Gazprom starts building Europe-bound pipeline

The South Stream pipeline will connect Russia's Black Sea coast with the Balkans, Austria and Italy, carrying up to 63 billion cubic meters of gas annually. Europe currently gets about two-fifths of its gas from Russia and the pipeline's route bypasses transit nation Ukraine to ensure safe shipping of its gas. Pricing and payment disputes between Russia and Ukraine have caused major disruptions in the past, cutting off gas for millions of customers in Europe.

The project, funded by Gazprom, Italy's Eni, France's EdF and Germany's Wintershall, is due to start operating in 2015. Gazprom holds 50 percent in the joint company and is the main investor in the project. However, investors and industry experts have criticized the €16 billion project as too costly.

Russian President Vladimir Putin, the pipeline's most powerful promoter, took part in Friday's ceremony in which two 6-meter steel pipes were welded together to mark the start of the construction.

"South Stream will create the conditions for a reliable gas supply for the main consumers in southern Europe," Putin said.

By beginning construction, state-controlled Gazprom steals a march on of its European Union-backed rival, the Nabucco pipeline, which has been plagued by a lack of funds and a reliable supply of natural gas.

"South Stream solves two problems at once," Gazprom CEO Alexei Miller said. "First, it does away with restrictions in the volumes of Russian gas exports and it minimizes transit risks by expanding our transportation network."

Gazprom in October also opened Nord Stream, a pipeline under the Baltic Sea directly linking Germany with Siberia's vast natural gas reserves with a capacity of 55 billion cubic meters. The construction of South Stream and expansion of Nord Stream will leave Gazprom with a surplus capacity of 50 to 100 billion cubic meters, according to analyst estimates.