Deals fire up gas pipeline contest

Russia and Nabucco in fight to gain control of major corridor into Europe.

The struggle for control of a major natural gas supply corridor to Europe is heating up, with the two principal contenders announcing landmark agreements at the weekend in a race to get under way by the end of next year. Both of the two proposed pipelines would supply a significant portion of Europe's gas supplies, but increased competition from other sources means only one is likely to go ahead in the next five years, analysts say.

On Saturday, Russia signed an agreement with Austria to co-operate on the South Stream pipeline, which would transport Russian gas under the Black Sea and terminate in Austria. The day before, backers of the rival Nabucco pipeline said they were taking construction bids for that project, which would bring gas from the Caspian region and Iraq through Turkey, also ending in Austria. Nabucco would potentially offer a link to lucrative markets for remote gas reserves in Iraq, Iran, Azerbaijan and Turkmenistan.

Vladimir Putin, the Russian prime minister, heaped scorn on the competing Nabucco proposal at a signing ceremony in Vienna, arguing it lacked sufficient gas supplies to fill the ?7.9 billion (Dh38.93bn), 3,300km pipeline. "We can guarantee Russia's growing demand and that of essentially all our clients in Europe for the next 100 years," Mr Putin said on Saturday. "Name me one [supply] contract that has been signed by Nabucco."

South Stream, costing up to ?25bn, would supply up to 63 billion cubic metres of gas per year - equivalent to 13 per cent of Europe's consumption last year - and re-route some supplies that now pass through Ukraine and other Eastern European countries. Nabucco would provide 31 billion cubic metres of new supply to the market. OMV, the Austrian oil company, has agreed to build a section of the Nabucco pipeline in partnership with Gazprom, the Russian gas giant. The companies expect to make a final investment decision within 18 months.

Gazprom executives have said they see competition for Europe's gas market increasing in coming years, not just from other pipelines but also from a global glut of liquefied natural gas (LNG) that is shipped by tanker and freely traded on the global market. An unexpected surge in domestic gas production in the US has led to an oversupply of LNG and put pressure on Russia and other pipeline suppliers to Europe, said Howard Rogers, a gas expert at the Oxford Institute of Energy Studies.

"If North American production remains resilient despite low prices, this would place greater strain on the ability of Europe's oil indexed pipeline importers to sell on their contractual minimum volumes," Mr Rogers wrote in a report last month. Nabucco's backers say their project is going ahead despite questions about where the pipeline's gas will ultimately be sourced. They say the pipeline presents strategic advantages to a European market that has become too dependent on Russian supplies.

The consortium of companies behind the project will accept bids next month for contracts worth $4.7bn, the Nabucco managing director, Reinhard Mitschek, told Reuters on Friday. "[This] is a substantial step towards starting construction at the end of 2011," he said. The Nabucco consortium has said it will make a final investment decision this year. It expects to sign gas supply contracts with Azerbaijan and Turkmenistan, and could also receive supplies from Iraq.

* with agencies [e-mail]