![](/wp-content/uploads/2016/09/EDM_draft_banner2.jpg)
Gazprom Again Reconfigures the South Stream Project
Publication: Eurasia Daily Monitor Volume: 7 Issue: 121
By:
![](/wp-content/uploads/2010/06/South_Stream_project_en.jpg)
Bulgaria’s suspension of the South Stream project on its territory is forcing Gazprom to reconfigure South Stream’s overall geography, with uncertain options and prospects (EDM, June 14, 18, 22). Gazprom is also reconfiguring the project’s technical and economic features. Moscow is enlisting influential allies in Western Europe, to lobby for South Stream with governments and banks. However, Gazprom is still not identifying any gas resources to supply South Stream, if and when the pipeline routes to Europe are finalized.
Gazprom’s CEO, Aleksei Miller, and Vice-President, Aleksandr Medvedev, announced the changes on June 19, to St. Petersburg Economic Forum participants. The pipeline section on the seabed of the Black Sea, projected in 2009 for an annual capacity of 63 billion cubic meters (bcm), is now planned to be built in stages, starting in 2013. It would consist of four parallel strings, to be laid one after the other across the seabed during an unspecified period of time. The first gas flow is promised for December 2015. While Italian ENI’s technology would build the seabed section, Gazprom would own it (Interfax, June 19).
As recently as June 9, a special meeting chaired by Miller had decided that South Stream’s seabed section would consist of one string at 31 bcm in annual capacity; with a second string of equal capacity possible later, contingent upon European market demand. The same June 9 meeting approved the seabed section’s feasibility study, just “completed” by a Gazprom working group. That study was still premised on a route to Bulgaria (Interfax, RIA Novosti, June 9).
On June 19, however, Miller and Medvedev practically invalidated their own June 9 planning decisions. They shifted from a Bulgarian to a Romanian route and announced the four-string concept for the seabed section. In this concept, the timing and sequence of laying the four strings would only depend on technical, not marketing considerations.
Gazprom’s top management professes to expect high demand in Europe for South Stream-delivered gas after 2013. Gazprom would “guarantee” to deliver the projected annual volume in full at 63 bcm per year, once the four-string seabed section and the overland pipelines in Europe are completed (no time-table being mentioned). Presumably this implies that each string would, once built, operate at full capacity. To back up the “guarantees” of delivery, Gazprom declares its intention to sign “ship-or-pay” contracts (pay the monetary value of any gas volumes not shipped as contracted to customers).
Gazprom intends to prepare a cost estimate for the overall project before the end of this year. It counts on receiving European credits “on favorable terms,” based on Gazprom’s purported creditworthiness; and it wants the EU to confer the status of a Trans-European Network (TEN) project to South Stream. Russian President, Dmitry Medvedev, requested TEN status for South Stream during the recent EU-Russia summit in Rostov-on-Don (ITAR-TASS, June 2).
South Stream’s Black Sea route from Russia to Europe, and the overland routes to Austria, and to Italy, are more questionable now than they seemed previously. The seabed pipeline had been planned to reach Bulgaria and branch out into those two European routes. Bulgaria, the indispensable land nexus for South Stream, has practically shelved the project on its territory, however (Ognyan Minchev, “Bulgarian Energy Policy: Tilting toward National Interest,” GMF Blog, June 16).
In their St.Petersburg briefing, Miller and Medvedev chided Bulgaria for shelving the project agreements, which the previous government had signed with Russia. By contrast, they highlighted Romania’s apparent willingness to offer a landfall point on the Black Sea shore for South Stream and a mainland nexus for the branch-off pipelines into Europe. They cited agreements reached with Romania’s economy ministry on June 16 in Moscow toward that goal, as well as interest in building electricity-generation plants with Gazprom on Romanian territory (Interfax, June 19).
Accordingly, Gazprom now proposes to lay the seabed pipeline from Russia to Romania, with a continuation route through Serbia and Macedonia, thus reaching to Greece and the originally planned route toward southern Italy. Thanks to Romania, in that case, Russia would circumvent a disobedient Bulgaria. However, the long circuitous route would further increase South Stream’s already exorbitant construction costs.
As recently as June 7, Gazprom and the Greek pipeline operating company DESFA had signed the founding documents of South Stream Greece, a joint venture to build and operate South Stream’s section on Greek territory. This is premised on the pipeline entering Greece from Bulgaria, however (Athens News Agency, RIA Novosti, June 7).
A northward route into Central Europe would be shorter from Romania, but clearly not by enough to offset the added costs of a southern route that circumvents Bulgaria.
The seabed pipeline route from the Russian coast to that of Romania seems far from clear; and the Miller-Medvedev briefing was vague again on this matter. Laying the pipeline through Turkey’s exclusive economic zone to Romania would involve a long detour and ultra-deep seabed portions, adding substantially to the construction costs. Russia expects Turkish consent by November 2010 for subsequent construction work in the Turkish zone.
Ukraine’s exclusive economic zone would provide a direct, and relatively shallower, pipeline route from the Russian to the Romanian coast. However, Ukrainian President, Viktor Yanukovych’s, government regards South Stream as an existential threat to Ukraine’s own gas transit system and the state’s revenue base. This is a matter of cross-party consensus and not even the present government would willingly agree to South Stream crossing Ukraine’s economic zone. Kyiv (and Donetsk) would, however, negotiate to share control of Ukraine’s transit system with Gazprom, if Russia abandons the South Stream project, or otherwise guarantees full utilization of Ukraine’s gas transit system.
Moscow exploits Ukraine’s fear of South Stream (along with other vulnerabilities) to increase its pressure on Ukraine. During their St. Petersburg briefing, Miller and Medvedev insisted that South Stream would go ahead even if Ukraine agrees to “merge” its transit system with Gazprom’s. In the event of a “merger,” they said, Naftohaz Ukrainy would “automatically” become a shareholder in Gazprom’s South Stream and Nord Stream projects. Apparently this alludes to the role of Naftohaz as minority shareholder in Gazprom after a takeover (by general reckoning of their market capitalization, Naftohaz would hold a single-digit percentage stake in Gazprom after a takeover).
Even Gazprom’s long-time allies in Ukraine, such as Fuel and Energy Minister, Yuriy Boyko, are aghast at the prospect of South Stream circumventing Ukraine, and seek publicly to discredit that project. Ukrainian Foreign Minister, Kostyantyn Hrishchenko, flew to Italy on June 22 to make the case against South Stream in front of the Italian government and ENI. His message is that South Stream is redundant as well as exorbitantly expensive, while Ukraine can provide fully reliable transit through its pipelines (Interfax-Ukraine, June 22).
Gazprom holds the necessary data on the Bulgarian seabed (from that country’s previous government); but this is of questionable relevance since Sofia suspended its participation in the project. Turkey promised in August 2009 to deliver its seabed data to Gazprom during 2010. Romania apparently promised to deliver the data for both the seabed and the overland route by October this year (EDM, June 18). Ukraine, however, is not known to have delivered recent data on its seabed to Gazprom.
Moscow does not sound conclusive about writing off Bulgaria from South Stream. According to Miller and Aleksandr Medvedev at their briefing, Russia would welcome Bulgaria rejoining the project, if it does so quickly; otherwise, Gazprom’s decision in favor of Romania would become “final and not subject to revision” (Interfax, June 19). Unable to identify gas resources for South Stream or to finance the project, Moscow uses these manipulative games to stall for time while at the same time hopes to slow down the EU’s Nabucco project.