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Derek Brower: Vienna Calling

Austria’s OMV is the latest to fall for Gazprom’s charms By Derek Brower YESTERDAY’S agreement between Austria’s OMV and Gazprom has left the EU’s strategy another few feet closer to the shredder. The memorandum of understanding, signed during a visit to Austria by Russia’s President Putin and Gazprom chief Alexei Miller, covers joint development of the Central European Gas Hub at Baumgarten, a wholly-owned subsidiary of OMV. OMV said the agreement would help Brussels’ energy strategy. “These integrated projects mark another milestone in the cooperation between our companies and will make a significant contribution to security of natural gas supply in Europe,” said Wolfgang Ruttenstorfer, the company’s chief executive. Miller said the deal showed Gazprom’s strategy “corresponds to the dynamic development of the energy sector in the EU”. Not really. The deal will see Gazprom take a stake in Baumgarten, increasing Gazprom’s security of demand at the same time. What it won’t do is help Brussels’ strategy to diversify its sources of gas away from the Russian company, which it considers to be unreliable and a dangerous monopolist with little ambition to assist the EU’s energy liberalisation project. From Gazprom’s point of view, its agreement with OMV is another masterstroke. By taking a stake in Baumgarten, the Russian company is hedging its bets as competition between two rival supply pipelines to Europe, Nabucco and the Blue Stream extension, heats up. Nabucco has long been a twinkle in Brussels’ eye. The pipeline, believe politicians like energy commissioner Andris Piebalgs, could break Central Europe’s dependency on Russian energy by importing up to 31bn cubic metres a year of gas from Central Asia and the Middle East through a pipeline stretching from Turkey to Baumgarten. OMV leads the consortium of five companies that is developing that $6bn project. Up to 70% of it is being funded by the European Bank for Reconstruction and Development and the European Investment Bank. The rival Blue Stream project would extend an existing Gazprom line between Russia and Turkey through the Black Sea. It would run up through the Balkans to Hungary. Since a memorandum of understanding between Moscow and Budapest last summer, Hungary’s MOL, which is one of the five companies involved in Nabucco, has increasingly been leaning towards the Gazprom project. Both pipelines are unlikely to go ahead, given that they target the same markets. Gazprom has waged a successful campaign to undermine Nabucco. In the downstream, its alliance with Mol has enhanced the viability of the Blue Stream project. In the midstream, Gazprom has increasingly developed relations with Turkey, the key transit country for both Blue Stream and Nabucco. And at the source, Russia’s recent agreement with Turkmenistan and Kazakhstan has effectively put control of Central Asian gas exports in its hands. That manoeuvring has left Nabucco on the death bed. But the latest agreement with OMV could, ironically, breathe some life into Nabucco. Unfortunately for Brussels, if it does it will be at the expense of the pipeline’s original strategic purpose – diversifying away from Gazprom. In taking a share of Baumgarten, the Russian company will control some of the gas that comes into it. Baumgarten processed 7.7bn cubic metres in 2006. Volumes this year could be double that. Ruttenstorfer said some time ago that Nabucco could share other “synergies” with Gazprom’s Blue Stream project. That could mean that it takes supplies from Gazprom. For the developers, that would solve its problems in finding gas to fill Nabucco. But if that happens, the EU’s development banks could ask why they have been instructed to subsidise another project that will effectively increase Europe’s reliance on Russian energy imports. Even if Nabucco goes ahead without Gazprom’s gas supplying it in the upstream, Gazprom could exploit EU rules to demand access to the pipeline’s capacity. Budapest might also be worried by Gazprom’s deal with OMV, given that it knows now that its special relationship with the Russian company wasn’t so exclusive after all. The new deal effectively pits Mol and OMV against each other in a battle to see which company will develop Gazprom’s Central European gas hub most quickly. Either way, Gazprom will remain the dominant and decisive player. Thanks to Europe’s companies, Brussels’ energy diversification strategy is increasingly looking like a pipedream.