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Gazprom starts work on Europe gas pipeline


After years of delays and negotiations, Russian gas company Gazprom has formally started construction of its 16 billion-euro ($A20 billion) Europe-bound South Stream pipeline, key to its strategy of strengthening its supply to its most important export market.

The South Stream pipeline will connect Russia's Black Sea coast with the Balkans, Austria and Italy, carrying up to 63 billion cubic metres of gas annually.

Europe currently gets about two-fifths of its gas from Russia and the pipeline's route bypasses Ukraine to ensure safe shipping of its gas. Pricing and payment disputes between Russia and Ukraine have caused major disruptions, cutting off gas for millions of customers in Europe.

The project, funded by Gazprom, Italy's Eni, France's EdF and Germany's Wintershall, is due to start operating in 2015. Gazprom holds 50 per cent in the joint company and is the main investor in the project. However, investors and industry experts have criticised the project as too costly.

Russian President Vladimir Putin, the pipeline's most powerful promoter, took part in Friday's ceremony in which two six-metre steel pipes were welded together to mark the start of the construction.

"South Stream will create the conditions for a reliable gas supply for the main consumers in southern Europe," Putin said.

By beginning construction, state-controlled Gazprom steals a march on of its European Union-backed rival, the Nabucco pipeline, plagued by a lack of funds and a reliable supply of natural gas.

"South Stream solves two problems at once," Gazprom CEO Alexei Miller said. "First, it does away with restrictions in the volumes of Russian gas exports and it minimises transit risks by expanding our transportation network."

Gazprom in October opened Nord Stream, a pipeline under the Baltic Sea directly Germany with Siberia's vast natural gas reserves. South Stream and the Nord Stream expansion will leave Gazprom with a surplus capacity of 50 to 100 billion cubic metres, according to analyst estimates.

The pipeline will go under the Black Sea to reach Bulgaria, Serbia, Hungary, Slovenia, Austria and Italy in one leg, and Croatia and Greece in a second.

South Stream will be able to carry a third of the gas Europe currently buys from Russia.

Gazprom's deputy chief executive Alexander Medvedev told journalists the company has agreements for the entire 63 billion cubic metres, although he refused to specify how firm these agreements are. He also said one-fourth of the gas supply running through South Stream would be bought by new clients, likely referring to energy companies in Serbia and Croatia.