Russian gas to flow to Europe via Baltic Sea

Posted in Russia | 12-Apr-05 | Author: Judy Dempsey| Source: International Herald Tribune

BASF CEO Juergen Hambrecht, German Chancellor Gerhard Schroeder, Gazprom CEO Alexej Miller and Russian President Vladimir Putin, from right, exchange signed contracts at the world's largest industrial fair in Hannover, northern Germany, on Monday, April 11, 2005.
HANNOVER, Germany Germany and Russia announced agreement Monday to build a North European Gas Pipeline under the Baltic Sea that will allow Russia's energy giant Gazprom to deliver gas directly to Western Europe and sharply reduce its dependence on its traditional transit routes through Ukraine and Belarus.

The announcement of the agreement, which will give Gazprom a larger foothold in Europe's energy sector, was made by Chancellor Gerhard Schröder of Germany and President Vladimir Putin of Russia in Hannover at the opening of one of the world's largest international trade fairs.

Schröder, who has forged a special relationship with Putin since becoming chancellor in 1998, said Monday that the pipeline showed how both countries were now embarking on a "strategic partnership" that would embrace economic, political, cultural issues.

"We have now a very deep cooperation," Schröder said. "It is known that both countries are very close when it comes to energy. But we are developing a strategic partnership, and the European Union and Russia will have one too."

That partnership, however, did not make any reference to press freedom or human rights, topics on which Putin has taken a very tough stance. Indeed, Schröder has often been criticized inside his own coalition for not taking a tougher stance on Putin's human rights record, particularly in Chechnya.

Putin, who opened the trade fair with Schröder, pledged that Russia would continue to be "a reliable and stable partner for delivering energy to Germany and Europe." He said there was now "an interdependence in economic issues."

Russia supplies 32 percent of Germany's energy needs and over a fifth of the EU's requirements.

The German government signed eight other agreements with German companies, ranging from agricultural and information technology to banking services and cargo transport. The largest was a €1.4 billion, or $1.1 billion contract in which Siemens, the country's large electronics group, will build 60 high speed intercity trains.

But the announcement that Gazprom and BASF, one of Germany's largest chemical and energy groups, would build the North European Gas Pipeline was the clearest sign so far of the extent of the relationship between both countries and their interdependence.

Aleksei Miller, the chairman of Gazprom, Russia's state monopoly energy conglomerate, and Jürgen Hambrecht, the BASF chairman, both mapped out how the complex agreement would work.

Miller said Gazprom and Wintershall, the energy division of BASF, would be involved in the construction of the pipeline, an ambitious project which could cost from $8 billion and $10 billion when complete, according to energy analysts, including the International Energy Agency, a division of the Organization for Economic Cooperation and Development in Paris.

The pipeline would give Gazprom a strong bargaining chip in its relations with Ukraine and Belarus. They are the main transit countries for Russian gas and earn lucrative fees by charging Gazprom for delivering the gas to the European markets. With an alternative route, Gazprom would be able to negotiate more advantageous transit costs, leaving the transit countries with little leverage since they are dependent on Russia for most of their energy needs.

"In some ways, Gazprom is Putin's foreign policy instrument," said Claudia Kemfert, director of the energy department at the German Institute for Economic Research.

Miller said work on the pipeline would start at the end of this year, although a consortium formed to look at the costs and viability of the project said on Monday that it would not finish its work until September. Financing of the project has not been formally discussed, according to the German energy companies involved in the consortium, including BASF, RWE and E.ON Ruhrgas.

Miller also said the underwater pipeline, which would link Vyborg, near St. Petersburg, with Greifswald on the northeastern coast of Germany, would be complete by 2010. In February, Gazprom pushed back the original timetable which had proposed completion of the pipeline by 2008. Wintershall will hold a 49 percent stake in building the pipeline with Gazprom holding the majority share. Miller said other companies could join the consortium, provided they met "the strategic requirements that involved high-value added."

Miller would not confirm the capacity of the pipeline or its costs. But he did say the project carried "advantages and some risks." He said the pipeline would "reduce the risk of transporting gas through other countries," an implicit reference to Ukraine and Belarus. Energy companies and analysts, including E.ON Ruhrgas, said the pipeline would have an annual capacity of about 30 billion cubic meters.

Hambrecht, of BASF, said the section of the pipeline that would involve Wintershall would cost "around $2 billion." The pipeline would also deliver gas to Scandinavian countries and Britain.

Putin also announced on Monday that Gazprom and Wintershall would jointly develop the Yuzhno Russkoye gas field in western Siberia, with Wintershall increasing its stake in the joint venture to 49 percent. Hambrecht said the field had a volume of 500 billion cubic meters, which he said would cover Germany's gas consumption for five years.

In return for Germany establishing a strong foothold in gas production in Russia, Gazprom will strengthen its presence in Europe through increasing its stake in Wingas, a joint venture established in 1993 by Gazprom and BASF's subsidiary, Wintershall. Miller said Gazprom's stake would rise from 35 percent to 49 percent, giving it greater direct access to European gas markets.