RUSSIA - EU Imports Rising But Asian Competition To Grow.

Europe is facing tough competition for Russian gas from the Asia-Pacific region and the US. Reiner Hartmann, the head of the Moscow office of E.ON Ruhrgas AG, the biggest utility in the EU, in April 2006 said Europe was no longer the only consumer of Russian gas, and had to compete with China, India and the US. He said Gazprom was capable of supplying gas to all these countries and that its investments into additional EU routes was a positive trend, stressing the importance of long-term contracts as gas prices were likely to continue rising.

On Sept. 8, 2005, Gazprom and BASF and E.ON Ruhrgas signed an agreement to build the North European Gas Pipeline (NEGP). Construction under the $12.6 bn project, managed by Gazprom, began last year and should be on stream in 2010 with a capacity of 55 BCM/y. The pipeline, to include two parallel legs measuring 750 miles each, will run under the Baltic Sea from near the Russian city of Vyborg to the Greifswald region on the German coast. It will supply the European market.

Industry and Energy Minister Viktor Khristenko on April 3 told a forum on Russia's role in energy in the 21st century about 25% of Gazprom's gas exports will go to the Asia-Pacific region as of 2020, compared with about 5% now, and the proportion of Russian oil exports to the region will increase tenfold to 30% from 3%.

Russian gas supplies to China may reach 80 BCM/y by 2020, to be pumped through two pipelines beginning in 2011. Khristenko said: "The 'eastern trend' in the framework of energy strategy and policy is an adequate response to the global challenges and risks facing Russia and is the realisation of the policy of diversifying markets and supply directions, and minimising the risks of transit territories". He said concentration of supplies to the East necessitated a single system of extraction and transport in eastern Siberia and the Russian Far East. Construction of the first leg of the pipeline leading from eastern Siberia to the Pacific, which will include a branch to China, will be completed by end-2008. The pipeline would run from the town of Tayshet in Siberia's Irkutsk region through Skovorodino in the Amur region to the port of Perevoznaya in the Primorye region on the Pacific coast. China is already a top consumer of Russian oil, but until recently all of it was supplied by rail.

Crude oil supplies by pipeline to China from Kazakhstan began in July 2006 (see omt6KazkhExprt-Aug7-06). Russia can export crude oil to China through this line.

Ukraine, the main transit route for Russian gas supplies to Europe, is the most important factor in Gazprom's current strategy. It will remain so until major alternative routes to Europe have become available. Ukraine's new PM Viktor Yanukovych on Aug. 15-16 began negotiating a lower price for Gazprom gas supplies during his trip to Russia's Black Sea resort of Sochi, where he met President Putin. Yanukovych, head of the pro-Russia Party of Regions who was named prime minister earlier this month, on Aug. 14 said: "If it is possible to decrease the gas price, we will make every effort".

Ukraine, which gets most of its gas supplies from Russia, early this year agreed to a twofold price rise after a bitter dispute with Gazprom, which briefly turned off the taps at the height of winter. That triggered a brief shutdown of supplies to west Europe. As part of the deal, Ukraine agreed to a price of $95/'000 CM from RosUkrEnergo - a JV of Gazprom and a company owned by two Ukrainian businessmen. This was still far lower than West European prices of around $250/'000 CM. Yanukovych said Ukraine did not plan to reconsider the deal for this year, but hoped he could win a better one in future, adding: "If the price decreases even by $1 per 1,000 cubic metres, it will be an achievement for us". He said the 2007 gas deal would be fully transparent.

Yanukovych's trip to Sochi, which included meetings with Russian PM Mikhail Fradkov and other officials, underscored his desire to mend ties with Moscow, strained over Ukrainian President Viktor Yushchenko's planned integration into the West. Yanukovych attended a meeting of the Eurasian Economic Community, a loose grouping of ex-Soviet states, and met separately with Kazakh President Nursultan Nazarbayev and Uzbek President Islam Karimov for gas supplies and pricing.

Gazprom on May 30 had put pressure on Central Asian gas exporters by saying Ukraine could face another price hike in the second half of 2006 if they raised prices. The supplies to Ukraine include Russian gas at $200 and a much larger volume of Central Asian gas at far lower prices, so the average price paid by Ukraine is $95/'000 CM. The deal stipulates that Ukraine get up to 60 BCM/y at the same price through end-2010. Ukraine uses some 80 BCM/y of gas, and provides about 20 BCM of this itself. This year, it is making up the difference with a separate contract with Turkmenistan, but that contract expires at end-2006.

The deal allows Gazprom to supply more to lucrative EU markets downstream. It is estimated that in 2006 alone, Ukraine will pay about $3 bn more for gas, while Gazprom will pay only about $500m in transit fees. That is a net gain for Russia of $2.5 bn in 2006 alone.