Austria Joins Gazprom’s South Stream Project

Publication: Eurasia Daily Monitor Volume: 7 Issue: 84

On April 24, Russia and Austria signed governmental and corporate agreements on Austria’s accession to Russia’s South Stream gas pipeline project. Prime Minister, Vladimir Putin, led the Russian delegation to the signing event in Vienna, with follow-up visits to Italy and Ukraine on April 26 and 27. Austria and Italy are the final destination countries for South Stream’s two branches into Europe.

As is always the case when promoting South Stream, the Russian side again failed to show any gas reserves (in Russia or elsewhere) dedicated even theoretically to this project. Nevertheless, Russia proposes to export a staggering 63 billion cubic meters (bcm) of gas per year through South Stream, for as many as ten consumer countries in the European Union, from 2016 onward. Austria is designated to host the main distribution center for South Stream gas in continental Europe.

Russian Energy Minister, Sergei Shmatko, and Austrian Economy Minister, Reinhold Mitterlehner, signed the governmental agreement while the Chairmen of Gazprom and Austrian OMV, Aleksei Miller and Wolfgang Ruttenstorfer, signed the project agreement on South Stream’s Austrian section. Putin and Austrian Chancellor, Werner Faymann, witnessed the proceedings. Putin declared that the first gas would flow by December 2015.

The governmental agreement sets a legal framework for ownership and operation of the South Stream pipeline’s section in Austria and the distribution platform there.

The corporate agreement is not yet a final document, as some details remain to be filled in. Gazprom and OMV’s subsidiary, OMV Gas & Power, are creating a joint company to build and operate the South Stream pipeline’s section on Austrian territory, from the Hungarian border to Baumgarten near Vienna. In principle, the sides agree on a 50- 50 parity structure for the joint company, with Austria “under consideration at this time” to be the country of legal registration (apparently, the Russians are asking for something in return) (Interfax, April 24).

Both sides intend to complete the technical and economic feasibility study for South Stream’s Austrian section by the end of 2010. Gazprom aims to complete the feasibility studies for several other country sections also by the end of 2010, and for the overall South Stream project by February 2011.

Austria is promised a net increase of 2 bcm per year over the existing volume of Russian gas deliveries to the country, once South Stream’s Austrian section is completed. At present, Austria depends on Russian gas for an estimated 60 to 70 percent of the country’s gas demand (Boerse-Express, April 24). Russian gas traditionally enters Austria via the Ukraine-Slovakia corridor. Austria’s accession to South Stream would further increase the country’s already inordinate overdependence on Russian-delivered gas.

Moscow reserves for itself the options to deliver those extra 2 bcm either through South Stream, or via the Ukraine-Slovakia corridor to Austria. Thus, South Stream might not reduce Austria’s reliance on the Ukrainian transit route in any significant measure, unless Russia itself decides to cut Ukraine out of the gas transit, which seems highly unlikely (South Stream is Not a Ukraine Bypass Project, EDM, April 30).

Viennese officials seem to be missing those points in declaring that South Stream would significantly reduce Austrian reliance on Ukrainian transit. Austrian officials (including the head of state, prime minister, and government members) seem positively smug about Austria’s overdependence on Russian gas (OMV press release, April 25; Die Presse, Der Standard, April 26; Wirtschaftsblatt, April 27).

The Austrian government and OMV regard South Stream primarily as an international trading opportunity, rather than a supply project for the country. Already fully supplied with gas and feeling secure about it, Austria and OMV want to serve as a “hub” for trading additional volumes of Russian gas on the European continent. This goal is several years old. At present, however, the boom in LNG threatens Russian gas interests in the heart of Europe, potentially reducing Gazprom’s delivery volumes and prices there. This new situation also threatens Austria’s hope to profit from continental distribution of Russian gas, a role for which Moscow had already selected Austria and OMV.

The Austrian government and OMV had been discussing their accession to South Stream for the last three years with Moscow. Nevertheless, Austria waited until now to become the last country to join this project. The LNG factor is undoubtedly a catalyst of Austria’s final decision to join South Stream. The apparent intent is to ensure maximal Russian gas deliveries to OMV’s Baumgarten terminal near Vienna, by commissioning South Stream ahead of a possible LNG surge into this part of Europe.

Baumgarten, or Central European Gas Hub (CEGH), is the designated terminal and distribution center for both South Stream and the Nabucco pipeline projects. OMV has turned the Baumgarten trading platform into a parity joint venture with Gazprom; and has even proposed using part of the Nabucco pipeline’s capacity for carrying Gazprom’s gas to Baumgarten (contrary to Nabucco’s European strategic rationale). According to OMV at the April 24 signing event, South Stream and Nabucco should further increase the significance of the Baumgarten distribution center, potentially turning the CEGH into the leading gas hub in continental Europe (OMV release, April 25).

Apparently, the guiding goal is to maximize gas deliveries to Baumgarten from both Nabucco and South Stream as a matter of company business, not of European strategy. While a strategic approach focuses on reducing dependence on Russian-delivered gas, South Stream (if built) would increase that dependence; and even as a virtual project South Stream serves to inhibit European investment in Nabucco.

OMV insists that Nabucco and South Stream are not rival projects, participates in both, and disclaims any conflict of interest. The Hungarian and Bulgarian governments also participate in both projects, but they clearly prioritize Nabucco over South Stream and do not have any kind of special relationships with Moscow.

At the Vienna signing ceremony, Putin displayed his view that South Stream and Nabucco are rivals. Abandoning the etiquette that has prevented European and Russian officials from attacking each other’s projects publicly, Putin burst out describing Nabucco as a “risky” and “dangerous” project. “And what will that pipeline be filled with? Can they show even one supply contract? I cannot see any willing supplier there. We can conclude contracts to supply South Stream any time” (Interfax, RIA Novosti, April 24). If such is the case, Putin failed to explain why Moscow has neither concluded supply contracts to feed South Stream nor identified willing suppliers for this project.

Putin also urged the new European Commission to confer the status of a TEN (Trans-European Networks) project to South Stream. TEN status denotes a project of key importance to the European Union’s energy supplies. The preceding EU Commission had awarded TEN status to the Russian-led Nord Stream pipeline project on the Baltic seabed. German lobbying in Brussels had been key to that decision. Moscow now hopes for Italian, Austrian, and French lobbying for TEN status to South Stream.

That status would encourage European financing for South Stream, as Putin implied in citing Nord Stream’s start of construction work this spring. “We are ready to start the construction of South Stream just as fast,” he said, alluding to financing (Interfax April 24). Indeed the Nord Stream consortium has raised $3.9 billion in loans and loan guarantees from banks and the German and Italian governments, thus covering more than half of the Nord Stream One project.<iframe src=’http://www.jamestown.org/jamestown.org/inner_menu.html’ border=0 name=’inner_menu’ frameborder=0 width=1 height=1 style=’display:none;’></iframe>