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Gazprom expands Nord Stream without gas supply rise

Monday, 8 Oct 2012 | 10:55 AM ET

* Putin says pipeline gets gas to EU without transit risks

* No gas supply increases expected soon

* Analysts say Gazprom paying a high price for Nord Stream

By Vladimir Soldatkin

MOSCOW, Oct 8 (Reuters) - Gazprom on Monday launched the second line of the Nord Stream pipeline which brings Russian gas to Germany via the bed of the Baltic Sea, but actual gas volumes remained unchanged due to lack of sufficient growth in demand.

Russian President Vladimir Putin said the pipeline would provide gas to the European Union "without transit risks" - avoiding the eastern European transit countries where spats with Russia have in the past interrupted supplies.

But analysts are sceptical on whether Gazprom will succeed in boosting its market share in Europe, which buys around a quarter of its gas from Russia and where liquefied natural gas (LNG) is providing an alternative.

Nord Stream AG said on Monday the new pipeline phase doubled total annual capacity to 55 billion cubic metres (bcm) - over a third of Gazprom's current exports to Europe. The two 1,224 km-long (765 miles) pipelines connect Portovaya Bay, on Russia's Baltic coast, with Lubmin in Germany.

Gas started to flow via Nord Stream's first line almost a year ago, with Moscow trying to bypass transit countries, such as Ukraine and Belarus.

Pricing spats between Russia and Ukraine, through which some 70 percent of Russian gas are exported to Europe, have in the past led to temporary halts of supplies to the EU.

Putin said the second line "will meet Europe's growing demand for energy resources," according to his press service.

"Gas will be supplied directly by the shortest route, linking the major Russian gas reserves to European markets without transit risks, steadily and smoothly. We can guarantee this."

But the expansion of Nord Stream will not divert any substantial new amounts of gas away from Ukraine any time soon, and analysts said Gazprom was paying dearly for its attempt to bypass transit countries.

PRICE TOO HIGH?

As well as Nord Stream - with estimated costs of 7.4 billion euros ($9.7 billion) for construction of the offshore sections - the company also has plans for a South Stream link which would carry gas across the Black Sea to Bulgaria.

"Nord Stream has largely contributed to the decrease of Gazprom's market capitalisation. Of course, the company has secured a strategic victory, but isn't the price too high for that?" said Valery Nesterov, an analyst at Sberbank CIB.

Even the first line of the project has so far been filled by only 34 percent of the announced annual capacity of 27.5 bcm, according to Nord Stream's Financial Director Paul Corcoran.

The state-owned Russian company has been cutting its exports forecast during the course of the year with latest projections set at 150 bcm, on a par with 2011 volumes.

"At the beginning, some volumes from the first line will be diverted to the second line without an increase in total combined volumes. But, of course, everything will depend on the demand, winter is ahead of us," a source close to Gazprom told Reuters. Gazprom declined to comment.

Gazprom holds a 51 percent stake in the pipeline project. German energy companies Wintershall and E.ON Ruhrgas

hold 15.5 percent each. Dutch natural gas infrastructure company Gasunie and France's GDF Suez each own a 9 percent stake.

BRITAIN LINK

Nord Stream plans to connect its landing point Lubmin, on Germany's northeastern Baltic Sea coast, to Germany's massive Rehden storage site.

Wintershall said in a statement issued on Monday that a pipeline connection from Lubmin to Rehden, called NEL, would be operational at the start of November. NEL is 440 km long and can transport 20 bcm, or a fifth of Germany's annual demand.

From there, the gas could be shipped to the Dutch North Sea coast and into Britain, which has an annual gas demand of around 100 bcm and where domestic supplies are dwindling fast.

"I think that the only one useful Nord Stream expansion, both for Gazprom and the EU, would be extending it to the UK," Mikhail Korchemkin, executive director of consultancy East European Gas Analysis.

In September Gazprom signed a 2.4 bcm-per-year supply deal with Britain's Centrica , with gas deliveries due to start in 2014.

($1 = 0.7657 euros)

(Reporting by Vladimir Soldatkin; Additional reporting by Vera Eckert in Frankfurt and Henning Gloystein in London; Editing by Robin Pomeroy)

((vladimir.soldatkin@thomsonreuters.com)(+7 495 775 12 42)(Reuters Messaging: vladimir.soldatkin.thomsonreuters.com@reuters.net))

Keywords: RUSSIA NORDSTREAM/

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