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Analysis: Europe teams up with Gazprom

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by Stefan Nicola
Berlin (UPI) Nov 16, 2007
Two major European energy players have recently linked up with Gazprom for large electricity projects in Russia and Europe. Some politicians fear Europe's energy security is suffering as a consequence.

According to the Financial Times, Eon, the world's largest utility by sales, is considering building gas-fired power plants in Germany, Britain and Hungary with the Russian state-controlled energy giant, after the Germans had already announced they would enter the soon-to-be liberalized Russian power market. And Italy's electricity giant Enel is investing some $6 billion (one of the largest ever foreign direct investments by a singly company) in Russia to gain access to the largest and potentially most profitable untapped electricity market on the continent.

Yet while hopes for immense profits run high in the companies' top management circles, European politicians look with a sorrowful eye to concrete plans with Gazprom, the Kremlin's most powerful energy and sometimes also foreign policy tool.

While investments in Russia aren't the problem (this has been tried in the past by several companies, with varying success), giving Gazprom access to end consumers in Europe has concerned policymakers from Madrid to Berlin.

Russia supplies half of the European Union's natural gas and roughly a third of its oil, and observers have in the past years called for an increased level of diversification instead of deepening old ties.

Yet not all politicians would agree.

In Germany, Foreign Minister Frank-Walter Steinmeier has long been an advocate of even closer cooperation with Russia. On Friday the minister said one should stop looking at Russia in good-or-bad categories.

"We need a new policy of detente żż through renewed and deepened cooperation," Steinmeier said in a speech at the European Forum conference in Berlin. "We must not gamble away the existing ties with Russia, despite the difficulties, which I am seeing as well."

The two-day conference, funded by the BMW Foundation Herbert Quandt, assembled more than 100 political and economic leaders in Berlin to discuss Europe's role when it comes to energy security.

And some of the company officials present already had established ties with Russia. Eon is already the largest foreign shareholder of Russia and is now trying to enter the Russian electricity market.

"This is the last country that Eon hasn't conquered yet," Roland Goetz, energy expert at the German Institute for International and Security Affairs, told United Press International Friday in a telephone interview. But the plan isn't without risks, neither for Eon nor for Enel, Goetz warned.

"The price increases in Russia for natural gas are hard to predict." He added that Europe's energy companies value the economic risks of investing in Russia much more highly than the political ones.

That's also the reason why Duesseldorf-based Eon didn't shy from opening a new chapter in its relations with Gazprom; Chief Executive Officer Wulf Bernotat earlier this week said Eon would team up with Gazprom to build power plants all over Europe, including in Germany, Britain and Hungary, according to the Financial Times. He added that he was considering giving Gazprom minority stakes in other Eon plants across Europe.

Alexander Medvedev, deputy head of Gazprom, told the Frankfurter Allgemeine Zeitung newspaper that one plant with a generating capacity of 1,000 megawatts will be built in Lubmin, near the Baltic Sea, adding that another project in Germany was also in the "advanced" planning stages.

Such moves would finally give Gazprom access to end consumers in Europe, a strategic expansion the company has long sought after. While Europe's lawmakers in September put forward a new energy strategy that would limit Gazprom's ownership abilities in Europe as it is operating in a state-ensured monopoly, Eon's CEO is less concerned about Russia. Earlier this month, Bernotat told the Financial Times the European Commission, which wants to break up large utilities such as Eon, posed a larger threat than Russia in energy matters.

Yet Eon would hardly offer Gazprom direct access to European customers if it didn't get something valuable in return.

Observers say the plans are linked to the giant Yuzhno-Russkoye natural gas field in western Siberia. Eon has been in negotiations with Gazprom to acquire a stake in the field, but those negotiations have been stalled for the past years. Eon is now much more optimistic. Bernotat said that a deal should be signed "soon."


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