Europe's Energy Supplies Hang In Balance

The crisis triggered by Russia's natural gas dispute with Ukraine could accelerate the Kremlin's efforts to build alternative pipelines, but any project faces big financial and political hurdles.

The two former Soviet republics have been at odds for years, and once again Europe's energy supplies hang in the balance. Russia supplies over one-quarter of Europe's gas, and 80 percent of that moves over Ukraine's pipelines.

A key issue, analysts say, is to what extent Russia and its state-controlled gas giant Gazprom are blamed for the natural gas cutoff and reductions of gas shipments to a dozen countries.

If Europe holds Russia responsible, that could scuttle Gazprom's plans for new pipelines that bypass Ukraine and other former Eastern bloc nations. But if Europeans hold Ukraine accountable, they could be ready to set aside doubts over hardwiring the continent to Russia's gas exports.

"Russian gas is not the problem," said Andrew Neff, an analyst with IHS Global Insight. "The transit routes are the problem."

Construction of any of pipeline could take several years. The most advanced is Nord Stream, a 750-mile offshore pipeline through the Baltic Sea that is supposed to connect Vyborg, Russia, with Greifswald, Germany. Russia is pushing hard for its construction.

"This situation underlines the inevitability and very strong necessity for urgent completion of big projects like Nord Stream to insure the stability, predictability of energy sources to European customers," said Dmitry Peskov, spokesman for Russian Prime Minister Vladimir Putin.

German Economy Minister Michael Glos agreed, saying this week that "if we already had the Nord Stream pipeline, then we in Germany, at least, would be a little more reassured."

So far, the $15 billion project is intended to bypass former Soviet states - including Ukraine - that have developed frosty relations with the Kremlin since the 1991 Soviet collapse.

Plans call for Nord Stream to carry 55 billion cubic meters of gas from Russian fields to Western Europe, about one-third of what Russia now ships to Europe. The pipeline is a joint venture between Gazprom, Germany's BASF AG and E.ON AG, and Dutch company Nederlandse Gasunie. Gazprom owns 51 percent of the project.

But the project, proposed more than a decade ago, has faced numerous hurdles.

Some European critics worry that it would increase the continent's reliance on Russian gas. Poland and other former Soviet and Soviet-bloc countries - traditional transit routes for Russian gas - also worry the pipeline could permit Russia to threaten their gas supplies without cutting off customers in Western Europe.

Russia proposed another pipeline in June 2007, called South Stream, which would ship about 30 billion cubic meters of the gas through Bulgaria and onto Austria, Greece and Italy.

The Black Sea project could be difficult to finance at a time when credit is tight and energy prices have fallen, said Chris Weafer, chief strategist at Uralsib bank in Moscow. The cost could reach $20 billion.

"Avoiding Ukraine comes at a great price," Weafer noted.

The EU, backed by the United States, has proposed a $5.8 billion, 2,050-mile pipeline to transport gas from Azerbaijan and Turkmenistan, through Turkey and across the Balkans to Central Europe, called Nabucco.

But there are concerns that Russia and China have already locked up most Central Asian gas supplies. And Nabucco would have to cross Iran.

Securing that route, Neff said, could prove vexing at a time when the West is pressuring Tehran to abandon its nuclear program.

Even if Europe could secure a route for Nabucco and fill it with gas, it would still carry only about six to eight percent of Europe's gas demands by 2020, experts say.