South Stream steals a march on Nabucco

By bne IntelliNews January 23, 2012

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Gazprom's South Stream gas pipeline, designed to ship Russian gas directly to Southern Europe circumventing Ukraine, looks to have stolen a march on the rival EU/US-backed supported Nabucco pipeline.

Construction of the South Stream gas pipeline under the Black Sea to Europe will start in December 2012, and not 2013 as previously planned, Russian gas export monopoly Gazprom said January 20. At the same time, two key backers of Nabucco - US energy envoy Richard Morningstar and German energy giant RWE - expressed doubts about the feasibility of the project, which is designed to ship Caspian basin and Middle East gas direct to Southern Europe, bypassing Russia.

Gazprom's announcement follows the permission it received from Turkey in December to build the pipeline through Turkish waters. "Gazprom has everything to considerably advance the previously announced start date for South Stream construction. We have an international legal framework, the huge interest of all participants of the project in Europe, the necessary financial resources and unique experience in implementing large-scale sea gas transportation projects," Gazprom CEO Alexei Miller said, according to RIA Novosti.

Conversely, US Energy Envoy to Europe Richard Morningstar made further downbeat comments about the rival Nabucco project on January 19, according to reports. "It has lately become clear that from a financial and time perspective, Nabucco is becoming more and more complicated to implement," a participant in the ongoing Kyiv conference "Natural Gas and Ukraine's Energy Future" told Interfax-Ukraine, with reference to comments made by Morningstar, to date one of the most enthusiastic backers of the project designed to reduce European energy dependency on Russia.

According to the source, Morningstar said he thought that the EU should focus on securing gas deliveries by constructing connecting pipelines from Turkey. Late last year, Turkey and Azerbaijan reached a political accord for another pipeline – known as TANAP – that would stretch from Turkey's eastern border to its western border.

Also on January 19, in an interview with the Wall Street Journal, Jurgen Grossman, CEO of German energy giant RWE, said the company might withdraw from the Nabucco consortium to reduce financial exposure. RWE favors options "that keep our own financial exposure limited," Grossmann said.

RWE could support other pipelines that have competed with Nabucco, Grossman said. RWE has been hit by the German government's decision in the wake of the Fukushima disaster in Japan to end the use of nuclear power.

South Stream could prove to be an important trump card for Gazprom in securing its status as Europe's premier energy partner in both the north and south of the continent. At the same time, given rapid developments in shale gas and liquified natural gas (LNG), it also runs the risk of turning into an enormous white elephant.

The pending start of construction work will also put pressure on Ukraine, which is currently in negotiations with Russia over ceding some control over its gas transport system to Gazprom. Ukrainian PM Mykola Azarov said on January 20 that creating a consortium to run the gas transit network involving Gazprom and the EU was the only way forward.

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