Gazprom is a hub of activity in Europe

By bne IntelliNews May 25, 2007

Derek Brower in London -

An agreement between Austria's OMV and Gazprom on Wednesday has pushed the EU's strategy to diversify its gas sources away from Russia closer to the edge.

The memorandum of understanding, signed during a visit to Austria by Russian President Putin and Gazprom chief Alexei Miller, covers the joint development of the Central European Gas Hub, a wholly-owned subsidiary of OMV, at Baumgarten near the Slovakian border.

OMV claims the agreement would help Brussels' energy strategy. "These integrated projects mark another milestone in the cooperation between our companies and will make a significant contribution to security of natural gas supply in Europe," declared Wolfgang Ruttenstorfer, the company's chief executive.

The Baumgarten hub

Miller said the deal showed Gazprom's strategy "corresponds to the dynamic development of the energy sector in the EU".

That could be stretching things a bit. The deal, which will see Gazprom take a stake of undisclosed size in the hub, is likelier to increase Gazprom's security of demand by increasing its share of the EU's gas market. Preventing that from happening has been Brussels' main strategic ambition where Russian energy imports are concerned.

Analysts say that by taking a stake in Baumgarten, the Russian company is hedging its bets as competition between two rival supply pipelines to Europe, Nabucco and the Blue Stream extension, heats up.

A tale of two pipelines

Nabucco is the pipeline that Brussels believes could break Central and Eastern Europe's dependency on Russian gas. It would do so by importing up to 31bn cubic metres a year of gas from the Caspian region and the Middle East through a pipeline stretching from Turkey to the hub at Baumgarten. OMV leads a consortium of five companies developing that $6bn project.

The rival Blue Stream project would extend Gazprom's existing gas pipeline between Russia and Turkey up through the Balkans and into Hungary. Since last summer, Hungary's MOL, which is one of the five companies involved in Nabucco, has increasingly been leaning towards the Gazprom project. Analysts say that both pipelines cannot co-exist, given that they target the same market.

Seeing Nabucco as a threat to its market share, Gazprom has waged a successful campaign to undermine the project. In the downstream part of the industry, Moscow's alliance with Budapest has enhanced the viability of the Blue Stream project (click here). In the midstream, Gazprom has fostered increasingly close relations with Turkey. And at the source, Russia's three-way agreement with Turkmenistan and Kazakhstan last week has effectively put control of Central Asian gas exports in Moscow's hands (click here). That strategy has left Nabucco looking moribund.

But Gazprom's latest deal with OMV could, ironically, breathe some life into the Nabucco project. If it does, it will likely be at the expense of the pipeline's original strategic purpose of diversifying the EU's gas supplies from Russia. By taking a share of Baumgarten, Gazprom will control some of the gas that comes into it. Baumgarten processed 7.away metres in 2006. Volumes this year could be double that.

In the meantime, OMV's Ruttenstorfer says Nabucco could share other synergies with Gazprom's Blue Stream project. Given the Nabucco consortium's struggles to find enough gas to fill the planned pipeline, that could mean it takes supplies from Gazprom to do so. In that case, the EU's development banks could ask why they have been instructed to subsidise – by up to 70% - another project that will increase Europe's reliance on Russian energy imports.

Budapest will also be concerned at the latest deal between Gazprom and OMV. The agreement effectively pits MOL and OMV against each other in a battle to see which company will develop Gazprom's Central European gas hub most quickly. The progress of Blue Stream and Nabucco could decide that. In either case, Gazprom will remain the dominant and decisive player.

While the Russian company's security of demand in Europe continues to rise, Brussels' strategy to diversify energy supplies continues to look increasingly like a pipe dream.

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