By Joao Lima

June 16 (Bloomberg) -- Spain is building up gas stockpiles and import capacity that officials say could help cut Europe’s reliance on Russian fuel. They just don’t have the pipes to deliver it.

Europe’s largest importer of liquefied natural gas, Spain wants to play a part in diversifying European Union gas supplies by sending spare shipments north. That will take time, because the existing pipe network on the Atlantic coast is too small, the Larrau link through the central Pyrenees can only send gas southward and the Midcat route along the Mediterranean won’t be finished for another six years because of building schedules.

“The infrastructure across the Pyrenees is very weak,” according to Morten Frisch, senior partner at Morten Frisch Consulting in East Horsley, southwest of London, which advises on gas projects.

While EU leaders have agreed on funding to boost pipeline capacity to France, the time needed for construction will give Russia scope to tighten its grip on Europe, which already gets a quarter of its gas from the country. Spanish energy industry officials tomorrow will make a presentation on the nation’s gas- export strategy, seeking to boost EU energy security as Russia threatens further supply cuts by the end of this month.

The EU, whose power producers have turned increasingly to gas from coal, has sought to vary and strengthen international supply links since a January dispute between Russia and Ukraine disrupted deliveries for the second time in three years.

Platform for Europe

Spain and Portugal, with no gas resources of their own, have half of Europe’s LNG regasification capacity and import most of their gas by pipeline or LNG tanker from Algeria and Nigeria. Russian gas exports through Ukraine were halted for almost two weeks in January in a spat over prices and debt.

French pipelines narrow as they head south, meaning gas can currently flow only in that direction, according to Jose Penedos, chairman of Portugal’s gas-network operator REN-Redes Energeticas Nacionais SA.

Building new links to France, which already gets gas from Russia, Norway, Algeria and Egypt, would only be cost-effective for pipes covering limited distances, according to Frisch.

“Under normal gas-market conditions it’s likely that it would be uneconomic for Spain to supply gas beyond Paris,” Frisch said June 5. “To build expensive pipelines you need economics telling you that it makes sense.”

Gas storage tanks in Spain and southern France were 71 percent full as of June 8, the second-highest of all European regions after the U.K., according to Gas Storage Europe.

Spanish Surplus

While Spain now has too much gas, its bid to help Europe diversify imports is “quite ambitious, considering how many different suppliers there are,” said Graham Freedman, senior managing consultant for gas and power at Wood Mackenzie Consultants in London.

Spain has a 1.34 billion-euro ($1.85 billion) plan to raise flow capacity into France to 14.4 billion cubic meters a year by 2015 from 100 million cubic meters now, gas-grid manager Enagas SA said in March. That’s almost double the amount France imports from Russia and a third of its annual demand, BP Plc data show.

The increase will come from expanding the Basque network along Spain’s northern coast, currently the only pipes sending gas to France from Spain; upgrading the Larrau link to send gas north as well as south; and completing the Midcat project connecting the two countries along the Mediterranean coast.

“Spain can contribute to guaranteeing supply in the rest of Europe,” Barcelona-based industry association Sedigas said June 10 in an e-mailed note. Sedigas is scheduled to outline Spain’s planned contribution to EU energy security at a press briefing tomorrow.

Increase Competition

Faced with the possibility of future supply disruptions, the EU in May approved 45 million euros in investment for the Larrau gas interconnection project. It has also earmarked 200 million euros to reinforce the French gas network along the so- called “Africa-Spain-France axis.”

The Midcat link, which would run between Barcelona and the south of France, will go ahead because there’s “government will” to realize the project, according to Jean-Marie Dauger, executive vice president of GDF Suez SA, which runs most of France’s gas grid.

If Midcat is completed as Enagas predicts in 2015, that’s still six years after the expected opening of the Fos-Cavaou LNG terminal in southern France next month. That site, developed by GDF Suez with Total SA, will process 8.25 billion cubic meters a year.

Montoir Gets Gas

France already gets LNG from its southern neighbor. Gas Natural SDG SA, Spain’s largest gas supplier, said in May it delivered a 130,000-cubic-meter shipment to the Montoir regasification terminal in northern France, its first cargo of LNG for Electricite de France SA as part of a four-year contract.

Spain, which gets gas from Algeria, Egypt, Qatar and Trinidad, could be a “landing point for gas heading north,” Enagas Chief Executive Officer Antonio Llarden has said. “The Ukraine-Russia crisis has shown the huge need for the EU to have north and south connections which let us help each other out.”

Russia has threatened a further supply cutoff in the event that Ukraine can’t pay for gas this year. On June 3, Prime Minister Vladimir Putin called on Europe to help Ukraine make payments, saying gas transit through the country may stop as early as the end of June or the start of July.

Shah Deniz

In an effort to boost imports that bypass Russia, the EU on May 6 approved 200 million euros in investment for the planned Nabucco pipeline, which would bring gas from the Caspian Sea region through southeastern Europe. Two days later, transit country Turkey said it would sign an accord on Nabucco in July, a necessary step to start operating the pipeline in 2015.

EU consumers may also look to the Netherlands, which is seeking to import LNG to boost energy security and become a gas- shipment hub for northwest Europe. The country may even join the 15-member Gas Exporting Countries Forum as an observer, Qatar’s Oil Minister Abdullah bin-Hamad Al-Attiyah said June 14.

Faced with EU efforts to diversify suppliers and move toward liquefied gas, Russian exporter OAO Gazprom is fostering alliances with European companies such as Royal Dutch Shell Plc and Total.

The Moscow-based company, in partnership with Shell, inaugurated Russia’s first LNG plant on Sakhalin Island on Feb. 18, opening an export route to Asia. The two companies plan further LNG projects in the Russian Far East and Arctic Yamal peninsula, Shell CEO Jeroen van der Veer said June 5.

Caspian Gas

Russia is also seeking to snap up gas from its Caspian neighbors amid increasing European interest in the region. Gazprom is ready to buy all the gas from the second phase of the offshore Azeri Shah Deniz project, Deputy CEO Alexander Medvedev said May 15.

Gazprom has courted gas suppliers in Azerbaijan and Iran, two potential sources of Nabucco gas, as it promotes the South Stream pipeline project to Europe via the Black Sea, and the Nord Stream link to Germany under the Baltic Sea. Gazprom said on May 15 it will double the capacity of the South Stream pipe in an effort to outpace rival Nabucco.

To contact the reporter on this story: Joao Lima in Lisbon at jlima1@bloomberg.net

Last Updated: June 15, 2009 18:00 EDT

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