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The Wall Street Journal: Gazprom Pipeline Plan May Fuel Worry

Wall Street Journal image

Pact With Italy’s Eni
Might Boost Influence
Over EU Energy Supply
June 25, 2007; Page A11

•  The News: Russia and Italy back a proposed pipeline carrying Russian natural gas to Europe.

•  The Backdrop: Europe fears the Kremlin could use Europe’s increasing dependence on Russian gas as a lever.

•  Italy’s Advantage: Italian firms may get greater access to Russia’s energy reserves at a time when other Western companies face political pressure.


ROME — A joint project by Italy’s Eni SpA and OAO Gazprom to build a pipeline into the heart of Europe may help slake the continent’s rising thirst for natural gas, but it could also boost the Russian gas company’s direct control of Europe’s energy supply.

Representatives of the Russian and Italian governments Saturday signed a memorandum of understanding to cooperate on a 900-kilometer, or 558-mile, pipeline. The pipeline could carry as much as 30 billion cubic meters, or 1.05 trillion cubic feet, of gas annually from Russia into Europe through the Black Sea. Construction would begin as early as next year if the project, which is to be owned and financed via a 50-50 joint venture between Eni and Gazprom, overcomes regulatory hurdles. The pipeline, called South Stream, is scheduled to be completed three years later.

Saturday’s deal has wide-ranging implications for Europe as well as the companies involved. The European Union is under pressure to find new sources of natural gas to feed its growing demand just as its internal production is falling. By 2015, the EU may find itself importing 220 billion cubic meters a year, or roughly 60% more gas than it does now. Finding that gas in an increasingly competitive global market, and building the pipelines needed to import it, will be a major challenge.

But just as Europe needs new pipelines, European politicians are increasingly concerned with the continent’s dependence on Russia for future energy supply. Russia supplies more than a quarter of the European Union’s gas, a figure slated to rise in the coming years.

Gazprom, Russia’s gas monopoly, is foremost among EU regulators’ concerns. In the last two years, the vast majority of Gazprom’s gas sales to Europe were to large energy companies that then resold it to local customers. But the Russian company has recently been trying to extend its reach by gaining direct access to the lucrative European retail market.

Policy makers are worried that if Gazprom controls the supply of gas and the distribution infrastructure, it would have excessive control of the market. That adds to a concern that Russia could one day use its gas supply as a political lever in its relations with Europe.

The EU’s competition commissioner, Neelie Kroes, said earlier this month that Gazprom would have to sell its distribution assets in Europe as part of a planned deregulation of Europe’s energy industry.

Gazprom winces at that prospect. Speaking at the signing ceremony on Saturday, Gazprom Deputy Chief Executive Alexander Medvedev said he felt such a demand “ran counter to the free market.”

“If principles of communism have come to the EU, someone should let us know,” he added.

The Italian government has bucked Europe’s concerns about Gazprom, aggressively endorsing Russia as a strategic partner in energy and other areas, such as aviation. Just last week, Italy’s foreign minister, Massimo D’Alema, held court in Rome with Dimitry Medvedev, Russia’s first deputy prime minister and also Gazprom’s chairman, to discuss cooperation in a range of sectors. An Italian airline, for example, recently announced its intention to purchase Russian commercial aircraft and an Italian defense contractor, Finmeccanica SpA, is jointly developing a fighter jet with a Russian company.

Italian politicians say forging tighter ties with Gazprom is essential for Europe’s energy security. “We think of [the pipeline] as a deal between Russia and Europe,” Italy’s industry minister, Pierluigi Bersani, said at the signing.

Eni has launched itself as Gazprom’s top partner in Europe — a strategy that could eventually give Eni an advantage over other major oil companies that are struggling to develop Russia’s vast oil and gas resources. BP PLC last week sold its stake in a vast Siberian gas field to Gazprom after coming under regulatory pressure from the Russian authorities. Six months ago, Royal Dutch Shell PLC sold control of the Sakhalin-2 project, in far east Russia, to Gazprom after Russian regulators threatened to shut down the venture because of alleged violations of environmental norms.

Eni is already Gazprom’s largest customer, a ranking that allows the Italian company to maintain its position as the largest gas company by sales in the EU, with 18% of the total market.

Since Eni Chief Executive Paolo Scaroni arrived two years ago, he has courted Russia with intensity, seeing it both as a way to secure Italy’s future energy security and to boost Eni’s fortunes. Those efforts may now be paying off. Last November, he signed a sweeping accord to extend Eni’s massive supply contracts with Gazprom to 2035 in exchange for granting Gazprom a share of the Italian retail market. The two also pledged to cooperate on future exploration and production projects in Russia as well as internationally.

Eni could also now hold on to some assets in Russia that it previously thought it would have to cede to Gazprom. In April, Eni bought a raft of assets at auction that had once belonged to Russian oil company OAO Yukos. The agreement at the time was that Gazprom would have the right to buy many of those assets later on. On Saturday, however, Gazprom’s Mr. Medvedev indicated that Gazprom may decide not to exercise its option to buy one of those assets, Eni’s 20% stake in oil producer Gazprom Neft.

Neither Eni nor Gazprom would discuss specifics about how much it would cost to build the South Stream pipeline, although the investment is likely to run into the billions of euros. The pipeline would start on Russia’s Black Sea coast, at the same point where another joint Eni-Gazprom pipeline begins.

The South Stream pipeline would cross the Black Sea to Bulgaria, from which point it could fork into two routes: one heading south toward Italy and another toward Hungary.

–Liam Moloney contributed to this article.

Write to Gabriel Kahn at [email protected] and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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