(Updates with Putin opening link in fifth paragraph.)
Sept. 6 (Bloomberg) -- OAO Gazprom today started pumping natural gas into a $10 billion subsea pipeline from Russia to Germany, bypassing Ukraine, where disputes halted supplies to European customers at least twice since 2006.
The Nord Stream pipeline runs under the Baltic Sea and will be able to carry enough gas to supply 26 million European homes when it’s fully up and running next year. It’s the first direct link between western Europe and Russia, which supplies about 25 percent of the European Union’s gas.
Clashes between Ukraine and Russia over gas prices and debts have disrupted shipments to Europe and led Gazprom to seek alternative routes. Nord Stream may weaken Ukraine’s hand in negotiating gas supply deals with Russia. Ukraine, which carries 80 percent of Russian gas to the EU through Soviet-era pipes, wants to revise its long-term contract for fuel imports.
“Nord Stream is important as it will reduce supply uncertainty and price volatility in the winter,” John Fahy, managing director of London-based consultants Eras Ltd., said by e-mail.
Russia’s Prime Minister Vladimir Putin today clicked open the valve to start filling the Nord Stream link with gas at a compressor station near Vyborg in the northwest of the country.
“We are slowly and surely turning away from the dictate of transit states,” Putin said yesterday. The pipeline will supply commercial gas to Germany at the end of next month.
Gazprom, Russia’s gas-export monopoly, and its partners, BASF SE’s Wintershall AG unit, E.ON Ruhrgas AG, Nederlandse Gasunie NV and GDF Suez SA, are building the pipeline in stages. The first line will have a capacity of 27.5 billion cubic meters a year, doubling to 55 billion cubic meters when the second is ready in 2012.
The Nord Stream partners had to overcome environmental concerns raised by the Baltic Sea countries as well as political challenges from transit nations, including Poland, which compared it with the Molotov-Ribbentrop Pact that divided Europe before World War II. Poland and Belarus transfer about a fifth of Russia’s gas to Europe.
The link crosses a seabed strewn with more than 150,000 mines, dating from the two World Wars, as it runs from the Russian city of Vyborg near the Finnish border to Greifswald on the Baltic coast in Germany, according to Nord Stream. The company bypassed the munitions in some locations and removed them in others.
The total cost of the link, including financing expenses, is about 8.8 billion euros ($12.5 billion), Russian Deputy Prime Minister Igor Sechin told reporters today.
European winter gas prices, led by the U.K.’s National Balancing Point, the continent’s largest single market for the fuel, have advanced to near three-year highs amid heightened concerns that security of supply will decline and import dependency may rise as North Sea production dwindles.
Gas for delivery in Britain during the six-month heating season from October reached 78.25 pence a therm on Aug. 31, the highest since October 2008. It rose 1.5 percent to 74.85 pence a therm as of 1:30 p.m. U.K. time today, according to broker prices on Bloomberg. That’s equal to $12 a million British thermal units.
With Nord Stream, Gazprom may divert as much as 20 billion cubic meters that are currently shipped through Ukraine, Chief Executive Officer Alexei Miller said in May, according to state television Rossiya 24. Sergei Kupriyanov, a spokesman for Gazprom, declined to comment on expected volumes yesterday.
Ukraine’s state-run energy company NAK Naftogaz Ukrainy, which pumps about 100 billion cubic meters of gas a year to Europe, has an annual transit capacity of 142 billion cubic meters.
“Reduction in transit volumes will cause Ukraine to lose about $550 million in revenues from transit next year,” said Denis Sakva, an energy analyst at Dragon Capital, a Kiev-based investment bank.
Nord Stream is nearing completion as Ukraine, the biggest buyer of Russian gas, seeks lower gas purchases from Gazprom and revisions to a pricing formula. Gazprom’s Miller had offered to revise the contract if Naftogaz agreed to merge with his company. That proposal was rejected by Ukraine.
The eastern European country may have to turn to an international court “as a last resort” to revise gas supply contracts, President Viktor Yanukovych said on Sept. 3, according to his website.
Former Ukrainian Prime Minister Yulia Tymoshenko has been detained in custody since Aug. 5, charged with agreeing to pay too much for Russian gas in 2009. She has accused Yanukovych of trying to silence his opposition before next year’s elections.
Adding a third line to Nord Stream may make sense given growing tensions with Ukraine, which can’t unilaterally terminate its gas contract with Russia, Sechin said today.
From Germany, Nord Stream’s first line will be connected to the OPAL system that connects the Czech Republic. The second will connect to the NEL onshore pipeline and carry gas to western Germany and other European countries.
Gazprom has contracted about 22 billion cubic meters to supply customers including EON and GDF Suez via Nord Stream in the coming years.
“Nord Stream will be especially important” if existing agreements between Russia and Ukraine “break down this winter over the pricing issue, thus leading to a new dispute,” said Katja Yafimava, a research fellow at the Oxford Institute for Energy Studies.
--With assistance from Ben Farey in London. Editors: Torrey Clark, Stephen Cunningham.
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