Russia to build South Stream natural gas pipeline via Turkey

Russia's Prime Minister Vladimir Putin expressed thanks to the government of Turkey for granting permission to OAO Gazprom for the construction of the South Stream gas pipeline in Turkish waters of the Black Sea.

Gazprom said Turkey granted "all the necessary and unconditional permissions" that allow the building and operating of the South Stream project via Turkey's exclusive economic zone in the Black Sea.

Turkey's permission was the final hurdle to the pipeline's construction, and was described by Gazprom Chief Executive Alexei Miller as "the most serious proof" that the project will be completed by 2015.

The South Stream project, which is expected online in 2015, will transport as much as 63 billion cu m (bcm)/year of gas in two legs: the first from Russia to Bulgaria, Serbia, Hungary, Slovenia, Austria, and Italy; and the second to Croatia, Macedonia, Greece, and Turkey.

The South Stream project was initiated by Gazprom and Eni SPA in 2007, and the two firms established a joint company for the project in 2008. Wintershall AG and Electricite de France SA also hold minority stakes in South Stream.

Analysts said the agreement with Turkey heats up the battle between Russia and the European Union over competing pipelines, especially the EU-backed project, Nabucco.

However, a European Commission spokesperson shrugged off the impact of the South Stream agreement, saying it "would not affect the existing framework and commitments." European officials have also long noted that, unlike Nabucco, South Stream has not even yet reached the project stage.

Brussels has long promoted Nabucco to reduce the EU's dependence on Russia for gas. But the Nabucco project suffered another setback last month as Azerbaijan announced plans to build its own pipeline through Turkey.

Analysts also said that the agreement between Russia and Turkey adds pressure on Ukraine which has been lobbying Moscow for cheaper gas in order to balance its budget. But in exchange for cheaper gas, Moscow wants control of Ukraine's pipeline system.

Indeed, one analyst said, "The deal is a major blow to Kiev because it will bypass Ukraine, linking the pipelines of the Gazprom-led link on Bulgarian territory after passing through Turkey's territorial waters."

In addition to granting Russia permission for the South Stream project, Turkey also secured a price cut that may be subject to a revision after three years in gas purchase contracts signed with Gazprom.

"We got a good price reduction from Russia," said Turkey's Energy and Natural Resources Minister Taner Yildiz. "The cuts will be valid for at least the first three years before a revision option for both sides takes effect."

Analysts said the reduction applies to Turkey's purchases from Russia via the Blue Stream gas pipeline that crosses the Black Sea and the western pipeline through Ukraine and Bulgaria.

Turkey's state-owned Botas has three contracts to buy gas from Gazprom. The first contract for 6 bcm/year signed in 1986 expires in early 2012, and a second contract for 8 bcm/year along the same route will expire in 2021. The Blue Stream contract will end in 2022.

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