In late 2007, an agreement was signed in Moscow during a visit by the Greek Prime Minister to establish a company to design the Burgas-Alexandroupolis pipeline.
Gazprom gave the go-ahead to the South Russkoye gas field development in the Yamal-Nenets Autonomous Region, with estimated reserves of 805.3 bcm (28.43tn cu f).
Finally, on December 20, Russia and Kazakhstan signed an agreement on the Caspian Pipeline System.
The Greek-Bulgarian project is a major alternative route for Russian and Caspian oil to theMediterranean and the Suez Canal bypassing the Bosporus and the Dardanelles, the straits where Turkey has been restricting freight navigation, especially tanker transport, since themid-1990s. It is a project BusinessMir has discussed earlier.
Northward bound… South Russkoye is a gas field crucial for the projected Nord Stream pipeline, which means that the long-term prospect of Russian natural gas exports directly depends on its operation. Russia’s Gazprom and Germany’s BASF have swapped assets as part of the South Russkoye development project.
Severneftegazprom, a Gazprom production subsidiary, will develop the South Russkoye field and export the gas produced, shipping it through the projected Nord Stream pipeline, which will run from Russia toGermany across the Baltic seabed.
According to the asset swap deal between Gazprom and BASF, the German company acquires 25% minus one share in Severneftegazprom, as well as one non-voting preference share in the original capital of Severneftegazprom, which is equivalent to 10% of the project, in exchange for energy assets in Europe.
Production at South Russkoye already started with 26 gas wells, which produce 15mn cubic metres (529.5mn cu f) of natural gas a day. Geological prospecting continues, and more exploration and production wells are being drilled. The field infrastructure is being developed, too, including roads, bridges, well sites, pipelines and buildings. Plans for the fourth quarter of 2007 stipulated the production of 1.4 bcm (49.42bn cu f) of gas. Plateau production of 25 bcm (882.5bn cu f) of natural gas per year is to be reached in 2009.
Gazprom CEO Alexei Miller described the beginning of production at South Russkoye as the most important event of 2007 for the monopoly. The last time Gazprom put on stream a new field comparable with South Russkoye was Zapolyarnoye in 2001.
Miller also explained the gas trading scheme through the special purpose vehicle, YRGM Trading. He said the gas price would be calculated 50% + 50% from two components, the domestic gas price in Russia and the export price at which gas is traded at the German border.
But BASF and Gazprom said this was not the time to count future profits, as they first needed to agree on the official division of spending under the project.
Gazprom’s investment in the project had reached €850mn, out of the planned €2bn, and BASF was to provide 35% of total financing.
Sweden and Denmark still advance environmental objections to the Nord Stream project, but the only way for it to reach Germany is through Denmark’s territorial waters. At the same time, the Polish government proposed directing the pipeline across the Baltic countries and Poland, and the European Union said it would consider the project. This is logical, as these countries want to keep their gas transit earnings and reliable supplies with Russian gas.
…and southward headed Russia and Turkmenistan will benefit from the Caspian pipeline, but the shareholding of the project has not been determined yet. Gazprom will probably hold 40% in the operating consortium, while the rest will be evenly distributed between Turkmenistan and Kazakhstan, with half of Kazakhstan’s share owned by its largest gas producer, KazMunaiGaz.
Kazakhstan will join the project officially, although it has raised the gas price and transportation tariffs for Russia and Ukraine. Judging by the progress of the gas talks with Turkmenistan and Kazakhstan, Russia may soon have to pay another $300mn a year to Astana to secure uninterrupted transit and make good on its agreements with Ukraine and Western Europe. It is the price Russia knows it will have to pay for bringing the Turkmen and Kazakh gas into the Caspian pipeline. With any other scenario, the project will have no future at all.
The recent agreement between Russia and Italy on another pipeline project, South Stream, has also influenced the deals reached with Ashgabat and Astana.
Part of the gas from the Caspian Pipeline will be further exported through South Stream, to run from Russia across the Black Sea to Bulgaria, former Yugoslavia and finally Italy to satisfy the steadily growing demand for gas in Europe. According to the EU commission on energy, it will grow at least by one third by 2015- 2020 from the 2007-2008 level.
Therefore, Hungary, which was never loyal to projects involving Russia’s economic priorities, has unexpectedly showed interest in South Stream, and so did Serbia after a long period of isolation from all major energy-related endeavours in the region. The Serbian government should prepare documents on joining the project in May, an endeavour that can be hampered by internal political problems more than anything else.
Another consideration is that there might not be enough non-Russian gas available to fill all of the planned bypass pipelines. The Nabucco project lobbied by the EU and the US, involving a pipeline running to Europe via the South Caucasus, Turkey and the Balkans and crossing the Caspian and South Stream pipelines, is only expected to be filled to 50% of capacity in the near future. On the other hand, it could be used to deliver more Central Asian and Iranian gas.
Competition to drive progress Growing competition in the gas market may in fact benefit Russia by encouraging domestic refining. Russia is currently boosting raw gas exports; but its long-term dependence on that income inhibits the development of processing and therefore the export of refined, and consequently more expensive, products.
When more Russian gas begins flowing to Europe by the northern route and Russian oil by the southern one, Russia’s transit routes will be broadly diversified.
This means that Russia will be able to focus on developing its gas refining sector, which would guarantee high export revenues for years to come, and, moreover, safeguard Europe’s energy security.
At the same time, Central Asian nations have decided to stop subsidising other CIS economies by providing them with cheap gas: the prices of Kazakhstan’s, Turkmenistan’s and Uzbekistan’s gas may double in 2008 and 2009. Most of the gas in question is purchased by Russia for domestic consumption (up to 30%) and for reselling to other CIS nations.
Their decision was undoubtedly prompted by Iran’s recent involvement in the pipeline projects bypassing Russia, Nabucco and White Stream. These two projects are mainly financed by the EU and the US. With Iran, they will become muchmore competitive and will havemore gas to fill them, which, in turn, stimulated the rise of the Central Asian gas prices.
Unfortunately, the latter fact impaired the Caspian Pipeline’s competitiveness.
A sharp rise in gas prices in Russia and the CIS could be avoided by boosting gas production in Komi and East Siberia, lowering production costs and reducing gas imports from Central Asia. The share of Central Asian gas in Russia’s economy is currently close to 30% and, experts say, might grow to 45% along with the commitments under Russia’s gas export contracts.
Those commitments will grow simply because exporting natural gas is three times more profitable than marketing it domestically. Russia’s rivals will most likely try and use Russia’s dependence on Central Asian deliveries against it, by lobbying for price rises and for pipeline projects bypassing Russia.
Growing prices of Central Asian gas may also affect the costs and pace of development of Russia’s domestic gas infrastructure. There is a shortage of gas distribution networks in around 35% of Russia’s territory, yet most of the gas production and transportation facilities commissioned since the late 1990s are meant to be used for exports; domestic consumers are the last to be supplied.
This makes Russia even more dependent on Central Asian imports.
