December 7, 2012 / 3:12 PM / 5 years ago

UPDATE 1-European energy firms back Gazprom at pipeline ceremony

* South Stream to start pumping gas in 2015

* Project faces regulatory risks in Europe

* Putin says will ensure dependable gas supply to Europe

* EU official has called South Stream “phantom project”

By Alexei Anishchuk and Vladimir Soldatkin

ANAPA/MOSCOW, Dec 7 (Reuters) - European energy executives lined up with Russian President Vladimir Putin to witness the first weld on the South Stream pipeline on Friday in a show of support for a project that would enable Russia to retain its dominance of Europe’s gas market.

Top executives from partners in the South Stream consortium - France’s EDF, Germany’s Wintershall and Italy’s Eni - joined the chief executive of project leader Gazprom, Russia’s state gas export monopoly, for the ceremony near the Russian Black Sea resort of Anapa.

The pipeline is scheduled to start shipping gas in late 2015 at an annual rate of 15.75 billion cubic metres and reach full capacity in 2018 of 63 bcm, around half of Russia’s current gas flows to Europe.

The show of European corporate support may be an example of what critics have depicted as a Gazprom policy of cultivating strong ties with individual consumer countries as part of a divide-and-conquer strategy in iyd disputes with the European Union.

Relations between Russia and the European Union have been fraught with distrust over energy supplies for over half a decade. They have worsened since the EU’s competition watchdog launched an antitrust investigation into Gazprom’s gas flows and prices in September.

The two are also at odds over Europe’s pipeline access rules, which Gazprom says hinders investment in one of its major markets and creates uncertainty for the South Stream project itself.

Putin, who is due to go to Brussels for an EU-Russia Summit on Dec. 21, is likely to use the opportunity to portray Russia as committed to providing reliable energy supplies to Europe to counter European concerns that it is using gas market dominance for political leverage.

“Together with Nord Stream - the similar system on the seabed of the Baltic Sea - South Stream will create conditions for safe, unconstrained deliveries of Russian gas to our key consumers in Europe,” Putin told an assortment of European executives and Russian officials gathered in a huge tent for the ceremony.

After his speech, a worker completed a first, symbolic, welding of two sections of the pipeline.


South Stream was designed to bypass Ukraine after a 2006 conflict with Kiev led to cuts to winter gas supplies and strengthened Europe’s resolve to cut its reliance on Russia and find other sources of gas.

Russia has emphasised its willingness to invest in European energy security through the construction of South Stream, which will go under the Black Sea to Bulgaria then overland through southeastern Europe to Italy, and the completed Nord Stream pipeline, which stretches under the Baltic to Germany.

Some investors are sceptical about South Stream, which could end up costing 25 billion euros ($32.5 billion) or even more for both the undersea and overland sections.

A final investment decision by the South Stream partners is still conditional on several regulatory issues including environmental assessments and permits from Turkey, Bulgaria and Russia. The laying of the underwater section is not expected before 2014, after all the permits are obtained.

EU Energy Commissioner Guenther Oettinger, an advocate of reduced dependence on Russian energy, has called the 16 billion euro, 900 km undersea section a “phantom project”, reflecting doubts it will ultimately be built.

“This business is about the right combination of risk and cash flow. The construction of South Stream and Nord Stream is about reduced risks, and I think it’s good that risks will be lower,” Russian Deputy Prime Minister Arkady Dvorkovich said when asked whether South Stream’s costs were justified.

“It will provide stable cash flow for the Russian economy. I don’t think we should treat each project separately in this context.”

The project emphasises Russia’s need to keep a grip on the European market, where it has delivered just over 130 bcm so far this year, far short of its 150 bcm target.

Turkish Energy Minister Taner Yildiz was also in Russia for the ceremony, which followed a meeting between Turkish Prime Minister Tayyip Erdogan and Putin that reflected a deepening relationship on energy and trade.

South Stream would pass through Turkish waters in the Black Sea. The energy-poor country is also a vital transit territory for rival gas pipeline projects such as the proposed Trans-Anatolian Pipeline, which would carry gas from the BP-led Shah Deniz II gas project in Azerbaijan to southern Europe starting in 2016.

Yildiz said the environmental assessment for South Stream was not complete.

“All the official process is now ongoing, and we have already mentioned that we will be supporting the South Stream in this regard,” he told reporters in Anapa.

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