Brussels, 13 May 2010

Growing Chinese competition for gas and weaker than expected European demand have raised new hurdles to two giant gas pipeline projects: Nabucco and South Stream. The issue is not as pressing for the Russian-backed South Stream project, driven more by politics than economics. But Nabucco's backers need to quickly line up supply deals before starting work on the 3,300-kilometre (2,050-mile) pipeline to bring Central Asian gas to Europe, analysts say.

Europe wants the gas to curb its dependence on Russia, its biggest supplier, but also an occasional political rival. But getting those pipelines built may not be easy. The economic crisis has put such a dent in demand that Nabucco will not be needed until 2020, but if it waits too long, China might have bought all the available gas supplies from countries such as Azerbaijan and Turkmenistan.

"The major factor here is China," said analyst Susanne Nies of French think-tank Ifri. "There is a risk that fast-growing China absorbs all the gas available to Europe as LNG (liquefied natural gas) and the gas from Central Asia."

China and central Asian countries opened their first crossborder gas pipeline in December, which will be able to pump up to 40 billion cubic metres of gas a year to China by 2013.

In Europe, Nabucco shareholder RWE has pushed back the expected signing of an important supply deal with Turkmenistan from the first to the second half of the year.

Sphere of Influence

European Energy Commissioner Guenther Oettinger denied Chinese competition posed a threat. "In the Caspian region there are immense gas reserves," he told Reuters. "This is enough gas for Europe, the Chinese and others.

"For Nabucco we only need 31 billion cubic metres per year, which is a tiny fraction of these reserves," he added. "If all the gas would be delivered via Nabucco, we could fill the pipeline for more than 5,000 years."

China's foray into Central Asia also represents a challenge to Moscow, which still sees the predominantly Muslim region as part of its sphere of influence. Russia's South Stream project involving a 900-kilometre pipeline is strengthened by its political intent to circumvent Ukraine to get gas to Europe under the Black Sea – but it too faces commercial challenges.

Weakened European demand may make it more of a cost than a profit centre for state energy firm Gazprom. Nies thinks Gazprom has limited appetite for investing the 20 billion euros needed for South Stream, especially with Ukraine becoming politically closer to Moscow since elections this year. Exports along that route could be bolstered for just 5.5 billion euros, she says.

Mikhail Korchemkin of U.S.-based consulting firm East European Gas Analysis said: "The Russian projects are political so they don't need any economic justification. Russian pipelines are simply to divert existing deliveries to new routes."

"Russia is making a mistake and not looking at the demand side of the projects," he added. "It means the money invested into the pipeline will not generate new profits. They will have new costs. It will reduce profits."

Demand Destruction

With economic contagion spreading throughout Europe from Greece, any changes to gas demand forecasts are likely to be downgrades, but commissioner Oettinger remains confident.

"The current gas glut will only last some years, and demand will pick up again in the second half of the decade," he said. Analysts say Europe's spreading economic crisis has created a setback to European gas demand of around 5 years.

"In 2009, we have seen unprecedented demand destruction," said Anne-Sophie Corbeau of the Paris-based International Energy Agency. "Preliminary data shows gas demand has fallen 5% in 2009 for OECD-Europe.

Italian energy company Edison, which backs the smaller ITGI import project to Italy, takes a similar view. "Demand has been slowed by the financial crisis, so the urgency of building new major import infrastructure for security of supply is not as it was last year," says Elio Ruggeri, head of gas infrastructure at Italy's Edison.

That is not to say that Europe does not need any new gas import pipelines, just less than was forecast before – and maybe no more than is already under construction. Such projects include the Nord Stream pipeline from Russia to Germany and upgrades to import pipelines from North Africa, such as Medgaz and Greenstream.

"In 2015, we might have a need for additional imports ranging from 40 to 70 bcm a year, and if you add up the volumes of all the projects already under construction, it also comes to around 70 bcm," said Ruggeri.

"A major bulk pipeline like Nabucco will be needed by 2020, but it is not any longer urgent for 2015," said Ruggeri. "A combination of EU interconnections like the ones foreseen by the ITGI Project is what is needed for 2015."

Meanwhile, smaller import projects will be vying to grow their market share, possibly crowding out Nabucco.

Ends --