Last week, during President Putin?s visit in Great Britain, the Russian energy minister, Igor Yusufov signed a corporation agreement with his British counterpart in order to construct a $6 billion pipeline that should deliver Russian gas to Britain.
Last week, during President Putin?s visit in Great Britain, the Russian energy minister, Igor Yusufov signed a corporation agreement with his British counterpart in order to construct a $6 billion pipeline that should deliver Russian gas to Britain. The capacity of the pipeline should mount to 2.9 billion cubic feet per day and would transport gas from Vyborg, near St. Petersburg, beneath the Baltic Sea to Greifswald in Germany, further to the Netherlands and again sub sea to the UK.
The Russian gas production is expected to rise from the current 591 bcm annual production to 680 bcm - 730 bcm annually until 2020. In Europe on the other hand, gas imports are likely to increase to 465 bcm - 565 bcm from the current 230 bcm.
The North European gas pipeline was welcomed by the politicians of both countries, by stressing the political significance of Russia as a big player in the world energy sector. Gazprom already supplies around a quarter of Europe?s energy needs and the new pipeline would make the company even more dominant in Europe. It is said that major companies like Royal Dutch/Shell, Fortum from Finland and the German Ruhrgas already signaled interested in the venture.
The European Union is also interested in the project. After negotiations on Thursday, it agreed to partly finance a feasibility study for the pipeline. The cost, involved in the feasibility study, is much smaller than the expected $6 billion construction expenses, but it is a strong political sign which could help the project. It is however unclear, by which date the pipeline could be completed. Gazprom claims that the project could start operating in 2007. But analysts claim that it is unlikely that the UK will be able to buy Russian gas before 2015.
There are not only plans by Gazprom for a new pipeline but several competing projects. Norsk Hydro and Statoil have been lobbying for a $2 billion pipeline, called Britpipe, to transport gas from Norway's massive Ormen Lange offshore gas field, which contains estimated gas reserves of 400 bcm, to the UK. Marathon Oil Corp. on the other hand suggested building an 8 bcm pipeline for 500 million euro from its Balgzand field in the Netherlands. These two projects could provide trouble for Gazprom?s venture as they are much closer to Britain which would decrease the transportation costs significantly. Great Britain has one of the most competitive gas markets world-wide and it seems unlikely that the government will openly support a high-cost option. However, it is also a fact that the gas reserves in Norway and the Netherlands will run out in around a decade. This could open the way for the North European Pipeline.
One of the problems for the new pipeline lies inside Russia. It is estimated that Gazprom will need investments between $100 billion and $170 billion until 2020 to develop the untapped fields in Siberia and the Arctic fields on the Yamal Peninsula and in the Barent Sea. Just to maintain the current production, these fields must be explored by Gazprom but the costs are enormous, around $65 billion only for Jamal. At the moment, cheap gas from Central Asia, mainly from Turkmenistan, gives Gazprom some time to raise funds for further investments. Without this gas, already in 2007, the company will be faced with a shortfall of gas of around 10 percent of the annual production or between 50 billion and 70 billion cubic meters. This would even be a challenge for an efficient run company but could become impossible for the inefficient, bureaucratic, state monopoly. There are hardly the necessary checks and balances in place to control and manage the required financial resources efficiently.
Another problem is the financing of the project itself. To finance the pipeline, Gazprom needs long-term supply contracts. But in a more liberalized EU gas market, it will become more difficult to clinch such deals. If there are no long-term contracts, there will be no international investor for the pipeline. It could however be, that the EU would give in, facing its mayor supplier, that satisfies 25 percent of the EU?s gas demand.