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. Last Updated: 07/27/2016

Eni, Gazprom Agree to 2nd Black Sea Pipeline

APEni's Paolo Scaroni, left, industry ministers Pierluigi Bersani and Viktor Khristenko and Gazprom's Alexander Medvedev shaking hands Saturday in Rome.
ROME -- Gazprom and Italian oil firm Eni unveiled a plan Saturday for a big new pipeline to take Russian gas under the Black Sea to Europe, undermining an earlier plan to extend a Turkish route.

The 900-kilometer South Stream pipeline would come ashore in Bulgaria and then branch to Austria and Slovenia in one spur and southern Italy in another, Eni CEO Paolo Scaroni said at a news conference with Gazprom deputy CEO Alexander Medvedev and the two countries industry ministers.

Scaroni said the project would now go through feasibility studies and that construction might start as early as next year.

It will carry 30 billion cubic meters of gas per year, enough to supply Greece and Bulgaria, Industry and Energy Minister Viktor Khristenko told Vesti-24 television.

The new pipeline will provide a direct route into Italy and mirrors Gazprom's project with E.ON and BASF to build the Nord Stream pipeline to Germany. South Stream will avoid having to send gas through Ukraine and Belarus, while Nord Stream bypasses the Baltic states -- all of which often have tense political relations with Russia.

"Gas is a political commodity nowadays; economically speaking, this project is not really justifiable," Vladimir Matias, managing partner of Asset Capital Partners, said by telephone from Vienna.

Saturday's agreement "underlines that Italy is playing ball with Russia" to secure future gas supplies, Matias said.

At least some of the gas will come from fields previously operated by bankrupt oil firm Yukos.

South Stream will come online three years after getting the necessary approvals, with the project costs shared equally by the two companies, the firms said.

Other details have yet to be finalized.

"The cost of the project and the distribution of stakes among the partners will be decided after the feasibility study, which is currently being done by Italy's Saipem," Gazprom spokesman Denis Ignatyev said.

Saipem was also the contractor for the Blue Stream pipeline from Russia to Turkey, also jointly owned by Gazprom and Eni. Gazprom has previously talked of expanding Blue Stream to southern Europe and Israel, but that would conflict with the new South Stream plan.

"We're going to continue to work with Turkey on plans to supply our gas across its territory and onward to Israel," another Gazprom spokesman, Sergei Kupriyanov, said.

He declined to say where that would leave the idea of expanding Blue Stream to southeastern Europe.

South Stream is also likely to dash hopes of Gazprom joining the Nabucco pipeline project, a 4.6 billion euro ($6.2 billion) plan led by Austria, to carry Caspian and Middle Eastern gas to Europe via Turkey and the Balkans.

Eni's existing dominance of the Italian gas market may make winning regulatory approval for the southern route more difficult. Only one of the two proposed pipelines within Europe may be built, and the Nord Stream route has a higher priority, Scaroni said on the sidelines of the briefing.

The newly proposed pipeline also carries political risk, some investors said.

"The gas will have to cross through eastern European countries, and eastern Europe hasn't reached the level of political stability that makes for a good investment environment," said Giorgio Mascherone, chief investment officer at Deutsche Bank in Milan, who helps manage 32 billion euros ($43 billion).

Apart from Germany, Italy is Gazprom's second biggest customer outside the former Soviet Union, relying on Russia for around 22 billion cubic meters of gas per year.

The companies signed an agreement last year that lets Gazprom sell gas directly on the Italian market, a key part of its strategy to control all revenue from its gas to avoid losing most of the value to end-user suppliers.

For Eni, South Stream is a chance to export gas from assets it bought at auction earlier this year, when Russia forced the breakup and sale of Yukos. With Gazprom holding a monopoly on exports, that opportunity is a rare one.

"The South Stream project is the third pillar of the strategic agreement signed by Eni and Gazprom in 2006," Scaroni said.

"This new gas supply agreement will let Eni make the best use of its recently acquired ArcticGaz and Urengoil assets."

Eni bought the production firms at a Yukos auction in April, together with a 20 percent stake in Gazprom's oil subsidiary Gazprom Neft, for $5.8 billion.

Reuters, Bloomberg