Will Western Europe still back Eastern Europe’s countries once an uninterrupted supply path for natural gas bypasses the contentious ground? Global traveler Sara Nunnally explores the conflict.

Soon, Eastern Europe might wake up to find itself in a Red January… A Russian-dominated era where the former integral energy pipelines coursing across ex-Soviet-bloc countries are dry and rusty, the taps having been turned off for good.

Recession, joblessness and cold seep in as Western economies turn their backs, too tired to take action, or just too annoyed to bother with support.

They’ve got their natural gas. Their people are warm, courtesy of two brand-new fully supplied pipelines that route Russian gas around “problem” nations like Poland, Georgia and Ukraine.

Without Western support, these countries freeze, and perhaps turn east, to Russia, fat with euros from natural gas deals. Penniless, Eastern Europe looks to the Motherland for help. What’s the difference now between the rough communist era a half-century ago and possible depression?

An outlandish scenario? Maybe… But then again, maybe not.

The Two New Pipelines

The two new pipelines are real, and fully endorsed by Western European countries. Last year, Russia and Georgia engaged in fisticuffs over South Ossetia, and Russian troops pushed nearly to the Baku–Tbilisi–Ceyhan pipeline, cutting through the Georgian capital of Tbilisi.

Russia also cut off natural gas supplies to a Ukraine thru-line in the middle of winter because of payment disputes. The ongoing conflict over the U.S.-proposed missile shield has lead to increased tensions between Poland and Russia, and even the Czech Republic and Russia.

How willing would the West be to support floundering Eastern European countries if its energy supplies were secure?

The Nabucco Pipeline Project was meant to give Western Europe an alternative to Russian natural gas. The EU relies on Russia for about 40% of its imports, and Gazprom, the largest extractor of natural gas in the world, alone supplies more than 28% of the EU’s total consumption.

Russia has been quick to turn off the taps, leaving some countries scrambling for energy to keep industry up and running or to keep its citizens warm.

In fact, according to one research organization (affiliated with the Swedish Defense Ministry), 55 energy disruptions in Eastern Europe since the Soviet Union dissolved have been proved to be politically motivated.

But what if Western Europe saw the issue not as a Russian supply problem, but as an Eastern European problem? What if the West could get Russian gas without the interruption?

Russia’s Pipeline Projects: Nord Stream and South Stream

Russia has two pipeline projects in the works that take Eastern Europe out of the equations. They are the Nord Stream pipeline and the South Stream pipeline.

The Nord Stream project runs from Vyborg, Russia, to Greifswald, Germany, as this image from the New York Times (via the International Herald Tribune) shows. It covers more than 750 miles running through the frigid Baltic Sea. The project has a price tag of more than $10.7 billion.

The International Herald Tribune reports, “Officials in Central and Eastern Europe fear that while profits from the pipeline, a joint venture between Gazprom and a trio of German and Dutch companies, will flow to Russian suppliers and German utilities, the long trod-upon countries once under the Soviet umbrella will become more vulnerable to energy blackmail.”

And that’s only one project. The second, the South Stream project, will bring natural gas through the Black Sea and through countries like Turkey, Hungary, Greece, Slovenia, and eventually to Austria and Italy.

Notice the “troublemakers” aren’t in the picture at all.

The Nord Stream project is expected to bring 27.5 billion cubic meters of natural gas to Western Europe in its first year of transmission, scheduled for 2011. In 2012, that amount is expected to double as a parallel pipeline comes online.

The South Stream project is designed with the capacity to move 63 billion cubic meters of natural gas a year. It is nearly 560 miles long, and is the joint venture between Russia’s Gazprom and Italy’s Eni SpA (E:NYSE).

The pipeline is expected to be completed in 2015, with the feasibility study done by 2010.

Intergovernmental Agreement with Russia

Gazprom and Eni SpA have entered into joint ventures with a number of countries through which this pipeline will pass. Here’s the timeline that was posted on the South Stream Web site:

Intergovernmental agreements have been signed between Russia and:
- Bulgaria – January 18, 2008;
- Serbia – January 25, 2006;
- Hungary – February 28, 2008;
- Greece – April 29, 2008.

Negotiations are underway to sign the relevant agreements with Austria and Slovenia.

Gazprom has also renegotiated contracts with Italy due to its South Stream involvement with Eni SpA.

Italy’s natural gas supplies from Russia will increase to 3 billion cubic meters a year by 2010, and existing contracts have been extended to 2035.

Eni SpA stock has been steadily climbing since its lows in March. I first talked about this company back in November 2008, when crude oil and gas prices were plummeting. The company did fall significantly in the beginning of the year, but I’ve kept it in our Taipan Insider model portfolio, and now we’re seeing some decent gains.

As of yesterday at noon, Eni SpA was trading at $54.52, a gain of nearly 20%. That’s not bad considering the fluctuations in the energy industry. Exxon Mobil is still down 2-3% on the year.

We’re still holding Eni SpA in Taipan Insider, and with this recent pop up near $55, those who haven’t been looking at Eni SpA should watch for any pullback below $52 for a possible entry point.

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Originally published October 27, 2009.

Other Related Topics: Natural Gas , Russia Investment , Sara Nunnally , Taipan Insider

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