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Russia Finalizes Natural Gas Pipeline to Europe

Written By Brianna Panzica

Posted November 13, 2012

Russia is a major global oil and natural gas supplier.

The nation was the largest natural gas exporter last year and second-largest oil exporter in 2009, falling only behind Saudi Arabia.

It exported 7.5 million barrels of petroleum last year and 6.3 trillion cubic feet of natural gas. And of those massive exports, 78% of oil and 70% of natural gas went to Europe.

European nations are heavily dependent on Russia’s fuel supplies. But most of those exports have to travel through the Ukraine, a nation also dependent on Russia but equally discontent with its pricing.

The Ukraine has problems with Gazprom (MCX: GAZP), Russia’s state-owned oil and gas conglomerate, in particular. The Eastern European country has argued with the government-owned firm over prices, and Gazprom believes that, on a number of occasions, this has threatened the supply meant for Europe.

So tomorrow Gazprom and partners EDF (EPA: EDF), Wintershall, and Eni (NYSE: E) will commit to the offshore leg of a gas pipeline that will carry supplies directly to Europe.

The project, called the South Stream gas pipeline, has met with opposition. It will contain both an offshore and an onshore section, and the offshore leg alone has a high price tag of $20 billion. And it is under discussion in a time when gas demand from Europe is declining.

From Reuters:

“There would have been more than enough existing transport capacity to Europe,” [Katja] Yafimava [of the Oxford Institute for Energy Research] said.

“And now the situation is uncertain with gas demand in Europe, both mid-term and long-term. The point of such massive infrastructure is questionable.”

And that’s also not the end of the costs. When the onshore portion of the pipeline is added to existing costs, the price could be bumped up to anywhere between $30.5 billion to $31.8 billion.

But Gazprom ‘s Leonid Chugunov has said the project is necessary and that the company has no choice but to get involved.

Gazprom’s offshore leg of the pipeline will travel through the Black Sea for 900 kilometers (559.2 miles), and construction will begin on December 7 this year.

When it opens in 2015, it will ship roughly 15.75 billion cubic meters (bcm) of gas a year, ramping up capacity to 63 bcm three years later.

Last year, Gazprom launched its Nord Stream pipeline, also moving gas to Europe. The two pipelines together would increase export capacity to Europe up to 300 bcm. But the company’s shipments are expected to be below 150 bcm this year as European demand remains low for the next few years.

The Russian oil company still needs to receive permission from Bulgaria to construct the pipeline, a move that is expected to happen on Thursday when the two negotiate a gas supply agreement.

The Ukraine is less than happy with the idea of this project, and it is working to break off dependence on Russia entirely. It is reducing imports from 40 bcm in 2010 to 27 bcm this year.

But that’s not enough. Valery Nesterov of Sberbank Investment Research told Reuters:

“By investing into the project, Gazprom has failed to keep such a large market as Ukraine, which is as important as Germany.”

Gazprom was down 3.29% to 140.12 rubles at Tuesday’s close.

That’s all for now,

Brianna Panzica

follow basic@brianna_panzica on Twitter

Energy & Capital’s modern energy guru, Brianna digs deep into the industry with accurate and insightful updates into the biggest energy companies and events. She stays up to date with the latest market moves and industry finds, bringing readers a unique view of current energy trends.

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