Gas standoff highlights Siberia's ties to Germany

NOVY URENGOI, Russia (Reuters) - A shortage of gas and sub-zero temperatures for their German customers were far from the minds of Gazprom workers in a concert hall in Siberia in November, receiving medals and flowers for outstanding work.

With a bear-hug for Juergen Hambrecht, chairman of the board of chemicals group BASF, Gazprom Chief Executive Alexei Miller the next day inaugurated a new project in a joint venture between the Russian group and one of its biggest customers.

"Gazprom is tied to Germany through long and trusting relationships," Miller said, as company songs played in the background.

By January Germany, which receives more than 40 percent of its gas from Russia, had seen temperatures at their lowest levels in almost 30 years and reduced gas flows on routes through Ukraine, in dispute with Russia for the fourth winter.

Europe receives a quarter of its gas from Russia, and companies including big German gas users depend on long-term supply contracts which in some cases run into the 2040s.

Germany's Economy Minister Michael Glos told the Frankfurter Allgemeine newspaper on Tuesday the annual row must stop: "There is no less to lose than Russia's reputation as a reliable shipper and Ukraine's reputation as a safe transit country."

The gas to be produced from Novy Urengoi by Achimgaz, the Russian venture with BASF subsidiary Wintershall that was the focus of the November 12 ceremony, is partly destined for a pipeline which would be laid under the Baltic Sea, bypassing Ukraine.

The project would be one of several whose gas would flow through the Nord Stream pipeline, which aims by 2012 to pump 55 billion cubic meters of gas to Germany annually to help ensure European gas flows are not subject to such disputes.

INTERDEPENDENCE

Nowhere more than in Novy Urengoi, where more than a third of the 118,000 population works in the industry around Russia's largest gas field, can the interdependence of eastern suppliers and western customers be felt.

Without full order books from the West, this remote city 3,000 km (1,860 miles) northeast of Moscow would never have sprung from the permafrost tundra.

Oleg Nikolayev, a 36-year-old engineer who as a child of Kazakh migrant workers set up home in the city after moving many times, said his hopes for the future rest on its success.

"My children have so much more here than I ever had," he said outside the dispatch center where gas starts a three-day trip to western Europe. "I want to stay at least until they have grown up."

The gas fields offer high salaries, good child care and pension provisions, attracting people to a workplace where temperatures can fall to minus 50 degrees Celsius (minus 58 Fahrenheit) and are below freezing for around 250 days per year.

The average monthly salary is 51,000-54,000 rubles ($1,860-$1,970), three times the Russian average. The early settlers, who lived in trailers when arriving in 1966, called their first street Optimists' Street.

More keep arriving today, from regions of unemployment and turmoil.

A November A.T. Kearney study showed Europe's annual import demand in 2020 will rise to 510 bcm -- double the 2005 volume. Domestic output will continue to fall but demand will rise, especially for power generation.

Executives at both ends of the gas supply route talk readily about their mutual dependence, and the risk to economic growth of supply disruptions.

"It is very important that Russia continues to send its gas to German distributors," said Oliver Wiegand, managing director of Bavarian glass manufacturer Wiegand-Glas, which has a 400-year history.

The company buys over 700 million kilowatt-hours of gas per year so gas prices are significant in his cost calculations, he said.

"Stable supply relationships are very important in the gas sector," added Bernd Drouven, chief executive of Europe's leading copper refinery Norddeutsche Affinerie (NA) in Hamburg, which uses gas among its important inputs.

"If Russia stopped delivering ... prices would rise strongly," Drouven said.

Likewise Russia, which sends 30 percent of its gas to Europe, has little alternative but to export raw materials westward to earn euros.

"Europe is the biggest pillar for Russia's oil and gas sales, and even if it talks about Asia as an alternative (customer), it cannot replace Europe," said Florian Haslauer, an energy analyst at consultancy firm A.T. Kearney.

"China, for example, is betting first on nuclear energy and coal and renewables, and only fourthly on gas," he said.

BYPASSING UKRAINE

The recurring dispute serves to underline the importance of alternative routes to Ukraine for pipes to transport the gas.

"Companies such as ours are also interested to see the Baltic Sea gas pipeline come into being as it will significantly improve security of supply," Wiegand said.

Nord Stream, which is headquartered in Zug in Switzerland, has already been delayed for years as Baltic Sea countries demand environmental impact probes and some European Union members say they fear they will be bypassed completely.

Poland, which currently receives direct Russian supplies through westbound pipelines, has alarmed EU leaders by saying it fears Nord Stream would leave it short of gas and reduce its transport revenues.

A spokesman for the Nord Stream project said it was finding more favor the light of the latest dispute: "But unfortunately, the row also serves those seeking diversification away from Russia as a fresh argument that gas offers itself to being used for political purposes," he added.

The Nord Stream consortium, in which Gazprom holds a 51 percent stake with E.ON and BASF of Germany each holding 20 percent and Dutch Gasunie the remaining 9 percent, upholds the current timetable.

"Nord Stream is a must, otherwise we would have to change our entire energy supply around, and that won't work before 2020," said A.T. Kearney's Haslauer.

(Editing by Sara Ledwith)