Bloomberg News

Gazprom Revives German Power Plan for Nord Stream Gas

November 27, 2012

OAO Gazprom (OGZD), the world’s biggest natural-gas producer, is reviving plans to build a power plant in Germany to boost sales to its biggest export market via the Nord Stream pipeline and develop European generation.

The northeastern German state where the pipeline comes ashore from the Baltic Sea is lobbying to build gas-fired power generators and has asked Gazprom to participate, Gunnar Bauer, the spokesman for the Economy Ministry of the state of Mecklenburg-Vorpommern, said by e-mail yesterday. A Gazprom Export official, who declined to be identified in line with company policy, confirmed its interest in the power project.

“Europe needs investments, particularly Germany with its nuclear closure,” Sergey Beiden, a power analyst at Otkritie Capital in Moscow, said by e-mail on Nov. 26. “Any project that secures stable gas supplies is interesting for Gazprom.”

Gazprom, which supplies about a quarter of Europe’s gas, is seeking to maintain its market share and boost German sales by gaining access to end-customers. With partners EON SE, GDF Suez SA (GSZ), Wintershall AG and Nederlandse Gasunie NV, the Moscow-based company last month doubled the pipeline’s capacity to 55 billion cubic meters a year.

While Nord Stream’s current flows are less than a quarter of capacity, Gazprom is considering adding two more lines to the project, with one potentially ending in the U.K. BP Plc (BP/) is interested in the Nord Stream expansion, Toby Odone, a spokesman for the London-based company, said by phone.

EON, Gazprom

EON plans to build and operate a combined heat and power generation plant in the town of Lubmin, near Nord Stream’s entry point, through a joint project company with Gazprom’s Wingas GmbH venture, said Alexander Ihl, a spokesman for the German utility. Gazprom is taking over Wingas, acquiring Wintershall’s half of the venture as part of an asset swap.

Gazprom had sought to build a gas-fired power plant with EON under a February 2008 memorandum, which was put on hold the next year because of the global economic slump.

Harry Glawe, the German region’s economy minister, will talk about the plan with Nord Stream representatives in Switzerland on Nov. 29 and Nov. 30, after meeting with Gazprom Export officials in Russia last month, Bauer said.

Power-generating operations may start by December 2015, the approval authority said in a statement on Nov. 19. The region plans to build three generating units with a maximum total capacity of 3,450 megawatts, according to the statement.

Well Advanced

The approval processes for gas-powered plants are “well advanced,” Glawe said in Moscow, according to an e-mailed statement dated Oct. 19. Mecklenburg-Vorpommern needs “the construction of additional highly flexible gas-fired power plants,” he said.

Gazprom wants to gain a foothold in European power generation to secure customers for its gas at a time when its clients are seeking discounts and revisions to its oil-linked pricing, and demand for Russian gas is squeezed by competition with liquefied natural gas, supplies from Norway and cheaper U.S. coal exports.

Gazprom and EON are banking on saving supply costs from Nord Stream to boost power-plant margins.

“It makes sense in terms of delivered cost of that gas,” said Massimo Di Odoardo, principal analyst for European gas and power research at Wood Mackenzie Ltd. in London. “But in Germany, no one is building gas power plants just because of the combination of the power prices on the one side, and the cost of gas versus coal makes these investments not suitable at this time.”

Clean-Spark Spreads

Germany generators make a loss of 12.43 euros ($16.15) a megawatt-hour from burning gas, according to Bloomberg calculations of the so-called clean-spark spread, which takes into account electricity, fuel and carbon prices for next month. Clean-spark spreads to at least 2015 are negative. The equivalent measure when burning coal shows a profit of 11.23 euros a megawatt-hour.

“At the moment, given where the carbon price is, it makes sense to burn coal, not gas,” Di Odoardo said by phone.

Long-term goals to curb use of dirtier-burning coal and increase the share of cleaner gas and renewables remain intact because of European Union environmental rules and Chancellor Angela Merkel’s order to close all German nuclear power plants by 2022.

“New clean coal technology is very expensive and I think gas power plants are quite attractive,” Otkritie’s Beiden said.

To contact the reporters on this story: Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net; Tino Andresen in Dusseldorf at tandresen1@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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