E.ON’s Russian-backed Baltic pipeline leads Europe’s gas race

LONDON (Bloomberg) -- E.ON AG’s Russian-backed gas pipeline in the Baltic is gaining the advantage over rival projects as the European Union weighs $21.5 billion of import links to reduce its reliance on fuel shuttled through Ukraine.

Nord Stream AG, controlled by OAO Gazprom, is on schedule to ship Russian gas to Germany in 2011, said Paul Corcoran, the project’s financial director. Backed by President Vladimir Putin and chaired by former German Chancellor Gerhard Schroeder, Nord Stream already has contracts for 22 billion cubic meters of its 55 billion-cubic-meter annual capacity, he said.

The Nord Stream plan may get a three-year head start over the EU-backed Nabucco pipeline project, which has been delayed by a lack of commitments from customers and suppliers. The two ventures are vying to send gas to Europe, which is seeking to increase and diversify imports to counter declining North Sea output and avoid a renewed halt in supplies transiting Ukraine.

“North Sea gas production is trailing off rapidly,” Corcoran said in an interview in Brussels. “There will be a very significant import gap in the future.”

Since Russian shipments through Ukraine were cut in January amid a spat over pricing and debt, the EU has boosted calls for alternative import routes. These include the 7.4 billion-euro ($10.4 billion) Nord Stream project and OMV AG’s 7.9 billion- euro Nabucco link, which would pipe Caspian-region gas via Turkey to Austria. Europe faces an 18 percent jump in gas demand by 2020 from 2006, according to the International Energy Agency.

-------------‘No obvious winners’

“Nord Stream is going to go through because it’s linked to the Ukrainian crisis as a way for Russia to reroute gas,” Thierry Bros, a utilities and gas analyst at Societe Generale, said on June 25 in Brussels. “I’m not optimistic about the other projects. There are no obvious winners.”

Aside from Nabucco, proposed pipelines in the so-called Southern Gas Corridor include the South Stream, Blue Stream and White Stream links, the Trans Adriatic Pipeline and the Interconnector Turkey-Greece-Italy, or ITGI.

Nord Stream, which will ship Gazprom’s gas mostly from the Yuzhno-Russkoye field in Western Siberia, has signed delivery contracts through 2035. Meanwhile Nabucco, whose other partners are Mol Nyrt., RWE AG, Transgaz SA, Bulgarian Energy Holding EAD and Botas AS, is yet to complete deals to fill the pipe’s planned 31 billion-cubic-meter capacity with non-Russian fuel.

“Gas traders are currently in negotiations with the countries of the Caspian region and Iraq,” Christian Dolezal, a spokesman for Nabucco Gas Pipeline International GmbH, said on Monday by e-mail.

------------------Caspian gas

Nabucco’s efforts to secure gas face competition from Moscow-based Gazprom, which has courted suppliers in Azerbaijan and Iran as it promotes its own export projects.

“There is no gas in the pipeline for the moment so people are saying ‘why develop it?’” Jean-Arnold Vinois, head of the EU’s energy policy security unit, said in Brussels last week in a reference to Nabucco.

Nabucco awaits agreements not only on supply but on route. Transit country Turkey, which has previously demanded 15 percent of the gas passing through the pipe at discounted prices for its own use, said in May it will sign an accord in July, a necessary step to start operating the link. Nabucco, initially planned for 2013, will deliver its first gas in 2014, Dolezal said on Monday.

Transit talks between ministerial working groups are “on the home stretch,” he said, adding that “we expect signing in Ankara soon.”

---------------Turkey accord

“The only way it will work is getting a transit agreement with Turkey,” Societe Generale’s Bros said. “If they can’t get a proper agreement then there is no point, because Europe would just swap the Ukraine risk for a Turkish risk.”

Ukraine’s lack of cash to pay monthly gas bills from Russia has raised concern that a further supply halt may be imminent, giving urgency to diversification. Following the January dispute, Ukraine agreed to pay for Russian gas within the first seven days of each month.

“We are in an early warning situation,” the EU’s Vinois said. “Everyone is waiting for July 7 to see what will happen. The new crisis looming is stimulating efforts to try and find the right answers.”

Nord Stream, which will run from Vyborg, west of St. Petersburg, to Lubmin near Greifswald in Germany, would benefit Russia and Europe as both are keen to cut reliance on Ukraine. It would also strengthen Russia’s grip on the EU, which already gets 25 percent of its gas from the country.

Nord Stream’s scheduled start in 2011 won’t affect Nabucco’s timing or financing, according to Dolezal. “Different project, different sources, different markets, different customers,” he said. “This does not affect our plans or funding in any case.”

------------Environmental concerns

The Nord Stream development has, like Nabucco, faced controversy over its proposed route.

The pipeline will pass through Russian, Finnish, Swedish, Danish and German territorial waters and requires permission from all these countries before construction can begin. Germany has already objected to the route because it runs through military training areas. Finland has voiced environmental concerns and proposed alternative directions.

Nord Stream is “working intensely” on environmental considerations, Corcoran said. From a “permitting perspective, going through the Baltic is probably easier than going through a land route.”

-----------------Two-phase project

Project partners expect to get permits by the end of the year from the five countries, which will allow construction to start in April, he said. Nord Stream will be developed in two phases, with the first pipe due to deliver gas in the fourth quarter of 2011 and the second pipe a year later, he said.

Almost a third of Nord Stream’s financing will come from shareholders Gazprom, Wintershall Holding AG, E.ON Ruhrgas and Nederlandse Gasunie NV. Half of the remaining 70 percent is scheduled to come from commercial bank lending and the rest from export credit agencies.

“Of course, our liquidity position is substantially different from a year ago,” Corcoran said. “But the impact on the project is not so significant in terms of cost because interest rates have fallen.”

Nord Stream may receive further commercial backing from France’s GDF Suez SA, which is in talks on joining the project as a stakeholder and as a potential buyer of supplies for its customers, spokesman Antoine Lenoir said by telephone.

GDF Suez’s entry would bolster the project’s fund-raising abilities and “reflect the European Union nature of the project even more,” Corcoran said. “Nabucco is much more complicated. The fact that the European Union is putting money into it shows it needs extra support.”

The European Bank for Reconstruction and Development said this month it plans to be a “senior participant” in the financing of the Nabucco project. The EU on May 6 approved investing 200 million euros in the venture.

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