Moscow Juggling Capacity and Cost Figures on South Stream

Against the European Union’s Southern Corridor project, Russia is redoubling efforts to advertise its own project, South Stream, with Italian backing. The scene for that advertising is in Bucharest this week. Due to stagnant gas production and aging fields in operation, however, Russia has been unable to identify any internal gas reserves to supply the proposed South Stream system. Unlike the Nord Stream pipeline project on the Baltic seabed, which has at least some Russian gas resources allocated to it at least in the planning, South Stream has no known resource backup in Russia or elsewhere. Moscow only suggests that it would shift some gas volumes from the Ukrainian transit pipelines into South Stream, though far from meeting South Stream’s declared future capacity.

The Russian government and Gazprom have embarked on a high-risk juggling act with quantative figures on South Stream’s future capacity and investment costs. In 2007-2008 Moscow was offering 31 billion cubic meters (bcm) annually in future aggregate deliveries to all putative customers of South Stream. In February 2009 Gazprom increased the offer without explanation to 45 bcm per year (EDM, February 7); and in May, Russian Prime Minister Vladimir Putin (meeting with the Turkish government leaders in Sochi) raised the ante to 63 bcm annually, even as Russia faced the prospect of gas shortfalls after 2010 (EDM, May 28, 29).

Moscow’s initial cost estimates for South Stream in 2007-2008 hovered around $10 billion. In its February 2009 briefing for Russian and other potential investor companies, Gazprom raised the cost estimate to the range of $19 billion to $24 billion in one stroke (EDM, February 7). And during Putin’s recent visit in Ankara, sources close to the Russian delegation cited cost estimates in the range of $25 billion to $28 billion (EDM, August 10, 11).

The capacity and investment figures can only be viewed as arbitrary in the absence of even preliminary feasibility studies. The spectacular rise in the estimates, however, makes some sense. Striving to enlist more participant countries and companies in this project for political effect, Moscow must constantly raise the aggregate declared capacity of the South Stream system. Similarly, with more branch-offs promised or offered in various directions, the system’s total costs increase. Finally, routing the seabed section through the Turkish economic zone means a longer pipeline on a deeper and more complex seabed, thus adding to the ultimate costs.

Meanwhile, the project seems academic in the absence of dedicated Russian gas volumes, and given Russia’s stagnant production. South Stream also looks clearly unbankable at such costs. The costs would have to be passed on to European consumers, if Russia could ultimately deliver the financing and the gas.

Nevertheless, Moscow seeks to maximize the number of participant countries and interested parties in South Stream. It also offers various pipeline routes or branch-offs, sometimes incompatible with each other, to various countries along the potential routes. The goal is to keep South Stream alive as a virtual proposition, in virtual competition against the E.U.-backed Nabucco project. Through shifting signals, Moscow seeks to induce countries in Central and Southeastern Europe to compete against each other for future supplies and transit of finite volumes of Russian gas.

In an illustration of these tactics, Gazprom CEO Aleksei Miller warned at the latest meeting of the Valdai discussion club: "There is little time left. The countries of Central and Southeastern Europe have to make quick decisions whether or not they want to support the South Stream project….Neighboring countries would be more than happy to take the place of any country that declines to participate" (Interfax, September 13).

The Bulgarian and Hungarian governments signed up to South Stream last year, but have fallen from power since then. Both governments were Socialist and Moscow-friendly. Hungary’s current caretaker government seems to have shelved the issue, pending elections and an expected landslide success of Western-oriented conservatives. Bulgaria’s new government has suspended the implementation of energy projects with Russia, pending a detailed review of their terms, which the new government deems onerous (EDM, August 6). Russia and Bulgaria have set up expert-level working groups to conduct that review (BTA, Interfax, September 18, 19).

In recent weeks the Russian government and Gazprom have offered to include some new countries and companies in the South Stream project. Thus on September 1 Putin made this offer to Croatia through that country’s new Prime Minister Jadranka Kosor. The Russian side proposes creating a joint working group with Croatia’s gas transmission system operator, Plinacro, to examine a possible branch-off from the projected South Stream system into Croatia from Serbia. This idea seems designed to unnerve the Hungarians farther downstream as well as to discourage investment in the E.U.-favored liquefied natural gas terminal project on Croatia’s Krk island (Vjesnik [Zagreb], September 21).

On September 14 and 24 (respectively), Miller and Putin offered to include Electricite de France as an investor in South Stream with a 10 percent stake in the project. Apparently this would imply a title to 10 percent of the gas volume for EDF. Moscow’s move seems largely political, hoping to enlist French government backing within the E.U. for South Stream (Kommersant September 15; Le Monde, September 17; Interfax, September 24). Such backing -which Moscow also seeks from the German and Italian governments- consists of lobbying within the E.U. to give South Stream some kind of status as project of European interest and even make it eligible for financial support.