UPDATE 2-Russia wins Hungary for South Stream gas project

Mon Feb 25, 2008 7:32pm GMT

(Releads, adds context and fresh Miller quotes)

By Oleg Shchedrov

BUDAPEST Feb 25 (Reuters) - Russia recruited Hungary to join its South Stream natural gas pipeline on Monday, striking a major blow in its "pipeline war" with the West to supply gas to southern Europe via the rival Nabucco scheme.

The deal was a triumph for Russian First Deputy Prime Minister Dmitry Medvedev, President Vladimir Putin's protege and Russia's likely next leader, widely expected to win easily in next Sunday's presidential election.

Before his blitz visit to Budapest, Russian media and analysts alike speculated that Medvedev would face an uphill task to persuade Hungary to opt for the Russian route.

"There is one more agreement we want to sign in the next few days," Hungarian Prime Minister Ferenc Gyurcsany told a news briefing after meeting Dmitry Medvedev.

"This is an agreement on an arm of the so-called South Stream project going through Hungary," he said. "The signing will take place in Moscow on Thursday."

"We agreed today on a joint venture with 50-50 percent ownership. Hungary will be represented by a 100-percent state-owned firm," Gyurcsany said.

Medvedev said Russia would be represented by Gazprom.

Paying a brief visit to Serbia earlier on Monday, Medvedev agreed with Belgrade that construction of the Serbian arm of the South Stream would start by 2012.

The 10-billion-euro ($14.65-billion) project by Gazprom and Italy's ENI is designed to bring Siberian gas to Europe. Its capacity is estimated at up to 30 billion cubic metres of gas, enough to cover annual demand of a country like Spain.

Analysts see South Stream posing a challenge to the rival EU- and U.S.-backed Nabucco pipeline, which would take gas from Azerbaijan to South Europe via Turkey in a European Union effort to diversify energy sources away from reliance on Russia.

Analysts say demand in Europe is not enough to justify having both pipelines, at least in the short term, so the first one to start operating will win the race.

BATTLE WON?

Medvedev and Gyurcseny both said diplomatically they saw no contradiction between South Stream and the other project.

"South Stream will have no negative impact on Nabucco, just as Nabucco will have no negative effect on South Stream," Medvedev said.

"Hungary is interested in both gas pipelines to run across its territory," Gyurcsany said.

Gazprom Chief Executive Alexei Miller reiterated Gazprom's sceptical view on Nabucco, which may lack Central Asian gas to fill its pipeline, and made clear the Russian gas giant would not rush to commit its own gas to save the alternative project.

"Nabucco clearly lacks gas resources. We have had it (said) strictly unofficially that such ideas are being floated," he told journalists.

"If they (Nabucco) come (with such proposals), we will consider them, but generally we count on South Stream meeting all the new gas needs of Southern and Eastern Europe."

The Hungarian premier estimated the cost of South Stream's Hungarian arm at "a couple billion dollars or euros," with recoupment within 15 years.

"We expect the (arm's) capacity to be at least 10 bcm (a year)," he said. "Hungarian needs are no less than 15 bcm."

Miller said he expected South Stream would start operating in 2013. "Exact dates depend on feasibility studies, but I am sure that this date is realistic."

"We are sure that within the next few months a company to operate the project will be created. Our goal is to diversify energy supplies to Europe."

He said that "Hungary is not the terminal point of the (South Stream) pipeline."

"In the next few days, you will hear news about the results of other talks," he added, but gave no further detail. (Reporting by Oleg Shchedrov; Writing by Dmitry Solovyov; Editing by Jim Marshall)

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