Pipe dreams: Gazprom courts southern Europe to exclude Ukraine

Russia's Gazprom is counting on its deep natural gas ties with Italy to revive plans aimed at bypassing Ukraine as a transit state for politically sensitive gas shipments to Europe.

But whether the tactic works is another matter.

Having tried and so far failed to bolster pipeline links with the continent through Bulgaria and Turkey, Gazprom is running out of options to secure its strategic entry point into southern Europe, and with it any chance of cutting Ukraine out of the picture this decade, industry and government sources say.

Undeterred, last week it announced new plans with Italian utility Edison and Greece's DEPA to supply natural gas along the seabed of the Black Sea into Greece and Italy, from where it could be sold in Europe.

The so-called Interconnector Turkey Greece Italy (ITGI) Poseidon pipeline scheme – stuck in limbo for years – was first conceived back in 2003 as a way of lessening reliance on Russia by bringing in central Asian gas.

At one time it even had the backing of the European Union which aims to dilute Russia's one third share of Europe's gas market.

But ITGI was shelved in 2012 after it lost out to rival project TAP on a major deal to transport Azerbaijani gas to Europe.

"My immediate reaction is that in light of political difficulties this project is unlikely to move forward at this time," Emily Stromquist, analyst at risk consultancy Eurasia Group said.

Two Italian government sources dismissed the Gazprom-ITGI announcement as a Russian manoeuvre designed to force its assent, saying officials were not consulted beforehand.

"The government was furious at the companies for the way this was handled, at being put in a situation which made it seem as if the government was behind the plans," one source said.

Edison declined to comment for this story.

How the 8 billion cubic metre a year capacity project plays out on the ground is still unclear.

Stakes are high for Gazprom which needs a southern European link to fully avoid Ukrainian territory by the time pipeline transit agreements with the country expire on Dec. 31, 2019.

Between 2006 and 2014, Russia halved to 62 billion cubic metres/year the amount of gas crossing Ukraine, but is unlikely to build any new export pipeline by 2020 to complete the process, a report by the Oxford Institute of Energy Studies (OIES) said this week.

All previous attempts have ended in failure.

Its long-planned South Stream pipeline was scrapped over a year ago after failed attempts to get around European Union anti-monopoly rules, known as the Third Energy Package.

A slimmed down successor project, TurkStream, was shelved this year in retaliation for Turkey's downing of a Russian fighter jet along the Syrian border.

"Nobody is in a good position here," Jonathan Stern, chairman of the OIES told Reuters.

"The Russians want to get their gas out of Ukraine and sell it to Europeans who will need to buy it, while the Ukrainians must realize they are not independent of Russian gas," he said.

Tense ties with the European Commission amid various ongoing investigations into Gazprom's business practices won't endear them to ITGI, which anyway will face the same hurdles that sank South Stream.

"Interconnection projects must contribute to the EU's diversification and energy security strategy, and … in particular the third energy package rules," a European Commission spokesman said in an emailed statement.

There are good reasons for Gazprom to choose Edison. The ITGI project has most of the authorisations in hand and Edison, like Depa, is a long-term buyer of Gazprom gas.

The plan is for ITGI to link up with South Stream or TurkStream if built, along with east Mediterranean fields, enhancing its prospects, industry sources say.

A Gazprom source said Turkey is a vital part of the chain to realise ITGI. "Now we are hearing Bulgaria wants to get back to South Stream again, maybe that's the way," he said.

What's more, Italy, which imports around 90 percent of its energy needs, currently counts on Russia for over half its daily flows and needs more gas to pursue ambitions to become a south Europe gas hub.

Cooperation with Italy won't be easy though. Reformist Prime Minister Matteo Renzi took a stand against Gazprom's controversial Nord Stream pipeline expansion plan, which aims to double flows into Germany, urging Europe to unite in opposition.

[Reuters]