New interconnection projects: Gazprom to push its pipelines into the heart of Europe

Energy giant Gazprom plans to build two new extensions of Nord Stream under the Baltic Sea, in collaboration with Royal Dutch Shell, E.ON and OMV in order to increase the quantity of gas delivered to Europe, says Alexey Miller, Chairman of the Gazprom Management Committee. The future transport infrastructure will allow the transport of an additional amount of 55 billion cubic meters per year, and in this regard has already signed a memorandum of intent, Alexey Miller announced, quoted by the international press.

Gazprom Nordstream2This would be the second largest pipeline project designed to set a direct route for supplying Western Europe with Russian natural gas. Launched in 2011, Nord Stream is made up of two pipelines connecting Vyborg (Russia) to Greifswald (Germany) via the Baltic Sea, thus bypassing transit countries in Eastern Europe. By building two new lines the transport capacity of the Nord Stream gas pipeline would double. Gazprom spokesman Sergey Kupriyanov stressed that Gazprom will own a 51% stake of the phases 3 and 4 of the Nord Stream project.

So far, there is no deadline set for starting works. A Gazprom official, however, said the new company will be based on the positive experience and achievements of Nord Stream AG. He added that “the project is the second Nord Stream”. The current pipeline, completed in 2012, with a length of 1,222 kilometres, is a direct supply facility for Germany with Russian gas through the Baltic Sea, it has an annual capacity of 55 billion cubic meters and provides 39% of Germany’s consumption. The project to double the capacity of Nord Stream bypasses Energy Package 3 of the European Union which prohibits an energy producer to be also the owner of the pipeline. This restriction has led to the cancellation of the South Stream project.

Investment of nearly EUR 10 billion

The value of the new project will be close to EUR 9.9 billion, possibly less due to cost savings, as compared with EUR 8.5 billion spent on the two existing Nord Stream pipelines. As in the case of the first two sections, the funding will be provided 30% by shareholders and 70% by loans. Much of the preparatory works have already been done, such as design and route planning, selection of contractors and of pipes suppliers. The new pipeline, which starts near the Russian port of Ust Luga, near Sankt Petersburg, will enter the German territory in the Nord Stream 1 and 2 entrance area. The gas will be delivered across Germany, OMV aiming to transform Austria into one of the largest gas supply centres in Europe.

The shareholders of Nord Stream consortium are, alongside Gazprom (51%), the German companies Wintershall, a BASF unit, and E.ON Ruhrgas with 15.5% each, the Dutch company Gasunie and the French company ENGIE (formerly GDF Suez), with 9% each.

Strategic alliance with Royal Dutch Shell

On the other hand, Gazprom wants to build a strategic alliance with Royal Dutch Shell which will include assets exchanges and will allow the Russian gas producer to enter new markets. Alexey Miller said the agreement with Shell targets the expansion of the USD 20 billion natural gas liquefaction joint venture on the island of Sakhalin and the exchange of assets in exploration and production. “Such important documents are signed only once five or ten years,” stated Miller. According to international media, the agreement with Shell would be a great gain for Gazprom, as it comes during troubled times for Russia, when many Western companies give up their partnerships with the former USSR.

Gazprom Group, which is subject to US sanctions, but not of the EU ones, is struggling for a market share in Europe in the context of gas supply exceeding demand, being locked in a dispute with Ukraine on pricing. “Many of our traditional partners are positioned as strong regional players. Shell is a global player. As the global gas market develops, we will set up a global strategic partnership,” Alexey Miller added.

This year Shell was involved in a very important transaction, as it took over BG (British Gas) for no less than USD 70 billion. Miller believes that the transaction increases the potential for collaboration with Gazprom, such as exchanges of exploration and production assets. “It will take some time to materialize the agreement, Shell must become the owner of BG. We hope to sign such an agreement (exchange of assets – our note) next year at the forum in Sankt Petersburg,” said the Gazprom manager. Shell has to get the consent of the regulatory authorities in Brazil, Australia and China in order to take over BG. “We know the markets of Brazil, Australia and Asia. This allows us to talk about a global partnership,” Miller underlined.

Negotiations underway to attract ENGIE in the new project

Gazprom is negotiating with ENGIE, the French company for utilities, present also in Romania, in the attempt to convince it to join the group of companies that wants to expand the Nord Stream pipeline’s transport capacity, international media reported, but for the time being the ENGIE representatives made no comment on the information. Involving ENGIE into the project comes after the German company BASF recently announced the signing of a memorandum of understanding to join the group of companies that want to expand the Nord Stream transport capacity. “Gazprom and ENGIE are carrying out negotiations but no decision has been taken yet. The key issue is represented by the conditions under which ENGIE might join the project,” sources close to the negotiations said.

Cooperation with Eni goes on

On August 20 a working meeting between Alexey Miller and Claudio Descalzi, CEO of Eni, was held at Gazprom headquarters, during which they discussed various aspects of cooperation in the gas sector. The agenda also included the current situation and the European gas market developments, the partners agreeing to continue the cooperation based on the contracts currently in progress. The managers of the two companies have reached topics related to the development in building the necessary infrastructure to supply Europe with natural gas from Russia. “Successful implementation of infrastructure projects such as Nord Stream and Blue Stream largely depends on the cooperation between the partners and the contractors such as Saipem. We are already envisaging the huge potential of future cooperation with Saipem, within Gazprom’s current and future projects,” Miller said. The Italian group Eni is Gazprom’s major partner within the Blue Stream gas pipeline project, an export pipeline with an annual capacity of 16 billion cubic meters, which transports natural gas from Russia to Turkey under the Black Sea.

The future Tesla project, to be decided in September

Serbia, Macedonia, Greece and Hungary could sign a memorandum of understanding on the construction of a gas pipeline from Turkey to Austria, the Russian newspaper Vedomosti reported, citing a source close to the project. The Tesla pipeline, which is an extension of the Turkish Stream gas pipeline supported by Gazprom, could pass through Greece, Macedonia, Serbia and Hungary to reach the natural gas hub of Baumgarten in Austria. The Russian media claims that the foreign ministers of the Balkan countries would meet in September to take a final decision on the extension of the Turkish Stream gas pipeline to Europe. If the parties will reach an agreement, the future pipeline will have a transport capacity of 27 billion cubic meters and could be completed by 2019. Turkish Stream will cross the Black Sea to reach the Turkish-Greek border, and then to reach the consumers in Southern Europe. According to the preliminary agreement signed late last year by Gazprom and by the Turkish company Botas, the total capacity of the entire Turkish Stream project is expected to reach 63 billion cubic meters per year, of which a capacity of 43 billion cubic meters would be for Turkey.

Unfavourable prospects

The Russian Ministry of Economy has announced that Gazprom’s gas output will reach a historic low of 414 billion cubic meters in 2015, by 10% less than last year’s production. The declining trend is a consequence of the company’s falling investment capacity in the context of international trends in oil prices and of the economic sanctions against Russia, following the conflict in Ukraine, it said, being quoted by the international press. This year will not be too good for Moscow’s ‘economic army’, given that Gazprom’s results registered last year were not very good either.

Falling net profit in 2014

Russian group Gazprom’s net profit fell last year by 86% to 159 billion rubles (USD 3.1 billion) due to the ruble’s depreciation and due to higher provisions. The Russian oil and gas producers have been strongly hit by lower oil prices and by the ruble’s depreciation, which has increased the debt denominated in USD. The group registered losses related to the foreign exchange amounting to 1,100 billion rubles (USD 21.2 billion), while the provisions grew by 245.5 billion rubles, including the costs derived from the commercial dispute with Ukraine. Gazprom’s total sales increased in 2014 to 5.59 thousand billion rubles against 5.25 thousand billion rubles in 2013.

The gas sales to Europe and other countries decreased by 8.5% to 159.4 billion cubic meters, while the average price rose by 11% to 13,478 rubles (USD 261.3) for 1,000 cubic meters.

Recently, the company posted results for the first quarter, showing an increase of 71% against the same period last year. Net profit in Q1 2015 amounted to 382.1 billion rubles (USD 5.91 billion), compared to the amount of 223 billion rubles in Q1 2014. Gazprom estimated a net result of 348 billion rubles for this interval.

NIS Petrol, Gazprom’s phalanx in Romania

The Serbian company NIS Gazprom Neft, under the Russian energy giant’s control, invested last year EUR 50 million for drilling and exploration works in four concession blocks in western Romania, the annual report of the company reads. A large part of the funding is provided by the parent company through long-term loans. At the end of last year, the value of loans granted by Gazprom to its subsidiary NIS was of EUR 9.2 million, up by 15.4% against the end of 2013. NIS Gazprom Neft owns concessions in the areas of Tria, Baile Felix, Periam and Biled, following an agreement signed in 2011 with the Canadian company East West Petroleum.

According to the document, NIS is financing 85% of the works. Moreover, the Russians own a perimeter jointly with the Irish of Oil and Gas Moesia and another one with the British of Zeta Petroleum. The company also announced that it targets a 10% market share of the petrol stations in Romania after 2015. By the end of last year NIS Petrol had in Romania 18 filling distribution stations through an investment of EUR 8 million, although initial estimates targeted 30 units. All the filling stations in Romania operate under the Gazprom brand.

NIS Petrol concluded last year with a turnover of EUR 32.6 million, up against 2013 of EUR 18.7 million. The company representatives recently stated it targets a total of 250 fuel distribution stations under the Gazprom brand in Romania, Serbia, Bulgaria and Bosnia by the end of the year.

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