OPERATION “RING”

On the eve of the Balkan Energy Summit (which was held in the Croatian capital of Zagreb at the end of June and was attended by President Vladimir Putin), a Russian gas company and Italy's Eni signed a memorandum to begin work on the South Stream pipeline to supply gas to southern Europe. The new route is planned to run not through Turkey, but directly from Russia to Bulgaria along the bottom of the Black Sea. Thus Russia is diversifying its corridors of gas supply to Europe, trying to avoid dependence on one transport system, experts point out.

The memorandum on mutual understanding to implement the South Stream project was signed by the deputy chairman of the Gazprom board and director-general of the Gazpromexport limited liability company, A. Medvedev, and Eni boss Paolo Scaroni within the framework of the bilateral agreement on strategic partnership signed on 14 November 2006. The 900km gas pipeline will run along the Black Sea floor from Russia to Bulgaria, and its capacity will be up to 30 billion cubic metres per year. In Bulgaria, the South Stream will split into two pipelines. One will go through Romania and Hungary to Austria and Slovenia and the other through Greece to southern Italy. In order to implement the new project, a joint venture will be set up to run the construction of the gas pipeline, which it will receive as a concession afterwards. The Eni boss explained that the partners will finance the project on a parity basis. "The gas pipeline will work within three years of obtaining all the necessary permits," Mr. Scaroni explained. Gazprom says that the cost of the project and the partners' shares will be defined after the feasibility study is drawn up by the Italian company Saipem which participated in the Blue Stream project, also belonging to Gazprom and Eni. A feasibility study for the South Stream was only recently prepared by the Hungarian company MOL, according to official information. Gazprom did not clarify why it did not go ahead with the Hungarian project, but the document that was signed shows that the route of the pipeline had suddenly changed. It was planned earlier to run through the Black Sea in parallel with the Blue Stream and then into Turkey. But, as experts point out, Turkey is not interested in the new project because it openly supports the alternative project, Nabucco.

A number of experts think that the change in the route of the South Stream was made to diversify corridors of supplies to Europe. Konstantin Batunin from Alpha Bank estimated the cost of just the sea section of the South Stream at 3-4 billion dollars. "It would be cheaper to lay a new section in the Blue Stream corridor than to go directly through Bulgaria," the analyst said in an interview with the Russian newspaper Kommersant. But the total throughput capacity of the South Stream and Blue Stream would be 48 billion cubic metres per year, while Turkey "would have the opportunity to influence the energy security of the European Union". "Being the closest ally of the United States in the region, it is not clear how it would use these transport flows and whether it would prefer Azerbaijani or Iranian gas to Russian gas at some point in the future," Batunin stressed. Valeriy Nesterov from Troika Dialog estimates the cost of the sea section of the South Stream at more than 5 billion dollars. "In conditions when Ukraine has raised the possibility of trebling transport duties through its territory for Gazprom, the new project will allow the monopoly to avoid insured risks," the analyst pointed out. According to the newspaper, Gazprom does not conceal the fact that it is in a hurry to implement the South Stream project. It has a real rival - the Nabucco gas pipeline, with a capacity of 31 billion cubic metres per year, which will run from the Caspian shelf to Europe through Turkey and the Balkans (the cost of the project is 5.1 billion dollars). It is planned to complete its construction by 2012. The South Stream in the Balkans almost mirrors the Nabucco route - the issue is which of these projects will be favoured by gas transit countries. It is no accident that the memorandum was signed the day before President Vladimir Putin's visit to Zagreb to attend the Balkan summit on energy cooperation. The South Stream, which directly links Russia and the Balkans, promises extra income from the transit of Russian gas. The average European transport tariff is 2.4-3.2 dollars per 1,000 cubic metres of gas per 100 km, which means hundreds of millions of dollars for the budgets of the transit countries. According to Troika Dialogue's estimates, each country will receive 300 million dollars per year.

Moscow is stepping up its gas diplomacy against a background of the significant strengthening of Gazprom's production and financial indicators. According to the Ministry of Economic Development, in 2006 gas extraction totalled 656.3 billion cubic metres (in 2007 - 665, forecast for 2010 - 702-717), export - 202.8 billion cubic metres (in 2007 - 198 and forecast for 2010 - 218-223). The export income of the company according to the results for 2006 reached a record level of 37.2 billion dollars. In 2006, Russian natural gas supplies to 22 countries in Central and Western Europe breached two records: 151.1 billion cubic metres in volume (147 billion cubic metres in 2005) and 37.2 billion dollars in revenues (26 billion dollars in 2005). The reason for the sudden increase in export revenues was the hike in gas prices, first of all in the CIS. In Ukraine alone, prices increased from 55 to 95 dollars per 1,000 cubic metres, while in the European Union the average cost of supplies increased from 230 to 260.7 dollars per 1,000 cubic metres. In December 2006, Romanian Prime Minister Calin Popescu-Tariceanu pointed out that Russian gas prices had reached 300-310 dollars per 1,000 cubic metres. "These prices are unprecedented," Mr. Medvedev maintains. He stressed that Europe's own extraction is falling while Russia's position in this market is getting stronger. According to this top manager, the share of Russian gas in Central and Western Europe consumption in 2006 reached 27 per cent and Russia's share of gas imports - 35 per cent.

In 2007, the management of the company hopes to increase revenues from gas exports; however, analysts believe that such forecasts are too optimistic. In their opinion, only a cold autumn and early winter, as well as a hike in oil prices on the world market and in gas prices for CIS member states, will help Gazprom implement its prediction on increasing revenues. Indeed, prices for gas supplies to CIS countries have increased again: for example, to 130 dollars for 1,000 cubic metres in Ukraine and from 46.68 to 100 dollars for 1,000 cubic metres in Belarus. However, experts still think that Gazprom predictions are way too optimistic. Brokerkreditservis analyst Maksim Shein recalls that because of the unusually warm winter, gas exports in January-May fell by 18 per cent, "Gazprom assumed an average European price of 290 dollars this year. But for the time being, we can see that due to the fall in oil prices on the world market last autumn, the price parameters of gas contracts in the first half of this year also turned out to be considerably more modest than was forecast - at 250-260 dollars," the expert said. "In any case, Gazprom has not lost everything yet," Valeriy Nesterov from Troika Dialog says. "If the autumn and winter are cold, gas consumption in the fourth quarter might cover the supplies missed in the first half-year. Gazprom has reduced its export forecast for this year by four billion cubic metres, however, it hopes to receive high revenues from a rise in gas prices in the last three months," the analyst maintains. A barrel of Ural oil was sold on international exchanges in January for 50.3 dollars, in February - 54 dollars, in March - 59 dollars and in the last three months - 65 dollars. With such oil prices, contract prices for gas will increase to the planned level of 290 dollars and make it possible to meet the annual financial predictions of the monopoly, according to Nesterov's calculations.

On the whole, thanks to its energetic gas diplomacy, Russia takes third place among the EU's trading partners, lagging only behind the USA and China. In turn, 52 per cent of all Russian exports and about 70 per cent of accumulated foreign capital in the Russian economy are with the EU. This mutual dependence is especially evident in the energy sector. As we said above, Russia is an important supplier of natural gas to the EU. About 44 per cent of EU imports are from Russia, or 27 per cent of all gas consumed in the EU. Since 2000, the volume of Russian oil exports to Europe has been steadily growing both in absolute terms and in weight. Russia takes second place in the supply of oil and oil products to EU countries. According to the EU's own predictions, by 2030 its dependence on foreign gas supplies will increase to 81 per cent and oil supplies to 93 per cent of overall consumption. There is no doubt that behind these figures, there is the prospect of increased economic presence and political influence for Moscow on the European continent.