EU and Russia jostle for gas

By bne IntelliNews September 10, 2010

Nicholas Watson in Prague -

The tussle between Brussels and Moscow over control of piped natural gas to Europe is reaching a head, as the EU-backed Nabucco gas pipeline project received a boost from international lenders on September 6, while a few days earlier Russia moved to tie up supplies of gas that would feed that pipeline.

Russian President Dmitriy Medvedev may be saying in public that the Kremlin isn't trying to "hinder any projects" that are alternatives to Russia's giant South Stream and Nord Stream gas pipelines, but the gas deal signed during his visit to Azerbaijan on September 3 appears to be designed to do just that.

Gazprom formally signed an agreement with Azeri state-owned oil and gas firm Socar to buy 2bn cubic metres per year (cm/y) of its gas from next year, double the 1bn cm/y originally agreed last year. As Pavel Sorokin, senior analyst at Alfa Bank, notes, these volumes are pretty small in the scheme of things, but when phase two of the giant BP-led Shah Deniz gasfield is launched around 2016 or 2017, "it may produce as much as 16bn-25bcm per annum." Indeed, Gazprom CEO Alexei Miller told reporters that the agreement has no upper supply limits, with the Russian firm ready to buy "as much gas as Azerbaijan can supply."

Given that it costs more for Gazprom to import Azeri gas than for the Russian firm to produce its own gas at home, analysts say this deal is almost certainly part of efforts by the Kremlin to kill off the EU's Nabucco pipeline, which is relying on gas from phase two of Shah Deniz to help fill its massive 31bn cm/y capacity.


Nabucco is designed to break Russia's stranglehold on gas exports to Europe by importing gas from the Caspian basin and Middle East without crossing Russian soil. The problem for the consortium building the estimated €8bn project - which includes OMV, Germany's RWE, Hungary's Mol, Romania's Transgaz, Bulgaria's Bulgargaz and Turkey's Botas - has always been where it would get the gas from. With supplies from Turkmenistan, Iran and Iraq still far off for various reasons, OMV has always hoped the next phase of the Shah Deniz gasfield could supply up to 15bn cm/y to the pipeline. (The field has estimated reserves of around 1.2 trillion cm and should produce 7.6bn cm this year, up from 6.2bn cm last year.) However, with Azerbaijan committing supplies to Turkey and other pipeline projects such as the Trans-Adriatic Pipeline looking to source gas from the field, some experts say the most Nabucco could expect to get would be just 8bn-10bn cm/y.

"The lack of a ceiling on the [Gazprom-Socar] supply contract is meant to tempt Socar and the Azerbaijani government to ship future gas production from the phase two development of the Shah Deniz field to Russia, which would effectively kill off the European Union-supported Nabucco gas pipeline project," Andrew Neff of the consultancy Global Insight says in a research note.

Such factors will certainly be taken into account by multilateral lenders when they carry out the due diligence for loans that are crucial for financing the project, the process to start which was agreed on September 6 between the Nabucco consortium and the European Investment Bank, the European Bank for Reconstruction and Development, and the World Bank's International Finance Corporation.

The three lenders said the loans could total as much as €4bn; the potential financing package will consist of up to €2bn from the EIB, up to €1.2bn from the EBRD and up to around €800m from the IFC.

"The involvement of the three [international financial institutions] is a demonstration of global and European support for the project and represents an important milestone in ensuring the overall financing of Nabucco," the consortium said in a statement, adding that export credit agencies and international banks would start their appraisal of the Nabucco project soon after the IFIs, with commitments from potential lenders expected to be sought in 2011.

EU and Russia jostle for gas

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