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South Stream gas carrier will begin to be laid December 7

December 05, 2012, 17:17 UTC+3 Alexandrova Lyudmila

MOSCOW, December 5 (Itar-Tass) — Construction work to lay the South Stream gas pipeline under the Black Sea to Europe will begin near Anapa, the Krasnodar Territory, on Friday, December 7. Analysts do not rule out that this project, for which the gas monopoly Gazprom has already made huge concessions to the participating countries, will cost a whole lot more but fail to yield proportionate economic dividends. There are no guarantees Russian gas will be in great demand in the European Union. However, Russia looks prepared to pay the price to shrug off the dependence on gas transit through Ukraine and to force Kiev into concessions on other issues, analysts say.

The need for laying South Stream was for the first time mentioned in 2005. Just as the recently commissioned Nord Stream, that project was launched in the wake of recurring gas wars with Ukraine - the monopoly transiter of Russian gas to Europe. Of Russia’s annual Europe-bound export of 150 billion cubic meters Ukraine pumps through 100 billion cubic meters.

South Stream is to become the most costly and the largest of all pipeline projects in Russia’s modern history. The main line will go to Treviso in Italy’s North through Bulgaria, Serbia and Slovenia (a spur line towards Croatia is possible). The pipeline will have a total length of 2,355 kilometers, of which 900 kilometers will be laid on the seabed, and 1,455 kilometers, on the surface. Another two branches will cross Bulgaria and Serbia towards Hungary and Baumgarten in Austria – the largest gas hub in the center of the European Union. The last branch from the territory of Bulgaria will run south through Geece under the Adriatic Sea to Italy’s Otranto.

Commercial supplies to Europe via the South Stream pipeline are to begin in the first quarter of 2016. Capacity operation (63 billion cubic meters a year) is to be achieved in 2018.

The stakeholders in South Stream Transport AG (the operator of the underwater stretch of South Stream) are Gazprom (50%), Italy’s ENI (20%), Germany’s Wintershall and France’s EdF (15 percent each).

How much exactly the project will cost is anyone’s guess. In October, Gazprom estimated the project at 15.5 billion. Then the likely budget soared to 16-17 billion. The monopoly recognizes quite officially that the eventual figure may be still higher. Valery Nesterov, an analyst at Sberbank Investment Research, is quoted by Kommersant-Vlast as saying that Gazprom will have to spend another ten billion dollars or so to expand the unified gas pipeline system inside Russia near Anapa to provide the necessary amount of gas. According to the periodical, this will push up the eventual cost of the project to 27 billion.

To lay the surface part of the pipeline project Russia signed inter-government agreements with Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia and Austria. The seabed part of the project had to be negotiated with Turkey. For nearly every agreement Gazprom had to make no simple concessions. “Evaluating the real scale of all benefits promised to countries for participation in the project is now impossible. Therefore, the question about the final price of South Stream remains open,” the magazine quotes a Gazprom top manager as saying.

The European Union, which believes that Europe’s dependence on Russian gas is excessive, tried to resist the South Stream project all the way, first and foremost, by supporting alternative projects. Nabucco, in the first place. However, in view of the high costs and the lack of a resource base the project is still very far from being implemented.

Russia has not yet persuaded the European Commission to establish the special status of a (Trans-European Network, TEN) for South Stream. In the meantime such a status would make this project immune to the operation of the EU’s third energy package, which demands third parties’ access to the pipeline. So far the TEN status has been awarded to two of Gazprom’s pipeline projects – Nord Stream and Yamal-Europe – and also Nabucco.

In the meantime, experts are very skeptical about South Stream’s chances of getting privileged treatment. “There is a possibility of getting the status, of course. But this will take time. It is no use hurrying now,” the chief of the investment analysis department at the Univer company, Dmitry Alexandrov, told Nezavisimaya Gazeta.

Italian energy affairs specialist Matteo Verda is quoted by Expert magazine as saying the beginning of construction work to lay South Stream is just the first move in what may turn out a long game Gazprom will be playing on the EU market. “Gazprom needs the launch of the project for two reasons. Firstly, in this way it will take away the last bit of strength away from the competitor – Nabucco. Secondly, it will gain a firmer foothold in relations with the European Commission in support of its demand for being exempt from the access of third persons to the pipeline. That’s a complicated game, indeed, which also involves an anti-monopoly investigation against Gazprom, and its outcome remains unclear.”

Analysts have very big questions to ask about the economic feasibility of South Stream. There is no certainty whether Europe will still be needing large amounts of gas when the South Stream pipeline is launched.

Valery Nesterov says Europe’s demand for imported gas in 2011 was about 500 billion cubic meters. Under the best case scenario the demand for gas will be growing 10-15% a year at the most, in other words, to 550-570 billion cubic meters. Gazprom currently supplies Europe with 150 billion cubic meters. When South Stream and Nord Stream achieve capacity operation, the throughput to Europe may exceed 350 billion cubic meters a year. In the meantime, Gazprom’s share on the market keeps dwindling as a result of the effects of the shale gas revolution, soaring LNG supplies, and the EU’s overall strategy of easing energy dependence on Russia. Possibly, the monopoly will have to make more price concessions, which may make more pipeline projects unprofitable, Nesterov said.

Experts see only one plausible explanation of Gazprom’s policy – the company is creating reserve facilities in order to have a chance to reduce gas transit through Ukraine to nothing. Which may make Kiev more pliable on as number of issues – from joining the Customs Union to putting Ukraine’s gas pipeline system under Gazprom’s control.