Czech Republic becomes a hub of Gazprom's gas strategy in EU

By bne IntelliNews November 30, 2007

Beth Potter in Prague -

Much to the chagrin of EU officials, a growing number of European oil and gas firms over recent weeks seem happy to do a "deal with the devil" in the form of the Russian state-controlled Gazprom.

As Gazprom grabs the headlines with high-profile deals like November's $14.8bn one with Italy's Eni to build the South Stream gas pipeline under the Black Sea, company officials have also quietly courted several other countries to sign gas storage contracts, including Austria, Hungary, Turkey and now the Czech Republic. Analysts say these deals fly in the face of EU interests, as policymakers try to lessen member states' dependence on Russian gas and develop a united energy policy for Europe.

In the Czech Republic, Moravské Naftové Doly is currently in negotiations with Gazprom to offer millions of cubic meters of new underground natural gas storage in the Bohemia region. While MND spokesman Dan Plovajko declined to give specifics of the deal, he told bne it could take "many months" to complete and be worth "billions of crowns."

Plovajko pointed to recent comments made by the head of Gazprom's export arm Gazexport, Alexander Medvedev, as proof of what's coming. "We are sure that our joint work will stimulate further strengthening of positions on the international energy market," Medvedev said in Prague on November 1.

MND subsidiary SPP Bohemia, formed in May of this year, controls Dolni Bojanovice, an underground storage facility coming online with a capacity of 576m cubic metres (cm), according to the company's 2006 annual report. It has a daily withdrawal capacity of 9m cm and was formed by previous drilling operations. MND also operates underground storage at Uhrice under a long-term contract with German conglomerate RWE Transgas, which has a planned storage capacity of 180m cm and daily withdrawal capacity of 6m cm.

MND owner and one of the Czech Republic's richest men, Karel Komarék, has said he wants to snap up more underground storage, meaning other deals could be forthcoming.

These talks come at the same time that Gazprom is negotiating for a 50% stake in the Central European Gas Hub owned by OMV, the Austrian oil and gas group. This hub is the trading platform for OMV's Baumgarten gas hub, which currently handles more than 30bn cm per year (cm/y) of natural gas. OMV and Gazprom are also working to develop other trading and financial products designed to make Baumgarten the biggest gas hub in Europe.

If that deal happens, it would be a huge coup for the Russians, as Baumgarten is planned to be the terminal hub for the EU's principal pipeline project to reduce the region's over-dependence on Russia for its gas. If built, the so-called Nabucco gas pipeline would open up gasfields in the Caspian region and Iran to the EU, by piping gas direct from these areas (avoiding Russia) some 3,300 kilometres across Turkey, Bulgaria, Romania and Hungary and into Austria. Some vision, though many regard it as fanciful.

These new gas storage contracts as well as the pipeline deals form part of a wider strategy of Gazprom and its Russian masters to control Europe's gas market from top to bottom, from getting the gas out the ground to piping it into EU citizen's homes. The Russian company's stated hard-charging strategy is to capture 33% of the European gas market, or 180bn cm/y, by 2015. It currently supplies about 25% of Europe's gas needs - mostly for heat, but also for petrochemical processing and other industrial applications.

In Hungary, Gazprom wants to build underground storage for 10bn cm of gas. As with the Czech Republic, the Hungary site would come from currently depleted gas fields. Meanwhile, in Turkey, Gazexport signed a contract at the beginning of the month with Avrasya to deliver 500m cm/y through 2021. As with the other deals, much of that gas is expected to feed the recently privatized Turkish domestic market, as more consumers switch from coal to natural gas to heat their homes. In addition, Gazprom has said it is interested in building underground gas storage units in the country, including one under the natural salt dome of Tuz Golu, a huge salt lake in the middle of rural Turkey.

While some companies seem happy to sell off assets to Gazprom, EU politicians are proving a harder nut to crack for the Russian firm. In a move clearly designed with Gazprom in mind, the European Commission in September proposed legislation aimed at splitting ownership of gas and power production from distribution, which would limit a foreign company's ability to buy EU energy assets.

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Czech Republic becomes a hub of Gazprom's gas strategy in EU

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