GAZPROM TAKES ITS SOUTH STREAM BLUFF TO BUCHAREST

2009/09/30

This week in Bucharest , high-level representatives of Russia ’s energy business and their Italian allies are making their strongest pitch yet for Romania to join their South Stream gas transport project. Romania is the latest target in Moscow ’s recent effort to enlist additional countries in South Stream — or to persuade participant countries to commit more actively despite doubts.

Romania is also being exposed to those shifting signals. At the moment, Moscow (with Rome in tow) seeks to convince Bucharest to join South Stream. Only three weeks ago, however, Russian Prime Minister Vladimir Putin announced at the Valdai meeting: “We plan to shift the transit route for future gas supplies from Ukraine to Turkey .” According to him, Turkey would become the main transit route for Russian gas to Europe (Moscow Times, September 14). Indeed, Putin made that promise to Turkish Prime Minister Recep Tayyp Erdogan amid great publicity in Ankara in August (see EDM, August 10, 11).

Routing South Stream via Romania ’s Black Sea exclusive economic zone would be incompatible with Putin’s promise to route it via Turkey ’s zone. There are two mutually exclusive route options for the pipeline from Russia to Bulgaria on the seabed of the Black Sea: either running through most of Ukraine ’s exclusive economic zone and a small portion of Romania ’s zone or, alternatively, crossing from Russia ’s zone into the Turkish zone en route to Bulgaria .

Any proposal to use the Romanian zone would make no sense if Russia intends to keep Putin’s promise to Turkey . However, Moscow is trying to play the two against each other. On September 28 in Dzhugba (Russian starting point of the Blue Stream pipeline to Turkey, and putative starting point of South Stream), Gazprom’s Miller declared that both Turkey and Romania were keen on being included in South Stream (RIA Novosti, September 28). This propositon is accurate in Turkey ’s case, doubtful in Romania ’s, and clearly manipulative in any case. Moscow is attempting to unnerve the Turks and pressure the Bulgarians by hinting at a Romania option.

Meanwhile, Russia ’s special presidential envoy for economic relations Viktor Chernomyrdin—formerly Gazprom’s CEO and recently ambassador to Ukraine —is casting strong doubts on South Stream’s officially declared rationale: that of bypassing Ukraine ’s transit pipeline system. According to Chernomyrdin at the Yalta European Strategy forum, the Ukrainian system “will remain the main transporter of Russian gas to Europe for the foreseeable future;” Russia may even increase the gas transit volume through Ukraine (Bohorodchany-Uzhhorod), if Gazprom obtains shared control over the Ukrainian pipelines; and any volumes carried by South Stream would be additional to those via Ukraine, not replacing them, Chernomyrdin said (Interfax-Ukraine, September 25).

Chernomyrdin’s is only the latest suggestion that Moscow could well renounce the idea of bypassing Ukraine through South Stream, if Gazprom achieves some form of shared control over the Ukrainian transit system. To  that end, Moscow is currently trying to enlist several European companies in a Gazprom-led consortium, hoping that Ukraine ’s January 2010 presidential election might bring a more Russia-friendly government in power. South Stream would become superfluous if Russia achieves shared control of the Ukrainian transit system. Gazprom would hardly shift any significant gas volumes from the Ukrainian system into  South Stream in that case.

Italy’s state-controlled ENI conglomerate (working closely with Prime Minister Silvio Berlusconi) is Gazprom’s ally in the South Stream project. As Francesco Sisci has summed up the situation, ENI views this project as an opportunity to corner a large chunk of the European market together with the Gazprom monopoly, contradicting the E.U.’s energy security policies and discouraging investment in Nabuccco by keeping the South Stream option, however dubiously, afloat (La Stampa, September 24).

Russia’s main motivations in promoting South Stream are mainly political. First, to discourage investment in the E.U.-backed Nabucco project by making it look as if struggling against a powerful Russian rival. Second, to threaten Ukraine with a massive shift in the gas transit volume, away from Ukraine ‘s overland pipelines into the proposed South Stream. And third, in a medium-term perspective, to create a transportation option for non-Russian gas from Central Asia and the Middle East, if Moscow succeeds in assembling a gas producers’ cartel under Russian leadership. That will become unlikely, however, if the E.U. successfully advances its Southern Corridor strategy, of which Nabucco is the first major component.

–Vladimir Socor

MOSCOW JUGGLING WITH CAPACITY AND COST FIGURES ON SOUTH STREAM PROJECT

by Vladimir Socor

Against the European Union’s Southern Corridor project, Russia is redoubling efforts to advertise its own project, South Stream, with Italian backing. The scene for that advertising is in Bucharest this week. Due to stagnant gas production and aging fields in operation, however, Russia has not been able to identify any internal gas reserves to supply the proposed South Stream system. Unlike the Nord Stream pipeline project on the Baltic seabed, which has at least some Russian gas resources allocated to it at least in the planning, South Stream has no known resource backup in Russia or elsewhere. Moscow only suggests that it would shift some gas volumes from the Ukrainian transit pipelines into South Stream, though far from meeting South Stream’s declared future capacity.

The Russian government and Gazprom have embarked on a high-risk juggling act with quantative figures on South Stream’s future capacity and investment costs. In 2007-2008 Moscow was offering 31 billion cubic meters (bcm) annually in future aggregate deliveries to all putative customers of South Stream. In February 2009 Gazprom increased the offer without explanation to 45 bcm per year (see EDM, February 7); and in May, Russian Prime Minister Vladimir Putin (meeting with the Turkish government leaders in Sochi ) raised the ante to 63 bcm annually, even as Russia faced the prospect of gas shortfalls after 2010 (see EDM, May 28, 29).

Moscow’s initial cost estimates for South Stream in 2007-2008 hovered around $ 10 billion. In its February 2009 briefing for Russian and other potential investor companies, Gazprom raised the cost estimate to the range of $ 19 billion to $ 24 billion in one stroke (see EDM, February 7). And during Putin’s recent visit in Ankara , sources close to the Russian delegation cited cost estimates in the range of $ 25 billion to $ 28 billion (see EDM, August 10, 11).

The capacity and investment figures can only be viewed as arbitrary in the absence of even preliminary feasibility studies. The spectacular rise in the estimates, however, makes some sense. Striving  to enlist more participant countries and companies in this project for political effect, Moscow must constantly raise the aggregate declared capacity of the South Stream system. Similarly, with more branch-offs promised or offered in various directions, the system’s total costs increase. Finally, routing the seabed section through the Turkish economic zone means a longer pipeline on a deeper and more complex seabed, thus adding to the ultimate costs.

Meanwhile, the project seems academic in the absence of dedicated Russian gas volumes, and given Russia ’s stagnant production. South Stream also looks clearly unbankable at such costs. The costs would have to be passed on to European consumers, if Russia could ultimately deliver the financing and the gas.

Nevertheless, Moscow seeks to maximize the number of participant countries and interested parties in South Stream. It also offers various pipeline routes or branch-offs, sometimes incompatible with each other, to various countries along the potential routes. The goal is to keep South Stream alive as a virtual proposition, in virtual competition against the E.U.-backed Nabucco project. Through shifting signals, Moscow seeks to induce countries in Central and Southeastern Europe to compete against each other for future supplies and transit of finite volumes of Russian gas.

In an illustration of these tactics, Gazprom CEO Aleksei Miller warned at the latest meeting of the Valdai Discussion Club: “There is little time left. The countries of Central and Southeastern Europe have to make quick decisions whether or not they want to support the South Stream project….Neighboring countries would be more than happy to take the place of any country that declines to participate” (Interfax, September 13).

The Bulgarian and Hungarian governments signed up to South Stream last year, but have fallen from power since then. Both governments were Socialist and Moscow-friendly. Hungary ’s current caretaker government seems to have shelved the issue, pending elections and an expected landslide success of Western-oriented conservatives. Bulgaria ’s new government has suspended the implementation of energy projects with Russia , pending a detailed review of their terms, which the new government deems onerous (see EDM, August 6). Russia and Bulgaria have set up expert-level working groups to conduct that review (BTA, Interfax, September 18, 19).

In recent weeks the Russian government and Gazprom have offered to include some new countries and companies in the South Stream project. Thus on September 1 Putin made this offer to Croatia through that country’s new Prime Minister Jadranka Kosor. The Russian side proposes creating a joint working group with Croatia ’s gas transmission system operator, Plinacro, to examine a possible branch-off from the projected South Stream system into Croatia from Serbia . This idea seems designed to unnerve the Hungarians farther down stream as well as to discourage investment in the E.U.-favored liquefied natural gas terminal project on Croatia ’s Krk island (Vjesnik [ Zagreb ], September 21).

On September 14 and 24 (respectively), Miller and Putin offered to include Electricite de France as an investor in South Stream with a 10 percent stake in the project. Apparently this would imply a title to 10 percent of the gas volume for EDF. Moscow ’s move seems largely political, hoping to enlist French government backing within the E.U. for South Stream (Kommersant September 15; Le Monde, September 17; Interfax, September 24). Such backing—which Moscow also seeks from the German and Italian governments—consists of lobbying within the E.U. to give South Stream some kind of status as project of European interest and even make it eligible for financial support.

Vladimir Socor

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