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. Last Updated: 07/27/2016

Gazprom Seals New Export Route to Europe

Itar-TassPutin and Schroeder blessed the pipeline, which is to be completed in 2010.
Gazprom agreed with German partners BASF and E.ON Thursday to build a 4 billion euro gas pipeline under the Baltic Sea to boost supplies of Russian natural gas to Germany and the rest of Europe.

The first gas deal of this size for Russia since the breakup of the Soviet Union, the 1,200-kilometer pipeline is due to be completed in 2010.

The deal was blessed by German Chancellor Gerhard Schroeder and President Vladimir Putin, who was visiting Germany just days before the Sept. 18 parliamentary elections.

"The agreement has a truly historic quality. Germany is securing its energy supply for decades," Schroeder said, Bloomberg reported.

The signing of the deal on the north European gas pipeline is unlikely to score any points for Schroeder in the upcoming election, experts say.

For Russia, however, it helps to cement its place as a leading energy supplier, coming at a time when there is a lack of new oil pipeline capacity.

Once in full operation, the new pipeline, which bypasses Belarus and Ukraine, will handle one-third of Gazprom's current annual exports to Europe. The pipeline will have two branches that will carry combined 55 billion cubic meters per year.

The official stamp of approval comes after weeks of speculation on the pipeline, which will be built by a joint venture headed by Gazprom, the world's largest gas producer.

Gazprom will have a controlling 51 percent stake in the joint venture, with the remainder shared equally by German chemicals giant BASF and utility E.ON.

The pipeline will allow Germany direct access to the giant Yuzhno-Russkoye field in Siberia, which has reserves of 800 cubic meters that Gazprom and BASF unit Wintershall agreed to jointly develop earlier this year.

Wintershall and Gazprom are already partners through the Wingas joint venture, which was set up in the early 1990s.

The pipeline will run from the northwestern city of Vyborg, in the Karelia republic, to Greifswald in northeast Germany. At a later point, the pipeline will be extended to the Netherlands and Britain.

The route of the new pipeline under the Baltic Sea is considered significant after years of disputes centered involving Gazprom over transit agreements through Ukraine and Belarus.

"We are not edging out anyone from this business," Putin said at a news conference in Berlin, Interfax reported. "In the end, we want to lower the price of the product that you are buying."

The North European Gas Pipeline could give Russia more leverage against Ukraine, through which it currently directs 80 percent of its gas exports, said Artyom Konchin, an oil and gas analyst at Aton brokerage.

"For European exports, Gazprom pays Ukraine for $1.7 billion worth of gas deliveries per year at prices three times less than European prices. ... At that rate, it will soon get returns on its investment of $2.5 billion in the pipeline construction," Konchin said.

Germany is Russia's largest gas customer in Europe, as well as its largest trade partner. Trade between the two countries reached $23 billion last year.

Putin is the last foreign leader to visit Schroeder before the German elections, in which polls predict his Social Democratic Party will face defeat by the opposition Christian Democrats.

Over the five past years, Putin has met Schroeder on more than 30 occasions, fostering political and economic ties between the two countries.

On this visit to Germany, he also took the opportunity to meet with opposition leader, Angela Merkel.

"The deal will have either no or very little effect on the upcoming elections," said Igor Maksimychev, an expert at the Institute of Europe at the Russian Academy of Sciences who spent 17 years as in the diplomatic service in Germany.

"Yet it is important to sign it now so that the deal does not get delayed if the new team arrives," Maksimychev said.

Chris Weafer, chief strategist at Alfa Bank, agreed.

"Once the agreement is signed, it is unlikely that it will be significantly delayed or its routing altered, as Germany is need of gas and the existing pipeline capacity will be full next year," he said.

It also is a sweetener for the previous deals falling through, Weafer added.

In April this year, shortly after Putin and Schroeder met in Hannover, Germany, engineering giant Siemens was denied the right to buy 70 percent in Power Machines, Russia's largest maker of turbines, due to concerns it would jeopardize Russia's defense production.

In a further blow to Siemens, a 1.5 billion euro agreement for the German company to develop and sell 60 high-speed trains to Russia is also being delayed as Russian Railways reviews the deal.

Putin said after the signing ceremony with Gazprom on Thursday that he expected agreements with carmakers Volkswagen and DaimlerChrysler on the construction of assembly plants in Russia to follow.

Some 4,500 German companies are active in Russia, according to the Moscow-based German Economic Union.