by Judy Dempsey

09-12-05 Russia's energy giant Gazprom started building a natural gas pipeline that for the first time will directly link Russia to its West European markets and bind Germany and Russia even closer.
The North European Pipeline, which is being built jointly with Germany's two largest energy companies, BASF and E.ON Ruhrgas, will let Gazprom reduce its dependence on Ukraine, Belarus and Poland, which for decades have been its customary transit routes for transporting Russian gas to Western Europe.

By having direct access to Western Europe, Gazprom can lock its partners there into long-term gas contracts before Europe's energy markets are thrown open to competition.
In return, Europe will have access to secure and stable supplies of Russian natural gas at a time when demand is expected to surge. Consumption in the 25-member European Union is expected to double to 450 bn cm a year by 2015, according to E.ON Ruhrgas.

Aleksei Miller, chairman of Gazprom, who is a close ally of President Vladimir Putin, said the North European Pipeline "will guarantee secure gas deliveries from Russia."
"This success is due to the long experience of an alliance with the German companies," he said.

Miller was speaking in Cherepovets, 800 km, or about 500 miles, east of St Petersburg. There, amid freezing temperatures and heavy snow, Gazprom began the first part of this 916-km pipeline, which will transport gas from Siberia up to Vyborg on the Baltic Sea. Gazprom said this stretch would cost 1.3 bn, or $ 1.5 bn.
From there, Gazprom and German companies will build an underwater pipeline stretching 1,200 km from Vyborg directly to Greifswald in Germany, with spurs to Scandinavia and Britain.

Expected to be completed by 2010, the pipeline will have a capacity of 27.5 bn cm per year. Juergen Hambrecht, chairman of BASF, said the project also includes the possibility of building a second pipeline, doubling the transmission capacity to 55 bn cm.
Rainer Seele, a board member of Wintershall,the gas division of BASF, and chairman of Wingas, the joint venture with Gazprom that is involved in gas exploration in Russia, said the two underwater pipelines would cost 4 bn. Gazprom will have a 51 % stake in the project, and BASF and E.ON Ruhrgas will each own 24.5 %. Wingas has already agreed to a long-term contract to buy 9 bn cm of gas from the North European Gas Pipeline.

Wulf Bernotat, chief executive of E.ON Ruhrgas, said the pipeline was "of outstanding importance" for West European energy supply.
"More than ever," he said, "security of supply is the key challenge of our time. Western Europe is now competing with countries like China and India, which although their economic development is just taking off, are already showing a huge hunger for energy."

With gas reserves from the North Sea decreasing, Bernotat said, there is a growing need to import gas from producing countries outside Russia.
Russia supplies a quarter of the EU's gas needs and over a third for the German gas market. Half of the EU's gas supplies is imported. E.ON Ruhrgas said this was expected to rise to 80 % by 2030.

Gazprom has pursued the new pipeline not just to diversify its export routes to Western Europe but also to weaken its dependence on Ukraine and Belarus, which was not an issue when the Soviet Union existed and Moscow could arbitrarily establish transit and gas prices for the other Soviet republics. Over the past few years, Gazprom had repeatedly clashed with Ukraine and Belarus over transit prices for Russian gas headed to Western Europe and the cost of gas sold by Gazprom to those two countries.
Gazprom has sold gas to Belarus and Ukraine at $ 50 per 1,000 cm, almost a third of world market prices. Gazprom, too, has criticized Ukraine's management of gas pipelines crossing its territory, accusing Kiev last year of stealing gas.

With energy prices at a record high, Gazprom this year started negotiating with Ukraine to triple the price. So far, Ukraine has refused to accept the increase, saying it signed long-term contracts and that any rise in the price of Russian gas would mean a steep rise in transit charges.
President Viktor Yushchenko of Ukraine told EU officials at the summit meeting between the EU and Ukraine that his country would "never jeopardize" gas supplies to Europe.

Michael Glos, German's new economics minister, said the North European Pipeline would "guarantee the security of energy supplies to Europe."
Chancellor Angela Merkel of Germany has strongly supported the project despite objections by the governments of Poland and Ukraine.