April 29, 2014 / 4:38 PM / in 5 years

UPDATE 2-OMV and Gazprom press on with Austrian branch of South Stream gas pipeline

* OMV and Gazprom aim to get permits by end-2015

* Full commissioning expected January 2018

* Parties relying on 2010 intergovernmental agreement (Adds OMV comment on sanctions, details of route, background)

By Georgina Prodhan

VIENNA, April 29 (Reuters) - Russia’s Gazprom and Austria’s OMV said on Tuesday that they had signed a memorandum of understanding to build a spur of the South Stream gas pipeline to Austria, despite Western sanctions against Moscow over Ukraine.

The pipeline is designed to carry Russian gas to Europe, bypassing Ukraine - through which existing pipelines carry nearly half the gas that Europe buys from Russia. The project faces stiff resistance from some EU and U.S. officials, who want Europe to reduce its reliance on Russian energy.

U.S. and EU sanctions imposed on Russia over its annexation of Ukraine and subsequent actions have so far been limited to asset freezes and travel bans on individuals and companies closely linked to Russian President Vladimir Putin or to Russia’s annexation of Crimea, and on pro-Russian separatist rebels in eastern Ukraine.

Neither Gazprom nor its managers have been targeted. Gazprom Chief Executive Alexei Miller is a longstanding ally of Putin’s.

OMV said the two companies aimed to get the necessary permits by the end of 2015, make the first gas deliveries in 2017 and fully commission the spur, with half the capacity of the main pipeline, by January 2018.

Both Gazprom and OMV have warned against broadening Western sanctions, saying they could disrupt gas exports to Europe.

Asked about the potential effect of sanctions, an OMV spokesman said: “We cannot foresee what will happen in the short term but, in the long term, we are convinced of South Stream’s contribution to European security of supply.”

Italy’s Saipem, already contracted to work on one of four parallel South Stream pipelines due to cross the Black Sea, said on Tuesday it had won a 400 million euro ($554 million) order to work on another of the pipelines.

The European Union, concerned about Russia’s dominant role in supplying a third of the bloc’s gas, says South Stream does not comply with EU regulations on ownership and third-party access, regardless of bilateral agreements between Russia and some EU countries.

But some EU leaders see South Stream as a solution to the potential for more problems following disruptions to the gas flow through Ukraine in 2006 and 2009.

South Stream’s path from the Bulgarian Black Sea coast through Serbia and Hungary to the Baumgarten gas hub in Austria is close to the route that the now-abandoned OMV-led Nabucco West gas pipeline would have taken, transiting some of the countries most dependent on Russian gas.

The main branch of the 2,400-km (1,500-mile) pipeline is planned to continue from Hungary through Slovenia to Italy.

The European Union has placed the approval process for the project on hold following Russia’s annexation of Crimea and said it might take years to give the necessary permissions.

Gazprom and OMV said they had already established a legal basis for the Austrian section of South Stream in an intergovernmental agreement between Russia and Austria signed in April 2010. (Reporting by Georgina Prodhan; editing by William Hardy and Kevin Liffey)

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