,” The Moscow Times quoted Putin as saying.

Nabucco spokesman Christian Dolezal challenged that description. “Nabbucco shareholders are currently negotiating gas supply contracts with Turkmenistan, Azerbaijan and Iraq,” he said.

Nonetheless, independent analysts are skeptical that Nabucco will ever get off the ground. Chirvani Abdoullaev, a senior gas analyst, said “Nabucco is a long way off, and it will probably never happen.” Weafer seemed to draw the same conclusion. “Every signature Putin collects is a nail in the coffin of Nabucco…Frankly though, I would say gazumping the Nabucco pipeline is of secondary importance - I think killing off Nabucco is more of a happy side-benefit,” said Weafer, adding that Nabucco has basic problems such as where it intends to get gas from.
Weafer said that South Stream’s two primary objectives were political and economic.

Economically, it seeks to protect Russian dominance of the European market from the emerging threats from shale gas and liquefied natural gas. “Russia has moved fast to lock in a pipeline grid so that it can establish customers for that grid and therefore be in a better position to maintain its market share when the alternative sources of gas arrive,” he said.

And politically, it ties these transit and recipient countries into Russia either directly or by bringing them profit from transit and storage fees. “If these countries are all customers of South Stream or are economically benefiting from the pipeline, then that also improves Russia’s position – it establishes the basis for barter for Russia, whether in trade or politics,” said Weafer.

That Putin has personally presided over negotiations and signings illustrates the importance to Moscow of the southern arm of Russian gas policy, and the closeness between the authorities and the oil and gas industry. Russia’s state-owned gas monopoly Gazprom accounts for some ten percent of Russia’s GDP. Russia’s liberal news weekly The New Times last week published a table to illustrate cronyism within Gazprom – the table showed how a substantial proportion of the monopoly’s top brass are allegedly directly connected to Putin through family and friends.

The speed with which Gazprom has maneuvered to gain signatures in Europe has been greatly facilitated by having the Italian gas company Eni as a joint share holder. “Eni is playing an extremely important role in Gazprom’s system of relations with its European partners,” Fyodor Lukyanov, the chief editor of Russia in Global Affairs, told Radio Free Europe. Putin yesterday finished up his three-day tour of Europe in Italy with his close friend Silvio Berlusconi, where he announced Italian companies have been awarded $2 billion worth of contracts in Russia’s Nord Stream project, which was received with chummy rhetoric from Berlusconi.

“South Stream is important because it allows us to have gas supplied from Russian even in the event that problems emerge through transit countries such as Ukraine - the countries which have not stabilized themselves politically,” Berlusconi said in a press conference yesterday. Bilateral trade, which topped $52 billion in 2008, has helped Italian-Russian relations flourish, but they are also buttressed by the strong personal relationship between Berlusconi and Putin.

In yesterday’s press conference in Italy, both leaders said that that joint South Stream share holders Eni and Gazprom would both give 10 percent of their share to France’s EDF, in a sign that Moscow is already moving to consolidate recent advances in Austria.

Nonetheless there remain serious obstacles to South Stream, said Abdoullaev, not only because the pipeline will swamp Europe with gas for which there is no demand. “The European gas market is soft and it’s not growing fast enough, so there is no need for additional capacity. Even South Stream is building excess capacity. Nord Stream and a stable Ukraine are pretty sufficient to supply European needs. So at this moment, I don’t see the need for additional capacity. Even South Stream is not a done deal – it’s not a given that this will happen unless European demand explodes, which is highly unlikely,” said Abdoullaev.

Then there are practical considerations. The Black Sea an extremely adverse environment for laying a pipeline, and it is unclear who will pay for it. Nor is it clear where the gas to fill it will come from: Russia is already having to develop its Yamal gas fields in order to compensate for declining output in its existing fields. “Now the key elements are in place. But that’s only phase one. Phase two is construction – that’s not going to be easy by any means,” said Weafer.
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