Italy’s ENI chief executive, Paolo Scaroni, has proposed unifying the Gazprom-led South Stream with the European Union-backed Nabucco pipeline project. The Italian state-controlled energy conglomerate ENI is the key technological and commercial partner to Gazprom in South Stream, the project aimed at transporting gas from Russia across the Black Sea to Europe.
In his remarks to a Cambridge Energy Research Associates forum in Houston (Bloomberg, March 9; Platts Commodity News, March 10), Scaroni called for a partial merger of the South Stream and Nabucco pipeline routes. He identified the segment where the two planned routes overlap, which runs overland from Bulgaria to Austria. However, the Nabucco consortium has clearly defined its pipeline route (Bulgaria-Romania-Hungary-Austria) and has already commissioned the engineering work on it, whereas Gazprom has avoided both.
Circumstantial indications suggest that a further option of “unifying” Nabucco and South Stream is also under consideration. This would shift Nabucco’s Turkish section from land to the seabed of the Black Sea, where ENI holds the technological lead.
ENI’s CEO would like to see South Stream combined with Nabucco in “one large project.” Scaroni portrays the two projects as complementary, rather than competing against each other. He argues that a partial merger of the two projects would reduce investments in construction and the subsequent operating costs, as well as increase the prospective financial returns overall.
Scaroni’s call reflects a loss of confidence in South Stream’s chances to materialize in the new global and regional market environments, which are now taking shape. It also confirms diminishing confidence in Gazprom’s capacity to supply all of its giant pipeline projects, including South Stream, with gas during the post-crisis years. Finally, the merger proposal is a response to the Nabucco project’s recent advances, contrasting with South Stream’s stagnation at all levels, other than Kremlin promotional activities and playing various potential transit countries against each other.
In effect, ENI seems to be attempting to downscale its commitment to South Stream and to devise a creative way for joining Nabucco, the likely winner. The argument that the two projects are complementary, rather than rivals, is a familiar disclaimer in situations that denote genuine competition.
ENI is a sine qua non participant in the Gazprom-led South Stream. It provides the technology (which Gazprom lacks) for laying the pipeline on the seabed of the Black Sea, and is the main potential customer for Gazprom’s gas through the southern branch of South Stream, which is planned to reach Italy. In the event of a South Stream-Nabucco unification as just proposed, however, northern Italy can receive gas via the unified pipeline from Central Europe, even in the increasingly likely event that South Stream’s own branch to southern Italy fails to materialize as intended.
Whether ENI has aired the South Stream-Nabucco unification proposal on its own, or in coordination with Moscow officials is unclear. Moscow’s public position remains one of confidence that South Stream can prevail against Nabucco. This posture ignores the ongoing, market-transforming processes. It also seeks to delay the moment when Russia’s gas shortfall will no longer be hidden by the recession-induced demand slump. Moscow’s declarative confidence in South Stream may well be about to change behind the scenes.
The reasons behind ENI’s declining confidence in South Stream seem easily discernible. They are both circumstantial and structural, both internal and external to the South Stream project itself.
The Russian-declared cost of the South Stream overall project has ballooned to 25 billion Euros, as confirmed most recently in Moscow to Croatia’s visiting Prime Minister Jadranka Kosor (Vjesnik [Zagreb], March 9). No financing is in sight, or imaginable, on anything approaching this scale. Russian attempts through certain German, and indeed Italian circles, to obtain some seed funding from the EU for South Stream have failed. The EU’s new Energy Commissioner, Guenther Oettinger, has ruled out EU financing for South Stream while announcing their release of initial funding for Nabucco.
Russian officials have never identified a source of gas for South Stream in their multiple negotiations with potential customer and transit countries. The often-quoted capacity figure of 63 billion cubic meters annually is only remotely imaginable with Turkmen gas. When ENI joined South Stream in 2007, it could still rely on a continued Russian monopoly on Turkmen gas to feed this pipeline project. That assumption was shattered in Turkmenistan in 2009, however; and ENI, as Gazprom’s key partner, seems to be drawing its own conclusions and seeking an alternative to the South Stream project. That alternative seems to be piggybacking on Nabucco.<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>