Gazprom’s South Stream Set Back On Several Fronts

Turkmen President, Gurbanguly Berdimuhamedov’s, September 16 statement, explicitly linking the Turkmen East-West gas pipeline with the European Union-backed Nabucco project (EDM, September 17), is not only a boost for Nabucco, but also a blow to Gazprom’s rival project South Stream. As Moscow analysts recognize, Berdimuhamedov’s announcement confirms openly for the first time that Gazprom cannot count on Turkmen gas to supply South Stream (Vedomosti, September 17).

South Stream had from its inception in 2007 been premised on re-selling Turkmen gas to Europe as “Russian” gas. Toward that end, Moscow had proposed to build a pipeline from Turkmenistan northward along the Caspian coast, ultimately to feed the planned South Stream from Russia. By 2009, however, Turkmenistan had changed its policy, prioritizing China over Russia as an export destination, and seeking direct access (as opposed to Russian-mediated access) to customers for Turkmen gas at the country’s western border. In May 2010 Berdimuhamedov initiated the construction of an East-West pipeline with a capacity of 30 billion cubic meters (bcm) per year, from Turkmenistan’s prolific gas fields in the east to the Caspian shore in the west. Due for completion by 2015, this line should enable Turkmenistan to sell gas at the western border, supplying Nabucco and other components of the EU-planned Southern Corridor to Europe. This goal has been implied, but not declared until Berdimuhamedov’s September 16 announcement at the Turkic states’ summit in Istanbul (Trend Capital, Turkmen Television, September 16).

Given Ashgabat’s habitual reluctance to tip its hand publicly or irritate Moscow through unnecessary announcements, Berdimuhamedov’s open statement amounts to a policy landmark. By the same token it is a landmark step in the development of the Nabucco project as part of the Southern Corridor for Caspian gas to Europe. The significance of this step is comparable with that of the announcement by lending institutions, only a week earlier, about allocating up to 4 billion Euros from 2011 onward for the Nabucco pipeline’s construction. Turkmenistan’s offer, however, is contingent upon a trans-Caspian link westward, to be provided by customers for Turkmen gas.

Failing such a link, Turkmenistan will have to either delay the construction of its East-West pipeline, or sell that volume of gas to other customers, (Russia or Iran). In that case, Moscow could reactivate its plan for a Caspian coastal pipeline northward into Russia. Of necessity, Ashgabat itself retains that fall-back option. Its East-West pipeline to the sea is designed to terminate at the point of inception of the Russian-planned Caspian coastal pipeline. It is up to the EU Commission and European companies to create a transport solution for up to 30 bcm per year that Turkmenistan proposes to deliver from 2015 onward. In the absence of a westbound outlet, Gazprom could offer to buy that volume, giving South Stream a new lease of life. Probably banking on such a scenario, Moscow seeks to keep a moribund South Stream in play at least politically, if not operationally.

Meanwhile Gazprom’s partner in South Stream’s seabed sections, Italian ENI, seeks ways to import up to 8 bcm of Turkmen gas annually for ENI’s own business, unrelated to South Stream. ENI looks at associated gas from the oil production in Turkmenistan as a potential source of gas for Europe, instead of having that gas flared at the oil well. While considering several transportation solutions, ENI has started discussions with Azerbaijan on possible shipments of 2 to 3 bcm of compressed natural gas (CNG) annually from Turkmenistan via the Caspian Sea, Azerbaijan, Georgia and Turkey, possibly into the EU-planned Southern Corridor (www.news.az, Trend Capital, Dow Jones, July 20; il Giornale, July 21). Although CNG is a long shot at present, ENI’s moves clearly imply a loss of confidence in the prospects of South Stream.

ENI seeks to reduce its commitment to South Stream and scale down the project.  Publicly, ENI has proposed unifying South Stream’s northern route (Bulgaria-Austria) with Nabucco, thus implicitly acknowledging that Russia does not have gas supplies to spare for South Stream. Backstage, ENI is stalling on an investment decision for the seabed pipeline in the Black Sea; and has proposed giving up South Stream’s southern route (Bulgaria-Italy), as well as reducing the project’s declared capacity from 63 bcm to 15 bcm per year. The shrunken capacity, however, would leave meager gas volumes for each of the half-dozen countries along South Stream’s proposed northern route. It would hardly justify the $9 billion investment in the pipeline’s Black Sea section (where ENI is a stakeholder) or investments in the overland sections (where each country would have to co-finance the construction on its territory, with Gazprom controlling the overall project).

Croatia is one of those would-be partner countries. Contrary to general expectations, South Stream was not mentioned publicly during the meeting of the Russian-Croatian inter-governmental commission on economic cooperation, held on September 17 in Zagreb. The Kremlin had proposed in September 2009 to include Croatia in South Stream and other Russian projects, fostering high expectations in that country through repeated offers during the intervening year. Russia seeks to enter the oil and gas sectors in Croatia, hoping to cut off Central Europe from seaborne energy supplies via Adriatic ports. Nevertheless, South Stream does not seem to have been specifically discussed at the joint commission’s meeting just held. A large Russian delegation under Sergei Shoigu apparently focused on far more modest proposals (Interfax, HINA, September 17; Jutarnji List, Novi List, September 20). This shift in emphasis also seems to reflect South Stream’s rapid loss of plausibility, following the latest advances of the Nabucco project and market-transformation processes in Europe.