Gazprom Enlists More Western Allies in South Stream

On June 19, at the St. Petersburg Economic Forum, Gazprom announced the appointment of Marcel Kramer as chairman of the board and CEO of South Stream AG, the company designated to build and operate the pipeline in the Black Sea (the overland sections are separate joint projects of Gazprom with each participant country). Kramer is completing his service as Chairman and CEO of Nederlands Gasunie, which is a minority stakeholder in another Gazprom-led project, Nord Stream (where Kramer also sits on the board). With dwindling gas reserves in the North Sea, Gasunie seeks to reinforce its positions in gas trading, transportation and storage by arrangements with Gazprom.

Also during the St. Petersburg Economic Forum, Russian President, Dmitry Medvedev, and his French counterpart, Nicolas Sarkozy, witnessed the signing of a trilateral agreement of intent by the heads of Gazprom, Italy’s ENI, and Electricite de France (EDF). The agreement envisages EDF joining the South Stream AG company before the end of 2010, with a stake of at least 10 percent. EDF’s stake would come out of ENI’s present stake of 50 percent, leaving Gazprom’s 50 percent intact. The agreement also governs the project’s joint implementation (Gazprom press release, June 19). ENI had unsuccessfully sought a symmetrical cut in Gazprom’s stake, which would have added to EDF’s stake while preserving Gazprom-ENI parity.

Sarkozy had discussed EDF’s entry into South Stream with Medvedev and Prime Minister, Vladimir Putin, during their recent visits to France (November 2009, March and June 2010). They also negotiated EDF’s participation in Russian nuclear energy projects; as well as the accession of another French champion company, Gaz de France, to the Gazprom-led Nord Stream pipeline project on the Baltic seabed.

EDF, a major producer of nuclear-generated electricity, seeks to become a significant international player in the gas business. Apart from supplying its own gas-fired electricity production plants, EDF also plans to sell natural gas from South Stream to its European customers (Dow Jones, June 20).

Thus, EDF joins the ranks of gas-poor companies that become gas traders by special arrangements with Gazprom; or maintain their gas-trading positions by partnering with Gazprom in Europe. The Italian ENI did so many years before EDF. Indeed, ENI provided its niche- technology and investment funding to lay Gazprom’s Blue Stream pipeline across the Black Sea, from Russia to Turkey, in 2000-2002. Gazprom, cash-poor at that time, repaid ENI with natural gas that ENI then marketed in Italy. Closely connected with Silvio Berlusconi’s government, ENI has opened a wide door for Gazprom to the Italian gas market.

These appointments and accessions illustrate the expansion of Gazprom’s business and political networks in Western Europe –a process conducted from the Kremlin via Gazprom. The gas deals as such would probably not suffice to advance this process. With the gas projects, however, the Kremlin offers package deals to key interest groups in Europe. For example, German and Italian steel producers receive the lion’s share of steel pipe orders for Gazprom’s European projects, generating political support regardless of adverse implications for energy security or EU common policies. Cross-lobbying by South Stream partners for Nord Stream, and vice-versa, also strengthens Russia’s positions in Europe.

Italy has been urging the European Union to declare South Stream a Trans-European Network (TEN) project –a status that would facilitate access to credits for South Stream. The TEN status has opened access to multibillion-dollar credits for Nord Stream. The French entry into South Stream is partly intended to push for TEN status for this project (Gazprom Again Reconfigures the South Stream Project, EDM, June 22).

Russian sources generally cite Gazprom’s 2009 cost estimates at $25 billion to $30 billion for the South Stream project overall, including $9 billion for the seabed section. Such costs seem to explode any known frame of reference for gas transportation projects. Moscow expects project financing both from Western Europe and impoverished East European countries along South Stream’s multiple branch lines. These countries would have to borrow heavily for financing their side of the joint ventures with Gazprom in each country. In that case, they would go into debt only for moving away from supply diversification and sharing control of infrastructure on their territories with Gazprom.