German Pipe Deal Becomes Political Issue

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German energy giant E.On on Thursday signed an agreement to become the third partner in an ambitious but controversial gas pipeline project beneath the Baltic Sea, joining Russia's Gazprom and German chemicals firm BASF, which forged an earlier deal in April (IOD Apr.12,p1). Billed as a "basic agreement on the construction of the North European Gas Pipeline (NEGP)," the new accord envisages the three companies forming a joint German-Russian venture company, with Gazprom holding 51% and the two German firms 24.5% each. The NEGP would be the first pipeline to supply Russian gas to Germany directly, with no transit countries. But this has also made it contentious. Germany's center-right parties -- currently ahead in the race for Sep.18 national elections -- are wary of increasing the country's already high reliance on Russian oil and gas, and have criticized the existing close Berlin-Moscow rapport. These parties have also expressed concerns that Germany's eastern neighbors may face greater risk of supply interruptions by Russia and be affected by the loss of transit revenues. Thursday's Berlin agreement was witnessed by Russian President Vladimir Putin and Germany's Chancellor Gerhard Schroder, which heightened the project's political context. The center-right opposition also wants to extend the operating life of the country's nuclear plants (IOD Aug.12,p2). That would not halt growth in German gas imports, but would limit the call on extra volumes needed from Russia, in turn affecting the NEGP's economic viability. E.On owns several nuclear plants. Publicly the gas arms of both German signatories -- BASF's Wintershall and E.On Ruhrgas -- insist there is no alternative to taking extra Russian gas, but decline to say if they will sign additional supply contracts with Gazprom, or instead reroute via NEGP existing volumes already contracted with Gazprom through 2030. "The aim is to conclude detailed contracts for implementing the NEGP project in the coming months," said a joint statement from both German firms -- phraseology that undermined attempts in Berlin to portray the deal as a final investment decision. The NEGP would extend 1,200 kilometers from Vyborg near St. Petersburg in Russia to Greifswald on Germany's Baltic coast. A single pipe of 27.5 billion cubic meters per year capacity is planned to be commissioned in 2010, with a second of equal capacity built at a later unspecified date. The cost for the two pipes is put at over €4 billion ($5 billion), with the first pipeline priced at €2.4 billion ($3 billion). No detail has been given on any onward westward spurs from NEGP to the Netherlands or UK, which Gazprom would like (IOD Sep.24,p1). Gazprom would likely retain title to any gas delivered to the German sponsors via NEGP up to Greifswald. It would contract with the NEGP company for transportation of volumes to the pipe's German landfall. Mark Smedley, London

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