Baltic Sea to get $10 bln gas pipeline

  • 2005-04-20
  • Staff and wire reports
RIGA - Germany and Russia last week agreed on a massive gas pipeline that will stretch from Vyborg on the Gulf of Finland, past the Baltic states, and come ashore at Greifswald in northeastern Germany.

The 570-mile underwater pipe, the North European Gas Pipeline, is one of Gazprom's most ambitious projects to date. Total construction costs will amount to some $8 's 10 billion, far more than the $3.2 billion spent on the Blue Flame gas pipeline under the Black Sea that connects Russia and Turkey.

But Russia, beset by poor relations with Ukraine and Belarus, through which the country's main export pipelines run, needs the NEGP in order to gain direct access to European markets. Which is why Gazprom CEO Aleksei Miller and to a lesser extent President Vladimir Putin lobbied Chancellor Gerhard Schroeder to win Germany's financial support for the project.

Their efforts paid off, and Putin and Schroeder announced an agreement April 11 in Hanover on launching the NEGP.

"It is known that both countries are very close when it comes to energy," Schroeder was quoted as saying. "But we are developing a strategic partnership, and the European Union and Russia will have one too."

Russia supplies one-third of Germany's energy needs and some 28 percent of its gas requirements.

Miller said last week that construction of the underwater pipeline would start this year and gas would begin flowing in 2010, although it was reported that the consortium of engineers working on the project's viability would not be prepared to give its final assessment until September.

The pipe will have an annual capacity of 30 billion cubic meters. Last year Russia exported some 140 billion cubic meters to the European market, and this should increase to 180 billion by 2010 under existing contracts.

The pipeline itself will be built by Gazprom and BASF, one of Germany's largest chemical and energy groups. Gazprom will own a majority stake in the pipeline, and Wintershell, the energy division of BASF, a 49 percent interest.

Most importantly, however, the pipeline will give Russia increased leverage when dealing with Belarus and Ukraine. Relations between the countries have soured in recent months, and historically Belarus and Ukraine have often failed to make timely payments for gas deliveries. What's more, Russian gas officials accuse their neighbors of gouging on transit tariffs, since Russia has no choice but to export through their territory.

Also, Gazprom officials have claimed in the past that pipeline managers in Belarus and Ukraine are negligent when it comes to cracking down on theft of gas from the pipeline.

Still, many analysts say that the NEGP is, at best, a project way ahead of its time. At worst, they say, it makes no economic sense. Russia is not using existing pipeline capacity through Belarus and Ukraine, and the underwater pipe to Turkey is only operating at 10 percent capacity. Given Russia's domestic gas needs and the investment requirements for extracting all the gas that will eventually fill these pipes, NEGP is more of a political than an economic project, analysts said.

In this sense Miller's efforts in Turkmenistan appear particularly poignant, since Gazprom will need Turkmeni natural gas to fill its pipelines and meet rising demand for gas. In January Turkmenistan ceased supplying gas to Russia's gas network system, claiming that it was not being paid a fair price.

Miller, however, was able to convince Turkmeni President Saparmurat Niyazov last week to renew gas deliveries. Gazprom stated in a press release that Niyazov, who operates on one of the most grandiose cults of personalities in the modern world, agreed to the previous price of $44 per 1,000 cubic meters, only now Gazprom will pay only in cash and not 50 percent cash and 50 percent in goods as before.

The existing contract between Russia and Turkmenistan expires at the end of 2006.