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INTERVIEW-New French gas pipeline to offer Germany alternative supply

* To be completed by end-2016

* Ukraine crisis makes LNG-to-Germany link more important

* To help unify French market, diversify European supply

* Grid sees potential for reverse flow

CREPY-EN-VALOIS, France, July 2 (Reuters) - A pipeline under construction in the beetroot fields of northern France is set to link a new liquefied natural gas (LNG) terminal in the port of Dunkirk with Germany by 2016, offering Europe's biggest energy market an alternative to Russian gas.

Germany is currently the world's biggest importer of Russian gas but the European Union in the wake of the crisis in Ukraine has reiterated its call for EU member states to reduce their reliance on Russian energy.

The 300-kilometre-long Arc de Dierrey pipeline being built by grid operator GRTgaz will mainly carry gas from state utility EDF's new LNG terminal and improve transit to southern France.

But its potential as an alternative link for Germany and Switzerland have gained importance since the Ukraine crisis reignited concerns about the transit of Russian gas to Europe.

"Arc de Dierrey is the first step of a grand plan to unify the two French gas hubs," Olivier Aubert, head of supply at GRTgaz, told Reuters in an interview.

"But it will contribute to another service in the future, making France an entry point for gas in Europe. And the most important market, that we all have in mind, is Germany."

Germany, which relies for 36 percent of its gas imports on Russia, does not have direct access to an LNG terminal on its coast, although two other terminals, in Belgium and the Netherlands, can supply it with LNG.

LNG, which is cooled to a liquid for transit by ship, can deliver gas from a diverse list of producers around the world.

In Europe it still struggles to compete with cheap, piped gas from countries such as Russia, but French LNG operators are among those betting that will change.

Faced with the prospect of declining North Sea production, GRTgaz' majority shareholder GDF Suez and EDF are upgrading France's three LNG terminals to increase the country's import capacity.

LNG prices have been swollen by rising Asian demand since 2011's Fukushima disaster in Japan but new projects are coming on stream in Australia and the United States in anticipation that global gas demand will continue to grow.

The potential for U.S. supplies in particular, fed by cheap shale gas and shipped from the U.S. east coast, is focusing investor attention.

"It's totally possible that LNG becomes more competitive and on that day, the question will come up about exporting to central Europe," Aubert said.

"Germany is a first step," he said, but other countries further east could also be interested. "That's the key point today for these countries which have access to Russian gas only through routes crossing Ukraine," he said.

Russian gas exporter Gazprom shut off supplies to Ukraine on June 16 citing unpaid bills. It is the third such stand-off between Moscow and Kiev in a decade and while gas is still flowing via Ukraine to the EU, it has focused attention on the issue of Europe's energy security.

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The 635 million euro ($866 million) pipeline, whose construction started in March in the plains north of Paris, has received a 77-million-euro subsidy from the EU for its role in diversifying European energy procurement.

It will also fully unify France's two gas zones, Peg Nord and Peg Sud, which have experienced diverging prices in recent years, with prices in the south, which already depends on the global LNG market, rising well above those in the north, which is supplied by pipelines.

To that end, GRTgaz is expected to take a final investment decision at the end of 2015 on another section of pipeline in the Val de Saone in the centre of the country. That will remove the bottleneck between the two zones - currently linked only by a low-capacity pipe - by around 2018.

In the meantime, work on a section called Hauts de France II is expected to be finished this year. It will then link up with the Arc de Dierrey pipeline, joining the towns of Cuvilly in Picardy and Voisines in the Champagne region and forming an arc east of Paris.

Phase 1 will be ready in November 2015 when the Dunkirk LNG terminal is completed, and phase 2 will link up with existing pipelines to Obergailbach on the German border and Oltingue on the Swiss border in November 2016.

Gas currently flows in one direction only, from Germany to France, but there is no major technical issue preventing it from flowing the other way, Aubert said.

However, France would have to change the way it odorises gas if it wants to start exporting to Germany, he added. Under French law, the odorisation process - adding a smelly liquid into natural gas distribution system so that leaks are easily detectable - is done centrally at gas hubs.

In Germany and most other European countries, however, it is done at stations outside each city. GRTgaz is currently experimenting with the first non-odorised link in France near the Belgian border to prepare for that possibility, Aubert said.

Russian gas supplies make up only about 10-15 percent of French needs, and Aubert said this meant France could cope without Russian gas, except in the case of extremely low temperatures, which are seen about every 50 years.

Nevertheless, Aubert believes other reverse flows should be made possible to improve France's options, such as the Marches du Nord Est link which carries North Sea gas to Italy via France and Switzerland.

"We could totally imagine to make this pipe flow in the other direction, in case there's a lot of gas in Italy but not enough in France, for example," he said, adding that the investment costs involved in doing so would be minimal.

($1 = 0.7331 Euros)

(Reporting by Michel Rose; editing by Jason Neely and Andrew Callus)