Gazprom pipelines and export capacity

Газопроводы Газпрома и экспортные мощности

Gas pipelines of West Siberia

Газопроводы Западной Сибири

Export flows of Gazprom

Экспортные потоки

Spot, Gazprom, Brent

Цены на нефть и газ

End-use price of gas

Russia and USA

Daily gas production

Суточная добыча

South Stream bypasses Ukrainian shelf (click on the map to download it in PDF format)

Very likely, on August 6 Russia will get permission to build the South Stream pipeline in the exclusive economic zone (EEZ) of Turkey. Russia will be closer to "the final solution of the Ukrainian problem" of Gazprom.

Bypassing the EEZ or continental shelf of Ukraine extends the submarine route by some 100 km and adds $1.3-1.5 billion of investment cost. The total cost of construction out of the Russian territory is estimated at $25-30 billion, with Gazprom's share representing over a half of the sum. Gazprom needs to invest another $20-22 billion to build new pipelines to deliver gas from the Bovanenkovo field to the Black Sea. If the Nabucco project is cancelled, Gazprom would need to invest few more billions of dollars into the new pipeline from Turkmenistan to Russia (Caspian Gas Pipeline).

In case both Nord Stream and South Stream pipelines are commissioned at full capacity, Russian gas transit via Ukraine is to go down to a mere 25-50 bcm/year. The Ukrainian transit expense of Gazprom will drop from $3.0-3.5 bn (without South Stream) to $1.0-2.0 billion. As a matter of fact, operating expenses at the new pipelines will exceed the savings in transit costs. There are no other benefits from the $35-40-bn investment of Gazprom.

Gazprom is very unlikely to get any profit margin from the gas exporters of Azerbaijan and Central Asia that can get a full European price by selling gas directly to Europe without the brokerage service of Gazprom. Any talk about the profit margin for Gazprom will initiate demands for freedom of international transit of gas across Russian territory. The only way Gazprom can slow down the process of setting the freedom of international gas transit in Russia is by paying the full European price for foreign gas.

Therefore, Gazprom will have to re-export all foreign gas without profit or may be at loss. The export basket of Gazprom is limited by the contracted volumes, so Gazprom would need to reduce exports of Russian gas which will result in lower profits.

From the standpoint of Russian budget, re-exports are unprofitable because these transactions are free of customs duties. Russian gas is subject to customs duty (30% of the contract gross value).

In fact, the Russian government is fighting to prevent Turkmenistan from selling some 20 bcm/year directly to Europe. A decade ago Gazprom has won a similar race by building the Blue Stream pipeline to Turkey. Turkmenistan's plan to export 16 bcm/year to Turkey has never been realized (according to Botas, the agreement was signed on May 21, 1999).

It is clear that Turkmenistan has lost billions of dollars because it did not have direct access to European markets, especially in the period of record prices of gas. The gains of Gazprom are not that obvious. In my view, Gazprom could have generated much higher profits by building the Yamal-Europe-2 pipeline instead of a more expensive Blue Stream project. Note that the 33 bcm/year Yamal-Europe-1 pipeline was commissioned at about the same time with the more expensive Blue Stream project (16 bcm/year). Yamal-Europe is operating at full capacity for nearly four years while the Blue Stream is still loaded by two-thirds.

Russian government has to consider the Blue Stream project as a complete loss because the pipeline does not generate any customs duties. The Blue Stream exports were freed from excise tax and export duties in 1999, when the average price of European exports of Gazprom was $65/mcm. Since then the average price went up to $472 and then down to $211, but the Blue Stream exports are still free of customs duties.

Note that from the commissioning day, the Yamal-Europe pipeline has generated about $16 billion of excise taxes and duties; while the Blue Stream pipeline got $3.5 billion of budget subsidies (the state budget did not get $3.5 billion). Surprisingly, the subsidies have already exceeded the total investment cost of Blue Stream ($3.2 billion)!

South Stream is likely to be a bigger loss than the Blue Stream project. The new Russian pipeline is designed to diversify the supply routes, which means the same volumes of gas will be exported by a new route. It will not increase the profit of Gazprom, but it will increase the operating expenses.

Despite all the negative characteristics, South Stream has a major advantage over the Nabucco pipeline. The Russian project does not have to be profitable. South Stream is included into the governmental plan. Therefore, it has to be built at any cost. However, it does not mean the Nabucco project will be abandoned.

Mikhail Korchemkin

August 5, 2009

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Last modified: 12/07/14                    East European Gas Analysis 2006-2014                                           Email:
Reproduction or use of materials is allowed only with reference to East European Gas Analysis or