Wednesday, 23 March 2011

Wintershall joins troubled South Stream project

Wintershall has announced that it is joining Russia's South Stream pipeline project. According to a press release on 21st March, the oil arm of German chemicals firm BASF will take a15 per cent share in the offshore section of the pipeline, slated to run across the bed of the Black Sea from Russia to Europe. Wintershall's stake will be worth approximately €2 billion, out of a total cost of around €20 billion.

The move is arguably a tactical success for South Stream, a vast and complex project which has been viewed with scepticism by many energy analysts as commercially unviable. Recently, Russia's Prime Minister Vladimir Putin seemed to signal that he, and Russia's energy giant Gazprom, were backtracking on the project. At a meeting with Energy Minister Sergei Shmatko, the two men discussed the possibility of abandoning the undersea section of the project and shipping liquefied natural gas (LNG) from Russia's distant northern Yamal Peninsula across the Black Sea instead. The plan, which was suggested in response to Turkey's reluctance to agree to South Stream traversing its territorial zone in the Black Sea, has been widely dismissed as commercially impossible.

The agreement with Wintershall implies that the original pipeline plan remains unchanged. The message was reinforced on 22nd March when Putin travelled to Slovenia and secured an agreement between Gazprom and Slovenian gas company Geoplin Plinovodi to develop the Slovenian section of the South Stream. In addition, French electricity firm Electricite de France is anticipated to join the project later in the year. Italy's Eni is already involved as one of South Stream's founding partners, alongside Gazprom.

The involvement of European companies is critical to reassuring European governments and the EU that South Stream is indeed commercially viable. The participation of Wintershall is particularly valuable for Gazprom, since the BASF subsidiary already works on the Nord Stream pipeline, which is being built along the Baltic seabed from Russia to Germany, demonstrating its track record of working on projects which actually do get built.

Wintershall's involvement, however, and the agreement with Slovenia, cannot dispel the issues which still remain for South Stream. The fact that Russia has even raised the possibility of using LNG instead of an undersea pipeline shows that very real political and technical challenges ahead, no matter how European companies participate.

Sources: Wall Street Journal, Wintershall, Bloomberg, AFP

For more news and expert analysis about the Caspian region, please see Caspian Focus.

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