The New Supply in the Pipeline

The planned 1200-km subsea gas pipeline linking Russia with Germany is one of the largest private infrastructure investments in Europe. O&G sits down with Matthias Warnig, Managing Director of Nord Stream AG, to discover how this ambitious and controversial project, majority-owned by gas giant OAO Gazprom, will meet Europe’s burgeoning energy needs.

For Europe, the Nord Stream pipeline cannot come soon enough. Soaring demand is fuelling the need for energy security – and the situation is set to intensify over the coming years. Once complete, Nord Stream will deliver 55 billion cubic metres of natural gas per year, accounting for 25 percent of the additional demand predicted in the EU by 2015. European demand increases by two percent annually so Nord Stream is seen as a sustainable step in meeting the EU’s energy supply goals which calls for around €19 billion in gas projects alone in order to diversify the energy mix. “The increasing demand [in Europe] is caused by declining domestic production and growing consumption of natural gas being the fossil fuel with the lowest emission values,” Warnig explains during an interview with O&G. “ Nord Stream will connect the European gas pipeline network directly with vast gas resources in Russia, such as the Shtokman field, and thereby complement existing infrastructure.”

It’s a bold scheme that has come with a hefty price tag, thus far. In March, bosses announced that the overall project budget had risen to €7.4 billion – almost double the original estimate of €4 billion. A large wedge of this inflated budget has been blamed on the mushrooming price of steel, as well as increased costs for environmental and technical security. “ The initial assumptions were made before specific requirements of the project were known in detail,” Warnig admits when pressed on the costings. “We have signed contracts with the pipe producers Europipe and OMK, and Letters of Intent with our pipe-laying and logistics suppliers Saipem and EUPEC; these agreements provide a solid basis for the current budget estimation. The calculation also reflects additional expenditure on the pipeline's technical and environmental safety. We also look into account recent project developments and price developments such as the steel market.”

If all goes to plan, the first of Nord Stream’s two parallel pipelines, running along the seabed from Vybord in Russia to Greifswald, Germany, will be complete by 2011. The second line is due to be transporting gas the following year. Gazprom’s vision is to connect Nord Stream to Siberia’s Shtokman field – the world’s largest gas reservoir. The project has suffered delays but bosses point to the fact that technological progress is allowing construction teams to build the pipeline faster. Despite concerns over the schedule, Nord Stream’s main backers, Russian gas major Gazprom (51 percent) and BASF Wintershall and E.ON (20 percent each) are confident that the deadlines will be met.

Gazprom began construction of the pipeline’s onshore section in December 2005 but the underwater segment has yet to begin. The first feasibility study was undertaken between 1997 and 1999. It’s been a long and controversial journey to now; indeed, there has been fierce criticism of its environmental impact, as well as the national security risks that it brings. Warnig, however, is confident that the pipeline poses no dangers to the region. “ Offshore pipelines are the safest means of transport within the oil and gas industry,” he proclaims confidently. “There have been no incidents causing shutdowns or repairs of large-diameter pipelines built since the 1980s – we ensure the highest safety standards by constructing the pipeline in accordance with the internationally accepted DNV standards.”

In terms of the environmental concerns, Warnig is says a huge amount of study has gone into assessing Nord Stream’s impact. “Of course, a large number of studies, including geophysical and geotechnical field investigations as well as studies on ship traffic or fishing and trawling activities, have been carried out.” He stresses that the results of these studies will be included in the Environmental Impact Assessment (EIA) report currently being prepared according to the requirements of the Espoo Convention – aiming to minimise any potential environmental impact. He adds: “ In everything we do, we abide by the highest international standards – for example in selecting  suppliers, materials or managing risk.”

Adding to the opposition of the scheme is the country of Sweden. Its environment minister has called for the application to run the pipeline through Swedish waters to be refused. Nord Stream has already dropped plans for a service platform off the coast of Sweden after concerns that it could disturb marine life, and the plan now is for no service platform at all. Greenpeace also argues that the project will endanger sea life along the pipeline’s route. Another concern is the fact that Gulf of Finland is littered with mines from the Second World War and these explosives on the seabed could be disturbed.

Of course, as well as the environmental opponents there are those not too happy about the pipeline’s route. Some see it as a decision by Russia to bypass traditional transit counties such as Ukriane, Belarus, Poland and Slovakia. These nations will lose out transit fees too. Poland’s Prime Minister Donald Tusk, who is furious at losing out on this revenue, argues that a pipeline on land would be far cheaper and easier. Nord Stream chiefs insist that an overland route was just not possible and that offshore is more economically viable. “ Following the original evaluation and feasibility studies carried out in the 1990s, our shareholders decided for an offshore route as the best solution from economic, technical and environmental aspects,” Warnig states.

He also argues that the shareholders are experienced in building and operating both on and offshore pipelines and will be looking for a return on their investment. The backers also say that the total cost of ownership for project like this, calculated over a 25-year period, is some 15 percent lowers than for similar onshore pipelines. This is due to the fact that underwater pipelines can be operated at a higher pressure. “Nord Stream does not require interim compression whereas land-based solutions need compressor stations every 200 kilometres,” Warnig reveals. “These are high maintenance and consume energy, causing additional green house gas emissions.”

The task ahead
The project is pushing the boundaries in terms of logistics and technology, and this doesn’t come without some major headaches for those involved in the construction and future maintenance of the pipeline. Warnig adds that just by it sheer size and pan-European nature, Nord Stream faces “very specific challenges”. Language is one. “ We co-operate with nine countries in nine languages to make the project environmentally safe and compliant with national and international legislation.” In terms of logistics, a great deal of planning has gone into the production and timely delivery of 1.1 million tons of steel in the form of pipes. The plan is for three kilometres of pipe to be dropped into the Baltic Sea every day. With each metre of pipe weighing around one ton, that’s 3000 tons a day.

When it comes to the pipeline itself, Russian company OMK has won the tender to supply 25 percent of pipes for Nord Stream. However, Warnig refuses to be drawn on whether any other Russian firms will be awarded contracts in either the construction or post-commissioning phases. “ The choice of all contractors is based on world-wide calls for tender,” he explains. “The decision is always based only on technical, commercial and capacity-related criteria and is made separately form the past tenders to ensure competition in the supply market. Therefore we may well use more Russian suppliers – if they are the most suitable bidder.”

So how would Warnig characterise the state of the pipeline infrastructure in Former Soviet Union today? He wastes little time in firing back a response.

“ In Russia, development and modernisation of the gas pipeline infrastructure is a top priority today.” He gives a couple of examples to illustrate the point: “One of the ongoing projects is the gasification of the St Petersburg region, while Gazprom is also developing new large scale projects such as the Shtokman gas field in close co-operation with foreign partners.”

In the meantime, he is fully focussed on getting the project complete and delivering a new gas route for Europe, even if it has divided Europe with the controversy surrounding its route. And then there are the spiralling costs. Former German Chancellor Gerhard Schröder, who is on Nord Stream’s board, has suggested that the total cost could increase to €8 billion. Analysts say that even this figure could be a long way short of the final amount. But whatever the final figure, there is no denying that this pipeline will make a significant contribution to the continent’s energy needs. Indeed, according to the International Energy Agency, the EU will be importing three quarters of its natural gas in 2015 – up from 57 percent in 2005. As the interview draws to a close, Warnig reiterates what the project will deliver: “Consumers in the EU will benefit from this investment that will be connected to the European gas pipeline networks via the shortest and most direct link – the Nord Stream pipeline.”

Europe consumes 500 billion cubic metres of gas a year but only produces 200 billion cubic metres.

Click here to view information by Nord Stream.

A closer look at the project

• Gas capacities: 55 bcm per annum (2 pipelines with 27.5 bcm capacity each)
• Pipeline length: 1220 km - Nord Stream is one of the longest offshore pipelines in the world
• Maximum water depth: 210 m
• Project start: 2005
• Completion of the first line: According to plan – in 2011
• Completion of the second line: According to plan – in 2012
• Pipeline diameter: 1.220mm/48 inches
• Design pressure: 220 bar/ 200 bar/ 170 bar
• Pipe steel standard: DNV Offshore Standard OS-F101; Steel grade: X-70
• Wall thickness: 26.8-41.0 mm
• Coating: Interior antifriction coating of 0.06 mm epoxy layer; exterior anticorrosion layer; passive anticorrosive protection is ensured by aluminium sacrifice bracelet anodes
• Gas supply resources: Yuzhno-Russkoye oil and gas reserve, Yamal Peninsula, Ob-Taz bay and Shtokmanovskoye fields
• Estimated investment so far: € 7.4 billion