Austrian-Russian Pipeline Deal Undermines European Gas Policy

Austria and Russia circumvent the European Commission by signing a bilateral pipeline deal.

European attempts to wane the bloc off Russian gas were set back last week when Austrian energy firm OMV agreed with Russia’s Gazprom to bring the South Stream pipeline to the Alpine nation’s Baumgarten gas hub, outmaneuvering Italy, which had wanted it to terminate there.

The European Commission had put the approval process for South Stream on hold after Russia annexed Ukraine’s Crimean Peninsula in March, saying it did not comply with its regulations on ownership and pipeline access. Austria and Russia circumvented this by signing a bilateral agreement.

Bulgaria, which imports almost all its natural gas from Russia, also backs South Stream.

Political project

It is estimated that Russia uses just 60 percent of its pipeline capacity while its European customers are actively looking for ways to reduce their dependence on Russian gas.

South Stream then is not so much a commercial as a political project, designed to enable Russia to put pressure on Ukraine by denying it gas while continuing to service its European customers.

The countries in the EU get roughly a quarter of their gas from Russia. Half of it flows through pipelines in Ukraine.

Most of the gas is used for heating, especially in Central and Eastern Europe, where some countries are almost wholly dependent on Russia for imports.

Western European countries, like Germany and the Netherlands, use most of the imported gas to generate electricity.

Quiet German backing

Austria was motivated to push for the South Stream deal after it lost out to Italy in a competition last year for a separate pipeline: The Nabucco project, in which OMV was a partner, was dropped in favor of the rival Trans Adriatic Pipeline to bring gas from Azerbaijan to Italy.

Germany, by far Gazprom’s biggest customer in Europe, is believed to be quietly backing Austria’s move, despite official recriminations of Russia’s aggression in Ukraine.

Its BASF, the world’s largest chemicals company, is a partner in South Stream through its subsidiary Wintershall. Siemens is contracted to supply the pipeline’s control systems.