Publication: Eurasia Daily Monitor Volume: 5 Issue: 14

The agreements signed on January 18 in Sofia in President Vladimir Putin’s presence pave the way for Bulgaria’s inclusion in Russia’s expanding energy networks. From President Giorgi Parvanov and Prime Minister Sergei Stanishev on down, Bulgarian officials are hailing this set of agreements as the only available strategic option for their country. This assessment amounts to a failing grade on Western energy policies in the Black Sea region.

Putin’s main trophy from Sofia is the agreement to include Bulgaria in the South Stream pipeline project for delivering Russian gas to Europe. Russian Industry and Energy Minister Viktor Khristenko and Bulgarian Economy and Energy Minister Peter Dimitrov signed the agreement, following last-moment negotiations in Sofia overnight involving First Deputy Prime Minister Dmitry Medvedev and Alexei Miller, respectively the board chairman and president of Gazprom. Ostensibly arbitrated by Putin, that nocturnal negotiation settled a few minor points in Bulgaria’s favor, enabling the government in Sofia to divert attention from the agreement’s strategic implications, which spell long-term dependence on Russia.

The project company for the pipeline’s Bulgarian stretch shall be registered in Bulgaria, with Gazprom and Bulgargaz each owning a 50% stake in the project on Bulgarian territory. However, Gazprom and its Italian partner ENI retain the overall ownership and operating rights for the entire project from Russia to Europe. Pipeline construction is planned to start in 2009 and gas delivery in 2013. The cost of building the pipeline’s Bulgarian section is officially estimated at $1.4 billion and is expected to be recouped after 15 years (BTA, Interfax, January 18, 19).

This bilateral agreement should be followed by a multilateral set of agreements with future users of South Stream gas in the countries along the pipeline’s possible routes, which have yet to be determined.

South Stream is expected to pump 30 billion cubic meters of gas annually at the entry point in Bulgaria. Originating from Russia’s Black Sea coast at the Beregovaya compressor station near Juga (Krasnodar Territory), the pipeline would run across the seabed of the Black Sea to the Bulgarian coast near Varna. The 900 kilometer seabed section would be the world’s deepest undersea pipeline, thanks to ENI’s engineering. From Bulgaria, the pipeline would continue in two potential directions. A westward route would run to Greece and, via the Adriatic seabed, to southern Italy. A northward route would run to Serbia, with two possible continuations: either to Hungary and Austria or to Croatia, Slovenia, and northern Italy. Under any of these options, Bulgaria would become the linchpin country for this entire project.

Turkmenistan is expected to supply the lion’s share of the gas volumes earmarked for South Stream. However, Gazprom would be marketing those volumes. It is Ashgabat’s current policy to sell its gas at the border directly to Gazprom, which then uses it or resells it on its own behalf. If Russia has its way, it would use Turkmen gas for South Stream in this same manner. But Turkmen President Gurbanguly Berdimukhamedov, who came to power one year ago, could begin questioning and challenging those inherited arrangements. Turkmenistan can start learning how to deal with end-user entities beyond its borders and how to make arrangements with transit countries other than Russia. For this, Turkmenistan needs more serious and better developed offers than it has seen from the West thus far.

Even with Turkmen gas, Gazprom seems highly unlikely to be able to supply both branches of South Stream to the full planned volume. Russia faces output and supply shortfalls of gas by 2011 at the latest, for several ensuing years, coinciding with the proposed commissioning and early stage of South Stream. Almost certainly, Gazprom is bluffing when it tempts Serbia, Hungary, Austria, or other countries with a South Stream extension (or its hypothetical alternative, Blue Stream Two). This tactic seeks to induce Austria or Hungary to defect from the European Union’s Nabucco gas pipeline project, rival to South Stream. In Serbia’s case, Gazprom is poised to take over the Serbian Petroleum Industry state company on the cheap, promising in return to build an extension of South Stream from Bulgaria to Serbia (see EDM, January 9, 10).

Almost certainly, South Stream cannot pose a commercially competitive threat to Nabucco, considering the exorbitant cost of the overall South Stream project. The official cost estimate in 2007 was $10 billion for the Russia-Bulgaria-Greece-Italy route (the northern branch would come at extra cost). As Gazprom and ENI admitted then, the cost of the pipeline’s seabed sections would drive up the price of South Stream gas to the high price level of liquefied gas. Gazprom would have to pass on the project’s costs to end consumers in Southeastern and Central Europe as well as Italy (see EDM, September 14, 2007). Moreover, that cost estimate will undoubtedly have to be revised upward in 2008 due to growing prices of steel and other material inputs.

Thus, the South Stream project rests essentially on two non-market premises: Russia’s monopsony on Turkmen and other Central Asian gas and Russia’s quasi-monopoly on gas markets in a number of Southeastern and Central European countries. The South Stream project would perpetuate both of those situations, absorbing more Turkmen gas and ruling out alternative suppliers in the already dependent countries. Technologically, South Stream is only possible because of ENI’s short-sighted assistance to Gazprom for the pipeline’s seabed section.

The EU seems uncertain how to react. An official spokesman has claimed that South Stream is a complementary project, not a competing one, to the EU’s high-priority Nabucco’s project (AFP, January 19). Such statements do not increase the credibility of the EU’s policy in this region. South Stream can easily be defeated in terms of commercial competition if the EU becomes more focused on Turkmen and other Central Asian gas for its Nabucco project.