* Pipeline to pump Russian gas via Black Sea into southeast Europe
* South Stream will avoid transit through Ukraine
* Balkans will have little alternative to Russian gas
By Ivana Sekularac and Michael Kahn
BELGRADE/PRAGUE, Nov 22 (Reuters) - Russia will take a step toward tightening its grip on Balkan energy supplies and strengthening its influence in southeastern Europe when construction starts on the Serbian leg of Gazprom’s South Stream pipeline on Sunday.
Balkan countries, which receive the bulk of their natural gas deliveries from Russia’s state-controlled Gazprom, have been eager to find new supply routes following repeated disputes between Russia and Ukraine that have shut down the main pipeline serving the region.
A pricing dispute in 2009 led Russia to turn off the spigots in freezing temperatures, leaving hundreds of thousands of homes and businesses without heat and spurring governments to search for ways to avoid future disruptions. A renewed row this year has raised fears disruptions could happen again.
“It doesn’t really solve any problems about diversity of sources but it does increase security of supply,” Graham Freedman, a power and gas analyst at Wood Mackenzie in London, said of the South Stream pipeline. “From a political perspective it helps Russia maintain political influence over the region.”
For Gazprom, the pipeline avoids troublesome transit through Ukraine and further locks in customers with few other options, bolstering its political influence in the Balkans at a time the European Union looks to diversify away from Russian supplies.
Gazprom plans to pump 63 billion cubic metres (bcm) of gas a year into Europe through the 2,500 km-long South Stream pipeline by 2016/2017, crossing the Black Sea into Bulgaria and further into central and southern Europe.
South Stream construction began in Bulgaria last month and the start of building in Serbia is important as it gives Gazprom a further foothold in a country that has long enjoyed Russian political support.
The biggest state to emerge from the ashes of federal Yugoslavia, Serbia put its oil and gas sector in Gazprom’s hands in 2008 in a deal seen as political trade off for Russia’s support of Serbia in opposing the secession of its former Kosovo province.
Belgrade, which has long touted its ties with Russia despite pursuing membership of the European Union, backed South Stream early on over competing projects such as the failed Nabucco pipeline.
Serbia consumes about 2.5 billion cubic metres of gas, mostly imported from Russia through Hungary, a pipeline which goes through Ukraine. The Western Balkan nations as a whole consume about 6 billion cubic metres per year, a figure expected to rise in coming years as economies rebound.
“Gazprom welcomes any additional volume of gas sold in Europe,” said Mikhail Korchemkin, executive director of Pennsylvania-based consultancy East European Gas Analysis. “The Russian gas giant needs to replace its expiring contracts.”
With the demise of the EU-backed Nabucco, South Stream will compete with the Trans Adriatic Pipeline (TAP) which will carry Azerbaijan’s gas via Turkey, Greece and Albania to southern Italy.
But with higher prices in Greece and Italy, it is likely South Stream will mainly supply the Balkan region until new sources such as liquefied natural gas (LNG) imports to Croatia are developed.
Critics in Serbia say South Stream could be too costly in the future and that it conflicts with the country’s aspirations to join the European Union.
Serbia has also not asked for the approval from Energy Community, which fosters energy market cooperation between the EU and neighbouring countries, to exempt South Stream from rules relating to the EU’s third energy package, which seeks to liberalise the European gas market by barring suppliers from controlling the transport infrastructure used to deliver their gas.
“According to the agreement there is no third party access to pipeline infrastructure which is not in accordance with the EU regulations,” said Aleksandar Kovacevic, Belgrade-based independent energy consultant.
Serbian officials argue construction will generate thousands of jobs and lead to cheaper gas prices for consumers because there will be no transit tax through Hungary on the pipeline where the country currently receives Russian deliveries.
Thiery Bros, Senior European Gas and LNG analyst with Societe General said South Stream is not likely to be very profitable because there is not enough demand for additional large gas flows to Europe due to high prices, but underlined it meets Russian goals of maintaining its influence in a region where it has long been dominant.
“South Stream is a pipe designed and mostly financed by Gazprom to increase its reliability as the major gas supplier to Europe.” (Additional reporting by Vladimir Soldatkin in Moscow; editing by Henning Gloystein and James Jukwey)