Russian Prime Minister Vladimir Putin yesterday (9 March) ordered an investigation into the possibility of building an LNG plant on the Black Sea coast, casting fresh doubts over the viability of Russia's South Stream gas pipeline.
Putin has backed the $21.5 billion South Stream link to transport up to 63 billion cubic metres (bcm) of gas to Central and Southern Europe. Russia plans to launch the pipeline in 2015 while the LNG option has never been discussed.
"Please, review as a possible part of South Stream implementation the construction of a liquefied natural gas plant in the Russian Federation's southern region of the Black Sea," Putin told Energy Minister Sergei Shmatko.
A standard LNG plant has the processing capacity of about 12 bcm of natural gas per year, which may cover initial export demand from Southern and Central Europe.
This in turn may reduce the need for the South Stream pipeline, which some analysts have said does not make economic sense and serves mainly political purposes.
"A Black Sea LNG project may be used as an excuse to postpone the South Stream project and eventually abandon it," said Mikhail Korchemkin of East European Gas Analysis, pointing out that currently there was no shortage of pipeline capacity.
Demand for Russian gas in Europe was crushed by the economic crisis, while relations with Ukraine have warmed under President Viktor Yanukovich who is insisting Russia should stick to its old transit route through Ukraine.
Analysts have said low demand for gas, good relations with Ukraine, emerging LNG opportunities and the high cost of the project may force gas export monopoly Gazprom and the government to rethink South Stream.
Russia has sought to diversify energy exports during energy transit wars with neighbours Ukraine and Belarus, embarking on expensive underwater pipelines such as Nord Stream – now under construction – and South Stream.
Gas export monopoly Gazpromand the Energy Ministry declined to comment on a possible delay to South Stream's construction. Putin's spokesman Dmitry Peskov could not be reached for comment.
Possible risk
Korchemkin said one possible risk for the Black Sea LNG construction was congestion in the Bosphorus Straits. The Bosphorus is controlled by Turkey, which will not allow the use of large LNG tankers, therefore increasing likely transportation costs.
Shmatko told Putin that the idea to build LNG on the Black Sea coast was proposed by the European Commission during recent talks in Brussels. Russia is due to make a South Stream presentation to the Commission in April.
Putin asked Shmatko to calculate the profitability of Black Sea LNG exports to Europe and report back within a week. He also asked him to discuss construction of LNG infrastructure in Europe to receive liquefied gas deliveries.
The request came one week after Putin oversaw a signing of a deal between France's Total and Russia's Novatek to develop LNG in the Arctic, suggesting that Putin's interest in the super-cooled fuel is growing.
South Stream is competing with OMV's $11 billion Nabucco pipeline, which is also due to be launched in 2015.