The South Stream pipeline is designed to deliver up to 3bnof natural gas from Russia to Central and Western Europe. It will extend some 2,000 miles from Russia, across the Black Sea, through Bulgaria and Serbia, then westwards to various parts of the EU. The line is being promoted by state gas company Gazprom and Italy’s ENI. Its cost has been put in excess of $13 bn.

Two routes had originally been under consideration: one via Romania, Hungary and Slovakia to Northern Europe and one passing through Bulgaria and Serbia en route to places further west and south. The Serbian route appears to have been chosen partly in order to strengthen Russian ties with a key ally in Eastern Europe. For its part, Serbia has been anxious to obtain a direct supply link with Russia for its gas rather than rely on the present pipeline that passes through Ukraine. On previous occasions during disputes between Russia and Ukraine over prices, Serbia has experienced interruptions to its supplies. Serbia has to import nearly all of the 250 mn cfd it consumes.

Another incentive for Moscow to proceed with the Serbian route was an agreement that Russia could take a stake in Serbia’s national oil company, Naftna Industrija Srbije (NIS) (see ‘The Month in Brief’). This is likely to involve a 25% shareholding in NIS and the stake is expected to go to Gazprom. NIS owns Serbia’s two oil refineries: the 98,000 bpd Pancevo unit and the 117,000 bpd Novi Sad refinery. Gazprom is also likely to build gas storage facilities in Serbia.

Some nine days after agreeing the Serbian deal, on 20th December, the Russians signed an agreement with Kazakhstan and Turkmenistan to build a 2 bn cfd pipeline between the two Caspian countries and Russia. The line would transit a further gas producer: Uzbekistan. The new pipeline is supposed to be in operation by late-2010 and could be increased in capacity after that date.

This suggests a fairly tight timetable for the project, but Moscow’s aim appears fairly clear. It wants to tie-up as much Caspian gas as possible in deals with its national gas company Gazprom before other, rival schemes have time to act.

Three major pipeline deals designed to bring Caspian gas directly into Europe are under discussion at present. All are being promoted as a way of reducing the EU’s reliance on Russia. The EU Commission has been giving particular encouragement to a line backed by Austria’s OMV and others to pipe gas from Azerbaijan and Turkmenistan to Central Europe in a project known as Nabucco.

Nabucco is the largest of the three lines proposed between the Caspian and Europe and if it were to go ahead, the other two-the Interconnector Turkey Greece Italy and the West Balkan line-would almost certainly not be built. The problem for the EU is that Nabucco may now not be able to go ahead either. Russia’s recent agreement to take up to 2 bn cfd of gas from Kazakhstan and Turkmenistan leaves little available for other export pipelines such as Nabucco. Moreover any Caspian and Central Asian gas not tied-up by Moscow would probably be exported to China rather than going westwards to Europe.

The Kazakh and Turkmen gas signed-up by Russia is almost certainly intended for the South Stream pipeline. The line may also carry gas from Uzbekistan to Europe. Russia has for some time been trying to encourage its Caspian and Central Asian neighbours to route more of their gas exports via its territory. After years of paying low prices for their gas, Gazprom agreed in 2007 to a doubling of the price paid to Uzbekistan to about $2.85 per mn BTU. This year, the Russian company will pay an extra 30% for Turkmen gas for the first six months and then an extra 15% on top for deliveries in the second half of 2008, bringing the total to $4.25 per mn BTU.

Russia’s latest plans may still leave some spare Caspian and Central Asian gas available for the Nabucco pipeline, but Moscow appears to have allowed for this by leaving open the idea that the 2 bn cfd pipeline to Kazakhstan and Turkmenistan might be increased in capacity. It is also possible that Russia will consider building spur-lines off South Stream to enable it to serve more countries in Europe. The EU may be beginning to realise this as well. The Energy Commission is promoting new trade links with gas exporters in North Africa and is even considering pipeline imports from as far away as the Middle East and Nigeria.