Croatia Joins Gazprom’s South Stream Project

Publication: Eurasia Daily Monitor Volume: 7 Issue: 44

On March 2, in Moscow, Prime Ministers Vladimir Putin of Russia and Jadranka Kosor of Croatia opened the way for Russian state companies’ expansion into that country and to the Adriatic coast. The Moscow talks covered oil, natural gas, and shipbuilding. Croatia’s energy sector was almost entirely free of a Russian presence until now.

Putin and Kosor witnessed the signing of an agreement of intent whereby Croatia would be included in Gazprom’s South Stream pipeline project, albeit as an ordinary importing country, rather than a transit country. Signed by Russian Energy Minister Sergei Shmatko and Croatian Economy Minister Djuro Popijac, the agreement envisages the creation of a 50 percent – 50 percent joint company to design, build, and operate a branch-off line from the South Stream trunk line on Croatia’s territory.

The agreement does not establish a project company. It fails to mention whether the branch-off would enter Croatia from Serbia, from Hungary or Slovenia (all of which have already joined the South Stream project). Consequently, the choice of a route through Croatian territory is also left in abeyance. The route, throughput capacity, and financing of the Croatian line are to be discussed in the context of Gazprom’s feasibility study for the overall South Stream project. Moscow envisions completing that overall study during the current year (Interfax, March 2; HINA, March 2, 3).

This agreement of intent is to be followed up by a Russian-Croatian inter-governmental agreement. As is usually the case when discussing South Stream with potential customer countries, the Russian side did not identify gas reserves in Russia or elsewhere that would support the South Stream project.

Meanwhile, the Croatian government seeks an increase in Russian gas supplies through existing pipelines to Croatia. Gazprom’s delivery volumes have not kept pace with Croatia’s rising gas consumption in recent years, resulting in a tight supply situation in this country. Croatia reportedly consumes 3.2 billion cubic meters (bcm) annually, some 60 percent of it being covered from the country’s meager gas fields and the remaining 40 percent is imported from Russia. Natural gas of Russian provenance enters Croatia mainly from Slovenia (after traveling from Russia via the Ukrainian, Slovakian, Austrian, and Slovenian transit pipelines). Croatia’s current supply contract with Gazprom is due to expire at the end of 2010. The Croatian government is interested in more than doubling the supply volume, from the current 1.2 bcm to 2.7 bcm per year (RIA Novosti, HINA, March 2; Poslovni Dnevnik, March 4).

The previous Croatian government (in office until mid-2009) had sought a supply increase of comparable magnitude from Russia. The Russian side, however, set the condition that Croatia must join South Stream. It seems likely that Moscow maintains that conditionality vis-à-vis the present Croatian government, as it also does toward other countries along the South Stream route.

Late-comers to the South Stream project, Croatia and neighboring Slovenia look like true believers in the project at this stage. Other countries such as Hungary and Bulgaria went through a phase of South Stream enthusiasm around 2007-2008, under socialist governments friendly to Moscow (and tolerant of corrupt Russian business in their own countries) at that time. The intervening experience has, however, turned those countries into South Stream skeptics, re-ordering their priorities in favor of the European Union-backed projects (Nabucco) and LNG. In Croatia, meanwhile, the political atmosphere is one of band-waggoning with South Stream.

This issue has surged to the top of Croatia’s political agenda in the last few months. Some influential politicians and commentators feel in retrospect that Croatia should have joined South Stream from its inception in 2007. Ironically, it was in Zagreb that Putin unveiled this project to the world for the first time. With hindsight, many feel that Croatia joined this project too late, missed the opportunity to become a transit country, and must now content itself with the status of an ordinary importer country, at the tail end of a supply line. This means forfeiting both transit revenue and bargaining leverage. However, Croatia’s geographic location relative to the South Stream route would seem in any case to place Croatia at a line’s end, regardless of the timing of its accession to the project.

Moscow claims that countries joining South Stream would no longer depend on the transit of Russian gas through Ukraine. Some in Croatia and elsewhere seem to accept this argument at face value. However, Moscow undermines its own argument by attempting to gain control of Ukraine’s gas transit system. Should Moscow obtain the desired control, it would undoubtedly claim that the Ukrainian system has become fully reliable, obviating any need for the estimated $25 billion investment in the overall South Stream project (compared with the estimated $3 billion cost of upgrading the Ukrainian transit system).

The proposed LNG terminal on the Adriatic coast retains the support of the Croatian government and local experts. The government reaffirmed that support at the February 24, region-wide energy summit in Budapest; and the US State Department’s Special Envoy for Energy Affairs, Richard Morningstar, underscored the LNG Adria project’s region-wide importance, in a follow-up meeting with Kosor in Zagreb, just ahead of Kosor’s Moscow visit (Poslovni Dnevnik, March 2; EDM, March 3).

In Moscow, Kosor reiterated her support for LNG Adria in response to Croatian journalists’ questions. She dismissed media conjectures that Moscow had asked Croatia to abandon that project as a condition to joining South Stream. However, Gazprom has made clear its view that South Stream and LNG Adria cannot coexist in the same market. Although South Stream looks implausible, the mere deployment of this virtual project can inhibit LNG Adria or Nabucco. In this sense, South Stream is not a real supply project, but essentially an anti-diversification 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>