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Analysts question Gazprom's focus on European gas market


By Nadia Rodova in Moscow


December 14, 2012 - Russia this year continued its efforts to expand its gas transportation capacity to Europe in an attempt to become independent of transit countries.


Analysts, however, are questioning whether the multibillion infrastructure projects are economically viable, and whether Russia should shift its focus toward rapidly developing Asian markets instead.


In December, Russia held a ground breaking ceremony to mark the start of construction of the Eur16 billion ($21 billion) South Stream gas pipeline with a capacity of up to 63 billion cubic meters a year, which is to cross the Black Sea to Bulgaria and run further on through southern Europe.


Gazprom is also studying the possibility of building one or two additional lines within the Nord Stream gas pipeline project across the Baltic Sea to northern Europe, which would bring its total capacity up to 110 Bcm/year. (See related map: Russia's gas transportation network: main arteries).


Analysis continues below...


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The second line of Nord Stream was commissioned in October, boosting the system's total capacity to 55 Bcm/year.


On top of this, within a few days in December Russian officials announced plans to add around 15 Bcm/year of capacity to the existing gas pipeline running via Belarus (which is fully owned by Gazprom and has capacity of nearly 50 Bcm/year) and did not rule out a possible increase in the capacity of the 16 Bcm/year Blue Stream pipeline across the Black Sea to Turkey to transit Russian gas on to third countries.


These multibillion dollar projects will allow Russia to secure stable exports and the flexibility to deliver gas at peak demand periods, Gazprom officials have said.


But the plans continue to puzzle many experts because they would create abundant transportation capacity to Gazprom's existing European markets where future gas demand remains uncertain.


Should all the plans be implemented, Russia's westbound export capacity would exceed 350 Bcm/year, analysts at Nomos bank calculated even before the plans for the possible expansion of Belarus and Blue Stream capacities were announced.


Yet Russia only exported 150 Bcm to Europe in 2011 and expects the figure to fall by 4-5% this year. (See related table: Russian pipeline gas exports 2011 (Bcm)).


"We do not believe that the South Stream project will be able to provide Gazprom with an additional customer base or any sizable increase in volumes of gas supplied on the back of the overall weak level of European gas demand," analysts at VTB Capital said. "In our view, Gazprom's investments in the South Stream project are likely to turn value-destructive for the company."


South Stream is to include four lines with a capacity of 15.75 Bcm/year each, with the first line to be built by the end of 2015.


Gazprom's intention to build up South Stream is widely viewed as a political move to increase pressure on Ukraine due to a long period of wrangling over the management of existing transportation capacity via Ukraine and a series of disputes over transit fees and the price of gas.


In January 2009, one such dispute resulted in a two-week suspension of supplies of Russian gas to Europe, after which Russia came up with the idea of a new pipeline bypassing Ukraine.


Gazprom may opt to limit South Stream to just one subsea line, with the fate of the other three parallel lines "contingent on the outcome of negotiations with Ukraine and the country's willingness to share the ownership of its pipeline with Gazprom," analysts at Citi said.


"Even though the new export pipeline capacity is excessive...the initial line...could arguably make some (marginal) sense to us. Gazprom spends some $3 billion/year on transit charges to Ukraine, which provides some economic rationale to a bypass."


Construction of all four lines would require additional investment to restructure Russia's onshore pipeline system to deliver volumes to the Black Sea coast, they added.


Until the first Nord Stream line was launched in late 2011, 80% of Russian gas exports to Europe went via Ukraine, with the remaining 20% going via Belarus.


Next page: Poor relations with Ukraine; shifting focus to Asia





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