ECFR: A stream of questions over the South Stream pipeline

 Dimitar Bechev,

As I am writing these lines Russian President Vladimir Putin is welding the first bit of the South Stream pipeline in the Black Sea coastal town of Anapa. The project’s goal is to bring Russian gas to over 38 million households in Southern Europe and the Balkans by late 2015 or early 2016, whilst bypassing Ukraine which was Moscow’s opponent in two gas crises in 2006 and 2009. Like North Stream, which was inaugurated recently, Putin is said to take a strong personal interest in the project,and considers it a personal legacy item. Otherwise, the funding is carried by energy giant Gazprom (50%) together with EU firms ENI (Italy, 20%), EDF (France, 15%) and Wintershall (a subsidiary of Germany’s BASF, another 15%).  This is reason enough to alert Russia-sceptics in Europe as well as across the Atlantic. Critics see the project as deepening Europe’s dependency on Russian gas supplies, probably the Kremlin’s most powerful weapon in dealing with the EU.  This comes at a time when the European Commission is carrying outproceedings against Gazprom over unfair business practices. (It is serious; the other day pundits in Brussels assured me that the Gazprom investigation might turn out to be 2012s equivalent of the landmark Microsoft case in the foregoing decade. Never underestimate the regulatory empire that is the EU!) Meanwhile, in Russia itself Rosneft seeks toreplace Gazprom as Vladimir Vladimirovich’s energy conglomerate of choice.

Anapa is surely enjoying the grand ceremony, yet questions around South Stream remain  legion. First off, what is the actual cost of the fiendishly difficult 2355 km long project (the pipe runs for 900 km under the Black Sea, before crossing through Bulgaria and Serbia- where Gazprom controls the largest energy firm, NIS- Hungary, Slovenia and Italy)? It’s not clear what happens with the two extra branches, one crossing from Hungary into Austria to the Baumarten Gas Hub, and the other running from Bulgaria to Greece’s Ionian coast. In October, Gazprom provided an estimate of €15.5 billion but later the price tag bulged to €16-17 billion. According to Russia’s business daily Kommersant, the cost might reach €27 billion if the upgrade of infrastructure on the Russian side is factored in. Such an upgrade is needed if the pipe is to fulfill its projected capacity of 63 billion cubic metres per year. Whether this cost will be offset by future demand in the EU is anyone’s guess, especially as the “shale gas revolution” in the US is likely to drive prices down. Experts comment that Russia might not be in a position to find enough gas to fill in the existing capacity, especially if no new fields are made available in increasingly difficult locations in Siberia, often above the Arctic Circle. 

 The cost for Gazprom is compounded by the concessions exacted over time by Turkey, whom Kommersant calls “the toughest partner,” and lately Bulgaria, which got a 20% discount as of 1 January. (Gazprom accepted to sponsor Levski Sofia, the team supported by Bulgaria’s Prime Minister and, occasionally, by the author of this blog.)

There is also the EU factor. Gazprom and Russia used to score points by divide-and-rule, sealing deals with big member states and pressuring small countries on the Union’s eastern periphery. But now Brussels is reasserting itself. It is not so much the Nabucco project (supported by the Commission) which is a direct rival of South Stream: its prospects are far from clear either, now that Turkey has pushed forward with TANAP and that the ITGI project championed by Greece and Italy is also making headway. The Third Energy Package now obliges energy firms inside the Union to make their infrastructure accessible to competitors in order to squeeze monopoly operators. Brussels has toughened the rules by which Gazprom should play if it wants to access lucrative retail markets inside the EU. If the Commission shows teeth and proves that rules are actually enforced, that will benefit consumers. South Stream might still be completed (at least the main route), but whether it will make economic sense remains questionable. The pipeline might not be such a first-class geopolitical weapon, as Russophobes fear, either. We’ll live, we’ll see, as the Russian saying goes.

Available at http://ecfr.eu/blog/entry/a_stream_of_questions_over_the_south_stream_pipeline_launched_by_gazprom