Russia and Germany Strengthen Gas Cooperation Amid European Energy Shift

Russia and Germany are stepping up cooperation on energy projects as a gateway to Western Europe's important natural gas markets. Gazprom, Russia's largest gas producer, signed a memorandum of understanding with BASF, a German chemicals group, allowing BASF's affiliate Wintershall to acquire a significant equity position in Gazprom's North Europe Gas Pipeline (NEGP) project. The deal also includes the development of the Yuzhno-Russkoye gas field, which will be initially fed into the pipeline. The project's capacity will exceed 30 billion cubic meters per year, with target markets including the UK and Scandinavia.

Key Takeaways:

• Gazprom and BASF signed a memorandum of understanding to create a 49-51% equity split in the North Europe Gas Pipeline (NEGP) project company, with BASF taking 49% and Gazprom 51%.
• Gazprom's stake in Wingas, a German gas marketer, will be raised to "50% minus one share" from 35%, and will be partially owned by Wintershall, which will see its share in Yuzhno-Russkoye West Siberian gas field reduced if E.On joins the project as an additional partner.
• The Yuzhno-Russkoye gas field, estimated to hold 500 billion cubic meters of gas, will be developed in a 50-50 joint venture between Gazprom and a separate venture, with the equity split favoring Gazprom.
• Gazprom will supply Ukraine with Russian gas at international market prices, starting in 2006, and plans to pump 128.1 billion cubic meters of gas across Ukraine this year.
• The deal is expected to increase Gazprom's marketing activities in Western Europe, with Wintershall and E.On expressing interest in the project despite concerns about Ukraine's gas transit network relayability.
• E.On may acquire an interest in Yuzhno-Russkoye worth approximately 25% in exchange for allowing Gazprom to acquire an interest of equivalent value in E.On's European gas and power sales.

Statistics:

• 128.1 billion cubic meters: Gazprom's plans to pump gas across Ukraine this year
• 23 billion cubic meters: Gazprom's supply of gas to Ukraine in lieu of transit payments
• 30 billion cubic meters per year: Former estimate of NEGP's capacity
• $2.6 billion: Estimated cost of NEGP pipeline
• 2006: Start of international market price supply to Ukraine
• 2010: Target date for NEGP completion
• 2004: Original target year for final investment decision on NEGP

Sources:

• NC Mar.3, p5
• NC Mar.23, p5
• NC Jul.15, p4
• NC Dec.2, p6