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Energy

Gazprom keeps Europe in a tight grip

Russia is expanding its position as gas supplier for Europe. By building the South Stream pipeline Moscow will reduce its dependence on Ukraine as a transit country ... and undermine the European Nabucco project.

Vladimir Putin will personally attend the official start of construction work. Russia's president has made it his personal goal to make the country an energy superpower. That's why Putin will be travelling to the South-Russian spa town of Anapa on the Black Sea on Friday (07.12.2012), where the first pipes of the South Stream pipeline will be welded together.

From left, EDF's director general Henri Proglio, Wintershall's member of board of executive directors Harald Schwager, Russian Prime Minister Vladimir Putin, Gazprom CEO Alexei Miller and ENI's director general Paolo Skaroni shake hands (AP Photo/Ivan Sekretarev)

President Putin with European South Stream partners (2011)

The first 900 kilometers of the pipe will be installed underwater. The pipe will then come to land near the Bulgarian harbor town of Varna. Eventually, the South Stream pipe will carry Russian gas via Serbia, Hungary and Slovenia all the way to Italy.

Russian energy giant Gazprom is one of the main drivers behind the multi-billion project. Gazprom owns half the shares in the South Stream Transport consortium that runs the operation. The other half is split between Italian company ENI who own 20 percent, French EDF and German BASF subsidiary Wintershall, who each hold 15 percent of the shares.

The chairman of the supervisory board is a German: Henning Voscherau is the former mayor of Hamburg. According to official figures, the project is due to be finished in late 2015 and is expected to transport up to 63 billion cubic meters of gas annually.

Gazprom's new strategy

This figure is comparable to the amount of gas that's currently being pumped to Europe via Ukraine. Ukraine has until now been the main transit country for Russian gas. The pipes were installed during Soviet times, and ever since, the European Union has been getting some 80 percent of its gas imports from Russia via these pipes.

But those days are over. Roland Götz, a former Russia expert with the German Institute for International and Security Affairs (SWP), based in Berlin, spoke of Gazprom's "clever strategy". The goal of the state-controlled energy giant, Götz said, was "to avoid transit countries by installing underwater pipelines". In the first stage, the North Stream project was realized in 2011, which transports Russian gas via the Baltic Sea to Germany. In the second stage, South Stream targets southern Europe, Götz told DW. On a map, the two pipelines look like a giant pincer that's keeping a tight grip on the European continent.

Russian pipelines are keeping Europe in a tight grip

Ukraine loses out

There's no mention of Ukraine at all in the image brochure published by the South Stream operation consortium. On the contrary, the texts refer to new "reliable delivery routes". Russia's gas deliveries to Europe were interrupted several times in the past because Russia and Ukraine fought over gas prices.

Ukraine considers itself a victim of the new Russian energy strategy. Ukraine will be cut off from transport fees - which means it's losing a valuable source of income. According to the government in Kiev, Gazprom already pumped less gas to western Europe between January and October 2012 compared to the same period the previous year.

Kiev expects to see transit volumes decrease even further. "Should Gazprom find an alternative route for its gas transports to Southern Europe, Ukraine would lose its monopoly status as a transit country", Moscow-based economic expert Alexander Polgalov told DW.

Economically viable?

But not everybody is convinced that the South Stream project is even economically viable. Its building costs that amount to a planned 16 billion euros are twice as high as for North Stream in the Baltic Sea. That prompted the Ukrainian government to point out that modernizing its existing pipelines would only be 4.5 billion euros, i.e. considerably cheaper.

It remains unclear just how demand for Russian gas will develop in the future. "South Stream comes at a time where the European gas market is in a period of transition," said Roland Götz, adding that demand was not rising as fast as initially projected. The reason, the energy expert said, was that new sources of energy such as shale gas or bio gas were making the market "more difficult to oversee."

Russia is aware of these developments. But the Kremlin demonstrates confidence. "Demand for gas may be going down at the moment, but there will be better times, too", said Putin at a press conference in the summer 2012. The South Stream project would continue, the head of the Kremlin insisted at the time.

Nabucco competition

Dr. Roland Götz from the German Institute for International and Security Affairs (press photo)

Götz: Russia has successfully disrupted the Nabucco project

But there is another reason why Russia is currently so eager to build an expensive pipeline in sourthern Europe. South Stream means competition for Nabucco. Nabucco is a pipeline in the planning that has the support from the European Union. Brussels wants to pump gas to Europe from Central Asia via Turkey to reduce its dependence on Russia.

The Europeans' goal is to "import gas from a variety of countries - not just from Russia", Claudia Kemfert, an expert with the German Institute for Economic Research (DIW), told DW. But that's of course not in Russia's interest. "If South Stream didn't get realized, Nabucco would," her Russian colleague Polygalov said. And that would mean the end to Russia's power in the realm of energy supply.

But currently, Moscow seems to have a better hand to play. Russia has successfully disrupted the Nabucco project, German expert Götz said. While the plans to have the Nabucco pipeline built are currently delayed and could be given up altogether, Russia is dishing up faits accomplis - it will begin building the South Stream pipeline.

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