July 20, 2011 / 4:39 PM / in 6 years

WRAPUP 1-German utilities look to Russia for gas and money

* RWE in exclusive talks with Gazprom

* EnBW in talks with Novatek - sources

* Both seek funding, access to natural gas

* German nuclear phase-out hits earnings, raises emissions

* Gas-fired power production low on carbon emissions

(Adds details, source on EnBW-Novatek talks)

By Peter Dinkloh

FRANKFURT, July 20 (Reuters) - Germany’s nuclear phase-out has prompted the country’s largest utilities to look to energy heavyweight Russia for investments and for natural gas for low-carbon power production.

RWE , Germany’s largest power producer, last week revealed it had begun exclusive talks with Russian gas monopoly Gazprom , the world’s largest gas producer, about gas and power joint-ventures.

State-owned Energie Baden-Wuerttemberg on Wednesday said it is in talks with Novatek , Russia’s largest independent natural gas producer, according to two people with knowledge of the matter.

The faster-than-planned nuclear phase-out in Germany together with a tax on nuclear power is eating away earnings at the power companies, with RWE forecasting three years of falling profits.

It has also put limits on a source of power that has lower carbon emissions than coal-fired plants. This has hit RWE as Germany’s largest emitter of the greenhouse gas and also EnBW as it relies more heavily on nuclear power than competitors.

The German cartel office has said it would closely examine Gazprom’s venture in Germany. The German government has said it would not oppose Gazprom taking a stake in a German company, referring to a newspaper report Gazprom might take a stake in E.ON (EONGn.DE).

State-owned EnBW, based in Karlsruhe in southern Germany, has offered Novatek a stake in VNG, eastern Germany’s largest gas supplier, hoping to get access to cheap gas, one of VNG’s shareholders, who declined to be identified, told Reuters.

“It’s a sign of desperation,” the person said.

EnBW declined to comment.

EnBW does not yet own a stake in VNG, but has an option to buy 48 percent subject to approval by a majority of VNG shareholders. Another complication is that only state-controlled Gazprom is allowed to export natural gas from Russia.

DIVERSIFICATION

Other parties in the negotiations between Russian and German companies instead want to look for partners in the west.

“We should not ignore the interest of (EU Energy Commissioner Guenther) Oettinger” and talk to potential investors in the west, which are also interested in VNG, said the VNG shareholder.

    Oettinger supports the Nabucco pipeline, which aims to bring gas to Europe from the Caspian region and Middle East from 2017 and reduce dependence on Russian gas.

    RWE Chief Executive Juergen Grossmann had been prepared to give up the group’s independence to solve its troubles via a merger with Spanish peer Iberdrola .

    But the talks failed in February and RWE has turned to Gazprom as a partner that could lead to a gas and coal power joint venture in Germany, Britain and the Benelux countries.

    EnBW’s and RWE’s desire for cooperation has strengthened the hand of Russian President Dmitry Medvedev in talks with the German government this week to secure its aim of better access to consumers in the biggest market for Russian gas.

    Medvedev offered Germany all the gas it needed, while German Chancellor Angela Merkel stressed that it would be market forces that would determine how much Russian gas would flow to Germany.

    Market forces have become a contentious topic as several major western European utilities have been negotiating for more than a year with Gazprom to lower the price of the fuel in long-term contracts.

    Gas on the open market has fallen in price to below contract prices, making those contracts loss-making.

    In addition, the European Commission, the executive arm of the 27-nation European Union, is aiming to reduce the EU’s dependence on Russian gas, of which Germany buys more than any other EU nation. Instead, the EU is attempting to strengthen projects such as the Nabucco gas pipeline.

    But future demand for gas from the Nabucco pipeline could become even more uncertain with Nabucco partner RWE teaming up with the main Russian exporter.

    (Additional reporting by Vladimir Soldatkin in Moscow, Tom Kaeckenhoff in Duesseldorf and Hendrick Sackmann in Stuttgart; Writing by Peter Dinkloh. Editing by Jane Merriman)

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