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