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Gazprom and OMV forge pipeline through Austria

Each will hold a 50% stake in a new company that will build the South Stream pipeline

Gazprom and OMV have agreed to build a section of the South Stream pipeline through Austria. Alexei Miller, chairman of Gazprom’s management committee, and Gerhard Roiss, OMV’s chief executive, signed a shareholders agreement for South Stream Austria at a meeting in Vienna on 24 June. Gazprom and OMV will each hold a 50% stake in the new company, which will take charge of building the Austrian section of the pipeline. 

The Austrian portion will have a capacity of between 30 billion-32bn cm per year (cm/y) and will run from the Hungarian border to the end point in Baumgarten. Roiss said the agreement “cements the role of Baumgarten as a key European gas hub in Europe” and safeguards European supplies. Miller said: “The agreement with OMV underpins our commitment to establish this new European gas transmission route. South Stream will offer additional guarantees of reliability and flexibility of Russian gas supplies to European markets.”

Construction on the Austrian section is planned to begin next year with first gas deliveries scheduled for 2017. It is expected to reach its full capacity in 2018.

The South Stream pipeline project aims to carry Russian gas across the Black Sea to southern and central Europe. The project is of huge strategic importance for Gazprom as it seeks to bypass Ukraine as a transit route for its gas supplies to Europe.

In April, Gazprom and OMV signed a memorandum of understanding to implement the South Stream project in Austria. This followed a 2010 intergovernmental agreement between Russia and Austria pledging cooperation over the project. 

Gazprom holds a 50% stake in the consortium developing South Stream. Italy's Eni (20%), Germany's Wintershall (15%) and France's EdF (15%) are the other shareholders.

The developers plan to build four pipelines, transporting up to 63bn cm/y of Russian gas. The planned route begins at the Russian Black Sea town of Anapa, crossing the Black Sea to Varna, in Bulgaria. The onshore portion of the pipe travels from Varna to Serbia, then via Hungary and Slovenia, before terminating in Austria. Gazprom wants to pump first gas via South Stream in 2015, with full capacity scheduled for 2018.  

Gazprom still hasn't received all the onshore permits necessary for construction of the pipeline or an exemption from the European Union (EU's) third-party access rules. These rules, which are part of the EU's third energy package, state that competing companies must have access to 50% of any gas infrastructure - even if they didn't pay for its construction. They are aimed at increasing competition and liberalising energy prices in European energy markets. Gazprom said it has construction permits for South Stream Austria which are valid until December 2015. 

The controversial project seeks to establish an alternative gas transit route which bypasses Ukraine. Meanwhile the European Commission (EC) has sought to use its powers to award construction permits as political leverage in diffusing disputes between Russia and Ukraine over gas supply.   

On 16 June Gazprom filed a lawsuit in Stockholm’s International Arbitration Court to recover $4.5bn it says it is owed by Ukraine’s Naftogaz for gas it had earlier supplied the country via the trunk line which exports gas to Europe.  

Gazprom said that starting from 10am (Moscow time) on 16 June it would only supply Ukraine with prepaid volumes of natural gas. However Ukraine’s state-controlled gas firm Naftogaz is still obliged to ensure natural gas transit to third countries.

At the beginning of June, the European Commission instructed Bulgaria to halt construction of its section of the South Stream pipeline. The Commission launched an infringement procedure against the Balkan nation, arguing Bulgaria had not complied with European Union (EU) market rules for awarding public contracts for construction of the pipeline. The Commission said that the South Stream project should be suspended until it achieves full compliance with EU legislation.

The EU has said that the inter-governmental agreements which EU member states have made with Russia regarding South Stream are not in line with EU law as they do not respect the key provision of the third energy package. “We take note of the plans of OMV and Gazprom. From the viewpoint of the Commission it is crucial that the project respects EU law,” an EU spokesperson said. “South Stream is not (and has never been) a priority project for the Commission, as our priority is to reach new supplier countries in order to foster diversification … South Stream diversifies the route but not the supply.”

In May the EC published an updated energy security strategy because of concerns over the tendering process for South Stream. It called on the EU to reduce its reliance on Russian energy supplies by increasing gas storage levels, improving energy efficiency and increasing the use of alternative fuels.

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