SOUTH STREAM — A CASUALTY OF MOSCOW’S EXCESS PIPELINE CAPACITY PLANNING

2010/03/18

by Vladimir Socor

Gazprom’s partner ENI apparently seeks a Nabucco life-belt for a sinking South Stream project (see accompanying article). Like all parties involved with South Stream, ENI must reckon with the new Ukrainian President Viktor Yanukovych possibly sharing control of Ukraine’s gas transit system with Moscow. In that case, Gazprom would no longer need South Stream as a Ukraine-bypass option, which Moscow had brandished all along to pressure Kyiv into ceding control of the transit system. Moreover, Gazprom would need to commit to full use of the Ukrainian system as part of that bargain with Kyiv, instead of shifting volumes from the Ukrainian system into South Stream, as the threat scenario had envisaged.

Furthermore, an investment decision in Russia’s supergiant Shtokman gas field has recently been “postponed” (or possibly abandoned), further constricting Russia‘s overall gas export potential in the years ahead. This also affects South Stream directly, placing it in competition with Nord Stream and other Russian pipeline projects, all now reliant on Siberian gas in limited availability. Shtokman’s postponement has left Nord Streamthe Baltic seabed pipeline to Germanywithout any source of gas for the project’s second stage. While Nord Stream One has Siberian gas earmarked for it, putatively at 27.5 billion cubic meters (bcm) annually, Nord Stream Two was planned to be fed with another 27.5 bcm per year from Shtokman in the Barents Sea. Instead, Nord Stream Two would have to draw on Siberian gas; and so would South Stream for most of its declared 63 bcm annual capacity, even as Russia’s gas shortfall looms.

Thus, apart from the undeclared rivalry with Nabucco, the South Stream project has entered an undeclared competition with Nord Stream Two, the Ukrainian transit system (more than 100 bcm annual capacity), and the Blue Stream pipeline (which ENI built for Gazprom earlier on the seabed of the Black Sea to Turkey, and is only being used at one half of its 16 bcm annual capacity, thoughGazprom hints at doubling it). All of these pipeline routes, existing or virtual, must vie for access to gas supplies from western Siberia, and without prejudice to the approximately 30 bcm of Russian gas transit through Belarus to Europe. All this while the operating gas fields move past their peak, new ones are not being developed, and Russian domestic demand recovers.

It would be logical to anticipate that the Italians would lobby in Moscow for South Stream and against Nord Stream Two. It also seems logical that Moscow might prioritize its German, French, and Dutch customers in Nord Stream, ahead of the South Stream project. South Stream cannot count on the strong political lobbying at state levels that helps drive Nord Stream forward.

South Stream seems caught in a no-win situation at this point. Ultimately, these insoluble dilemmas stem from the Kremlin’s pre-crisis policy to plan export pipeline capacities massively exceeding Russia’s own export potential. South Stream and other projects are the fruits of that policy. It was wrongly premised on continuing Russian monopolization of Central Asian gas; European consent to high-priced, take-or-pay long-term commitments to Russian-delivered gas; acquisitions of infrastructure assets in Europe, to cement a grip on markets; and, as an intent, a Russian-led cartel of gas exporters to Europe. Both Dmitry Medvedev (Gazprom chairman, then head of state) and Vladimir Putin (head of state, then prime minister) are closely associated with the pipeline expansion policy.

Failure to invest in Russian gas field development (apart from Siberia’s east and far east) and loss of Gazprom’s dominance in Turkmenistan have left South Stream without dedicated resources. Market-transforming processes in Europe, through the surge of LNG and spot markets, have left South Stream behind, both in a non-competitive position and as an unappealing investment prospect. Like Nord Stream in many ways, the South Stream project is rooted in the invalidated assumptions of past years.

ENI’s proposal to unify South Stream with Nabucco could provide a lifeline for the South Stream project, serving ENI’s corporate interest as well as Russia’s strategic advantage in Europe. Meanwhile, however, Moscow affects a lack of interest in such unification. Following ENI CEO Paolo Scaroni’s proposal, Russian Foreign Affairs Minister Sergei Lavrov and Energy MinisterSergei Shmatko have reasserted Moscow’s full confidence in South Stream and its resolve to press ahead with it. These responses did not even allude to ENI as such. As Russian officialdom has done all along, Lavrov and Shmatko each made self-contradictory arguments: that South Stream and Nabucco are not in competition against each other, but that South Stream is in a far stronger position to succeed, compared with Nabucco. For its part, Gazprom acknowledged but downplayed ENI’s proposal. Gazprom spokesman, Sergei Kupryanov, parried that Scaroni was merely trying to demonstrate that South Stream and Nabucco are not rivals (Interfax, March 14, 15, 16).

In far more revealing remarks, Russian Gas Society President Valery Yazev (who also lobbies for Gazprom as a senior Duma deputy), has suggested that South Stream-Nabucco unification in Europe “is worth considering” and “could make sense” from Moscow’s standpoint. In that event, according to Yazov, Turkmen gas could be supplied through the planned Caspian Littoral pipeline and existing pipelines to Russia’s Black Sea coast, then pumped into South Stream across the seabed of the Black Seato EuropeTo justify South Stream’s seabed solution, Yazev deprecated the Nabucco transit through Turkey asunreliable. According to him, South Stream-Nabucco unification in Europe would “add a branch [Nabucco] to our South Stream,” as well as “solve the problem of filling the pipeline with Russian and Turkmen gas.” Yazev’s statement entreated West European companies in the Nabucco project to cooperate in unifying it with South Stream (ITAR-TASS, March 14).

While Moscow’s political officials affect lack of interest for reasons of prestige (as some Western policymakers assume) or play hard to get (as seems more likely), Yazev has spelled out Russian interest in a possible unification of the two projects, depending on terms to be negotiated. Unification might perhaps rescue some downscaled version of South Stream, but only at the expense of the Nabucco project, Turkmenistan, and European energy security. Considering its recent and continuing advance, Nabucco does not need South Stream in order to succeed.

–Vladimir Socor

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