Russian gas pipelines to go ahead despite
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[August 03, 2017]
By Oksana Kobzeva and Alissa de Carbonnel
MOSCOW/BRUSSELS (Reuters) - New U.S.
sanctions will make it harder for Russia to build two gas export
pipelines to Europe but the projects are unlikely to be stopped.
U.S. President Donald Trump has reluctantly signed into law further
sanctions on Russia but some of the measures are discretionary and most
White House watchers believe he will not take action against Russia's
This would allow Gazprom's two big pipeline projects to go ahead,
although at a higher price and with some delays.
The Kremlin, dependent on oil and gas revenues, sees the pipelines to
Germany and Turkey - Nord Stream 2 and TurkStream - as crucial to
increasing its market share in Europe.
It also fears that Western partners - needed to develop the deepwater,
shale and Arctic gas deposits that will fill the pipelines - will be
scared off by sanctions.
Gazprom warned investors last month that the sanctions "may result in
delays, or otherwise impair or prevent the completion of the projects by
With all that in mind, the Russian gas giant is taking steps to reduce
the impact of sanctions.
It has accelerated pipe-laying by Swiss contractor Allseas Group under
the Black Sea for TurkStream - even though there is no final agreement
on where the pipeline will make landfall in Turkey. It is also hurriedly
building a second TurkStream line to export gas to Europe.
"The construction of the second line is underway just in case the
sanctions hit," a senior Gazprom source told Reuters.
A spokesman for Allseas said 100 km of the 900-km first line have been
built since June 23 and preparatory work is underway for the second
THE UKRAINIAN CONNECTION
The biggest cost of any delays to the new lines could come from
increased transit fees paid to Ukraine, the route by which Russian gas
has traditionally reached Europe.
Nord Stream 2 and TurkStream bypass Ukraine, but if they are brought
into use late, Gazprom will have to continue using the Ukrainian route
and may have to pay more for the privilege.
The European Union, fearing sanctions will hurt oil and gas projects on
which it depends, said it was ready to retaliate unless it obtained U.S.
guarantees that European firms would not be targeted.
Five Western firms that have invested in Nord Stream 2 - Wintershall
<BASFn.DE> and Uniper <UN01.DE> of Germany, Austria's OMV <OMVV.VI>,
Anglo-Dutch Shell <RDSa.L>, and France's Engie <ENGIE.PA> - say it is
too early to judge the impact of sanctions.
For now, they are standing by their pledge of up to 950 million euros
($1.13 billion) each to finance the 1,225 km (760 mile) Nord Stream 2.
Despite Trump's desire to promote U.S. liquefied natural gas exports to
Europe that would compete with the Russian gas, he said he did not want
the sanctions to get in the way of efforts to resolve the conflict in
EU officials, industry sources and experts therefore doubt that Trump
will use what he regards as "significantly flawed" sanctions to punish
"Their approach is going to be strictly by the letter of the law: what
do they have to do," Richard Nephew, a former U.S. deputy chief of
sanctions now with Columbia University's Center on Global Energy Policy.
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A man is seen at work at Zagorsk Pipe Plant (ZTZ), which launched
the production of large-diameter pipes for Russian gas giant
Gazprom, outside Moscow, Russia May 29, 2017.REUTERS/Sergei
The sanctions law is however expected to hamper Gazprom's efforts to
"The price of any project automatically increases," said Tatiana
Mitrova, director of the Skolkovo Energy Center.
"Gazprom's relationships with partners, subcontractors, and
equipment and service providers are severely complicated," she said.
"They will all ask for a risk premium."
Gazprom will have to take on the additional cost itself, depend on
Russian state banks, or seek money at higher rates from Asian
lenders, financial analysts said.
"This, however, does not mean that Nord Stream 2 won't be built,"
said Katja Yafimova of the Oxford Energy Institute.
Industry sources say the loans from Western partners for Nord Stream
2 are already at above market rates to reflect the political risk of
partnering with Russia in a project that has also faced opposition
The added uncertainty ups the stakes further. "It's like reading tea
leaves," one source with knowledge of the European side of the Nord
Stream 2 financing structure told Reuters.
While big players may be able to stomach the risk, analysts say the
smaller contractors on which Gazprom depends to build the pipelines
may get spooked. "Not all partners can afford to see things through
with Gazprom," said Valery Nesterov, an analyst at Moscow-based
A spokesman for Nord Stream 2 said more than 200 non-Russian
companies from 17 countries, most of them European, are building the
pipeline. Most of the big contracts for steel, port logistics and
construction have already been concluded.
By forcing the pace of construction, Gazprom may have gained enough
time to build the new pipelines but longer-term projects will take a
"Unless Trump takes a really sharp turn, it is highly unlikely that
companies that are supplying pipeline goods are going to be punished
in the next year or so," Nephew said. "A lot of companies are now
thinking: 'I've got maybe 12, maybe 18 months in which I can do some
stuff but after that maybe I won't'."
(Additional reporting by Vladimir Soldatkin in Moscow, Shadia
Nasralla in Vienna, Vera Eckert in Frankfurt, Ron Bousso and Nina
Chestney in London; Writing by Alissa de Carbonnel @AdeCar in
Brussels; Editing by Giles Elgood)
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