Nabucco rival

Executives at Russian energy giant Gazprom have approached German energy concern RWE to discuss the prospect of it joining the Russian-led South Stream project.

"It was just a preliminary discussion, nothing concrete," a Gazprom source told Reuters. "They are interested in entering the project."

RWE declined to comment on the talks, saying only that the rival Nabucco pipeline "is the best project for RWE at the moment."

Rival pipelines

The South Stream pipeline is to carry up to 63 billion cubic meters of Russian gas a year across the Black Sea to Bulgaria, where it will split into two paths to be built by Gazprom jointly with local partners.

By comparison, the 3,300 kilometer Nabucco pipleline is planned to have an annual capacity of 31 billion cubic meters. It will transport Central Asian gas to Europe using a route that leads through Turkey, Bulgaria, Romania, Hungary and Austria - and bypassing Russia.

Current partners in the Nabucco project are Bulgarian Energy Holding, Turkey's Botas, Hungary's MOL and Romania's Transgaz, in addition to RWE and Austrian power company OMV.

Gazprom has been talking to other European energy companies about South Stream. It has won over Italy's ENI and France's EDF as well as OMV, which plans to participate in both pipeline projects.

It is unclear whether or not RWE intends to follow OMV and have a foot in both camps. Some analysts believe the German company may do just that.

Leading partners

"RWE and OMV are leading partners in the Nabucco project," Graham Freedman, senior energy analyst with market research and consulting company Wood Mackenzie in London, told Deutsche Welle. "I'm sure the two are talking together. They're probably looking at the potential for each of the projects."

A decision by RWE to pull out of Nabucco and join South Stream could severely weaken or even put a complete end to Nabucco, Freedman warns.

"RWE was brought into the consortium originally as a large aggregator of gas - a big utility based in Germany, which is effectively the end point for Nabucco," he said. "I think [it] would deal quite a large blow to Nabucco if RWE were to leave the consortium."

Nabucco has been slow to get off the ground, largely due to the venture's struggles to find a sufficient base of natural gas suppliers.

But the European Union is particularly keen to see Nabucco become a reality to reduce what it and many of its member states view as a growing dependency on Russian natural gas.

Today, a quarter of the gas consumed in the EU comes from Russia, which is expected to produce more than a third within the next few years.

World's largest gas reservoir

A key driver of that growth is the Nord Stream pipeline venture, which will transport Russian gas through a pipeline passing through Russian, Finnish, Swedish and German waters. It will connect Western European markets to Siberia's Shtokmanovskoye field, the world's largest gas reservoir, among other Russian gas fields.

Diversification of gas regions and pipelines is important, according to Claudia Kemfert of the German Institute for Economic Research. And in that context, "Nabucco has a key role," she told Deutsche Welle.

But Kemfert isn't overly surprised by the talks between Gazprom and RWE. "I can understand the companies who would like to go for a safe strategy, and Russia is a more safe strategy," she said. "Nabucco has a lot of uncertainties," which companies like RWE and OMV need to assess.

Hedge their bets

While European power companies may be tempted to hedge their bets by participating in the two rival pipeline ventures, Kemfert warned that supporting both could severely drain management and financial resources.

Georg Zachmann of the think-tank Bruegel is skeptical about both projects. He warns of a "gas glut" in Europe. The region, he said, is receiving increasing volumes of liquefied natural gas from the Middle East. Meanwhile the United States, a big consumer of natural gas, has been importing little or no gas from world markets since it tapped into rich shale gas deposits formed among layers of sedimentary rock.

In the short and mid-term, Zachmann said, "everything points in the direction of oversupply in the European market," raising questions why anyone would want to invest "in a new expensive pipeline through various countries with the aim to discipline the pricing behavior of monopolies."

Author: John Blau
Editor: Sam Edmonds