No Gas Sources Foreseen for Gazprom’s South Stream

Gazprom vice-president Aleksandr Medvedev’s extensive briefing on the South Stream transport project for potential investors (see article above) left the matter of sourcing it with gas entirely obscure. This omission could not come as a surprise, given Russia’s gas production shortfall now setting for several years ahead (Interfax, February 6; Kommersant, RIA Novosti, February 9).

To keep its South Stream project afloat nevertheless, and to outbid the Western-backed Nabucco project, Moscow is enlarging the putative gas offer through South Stream. The day after the Nabucco summit in Budapest (January 26-27), Russian government and Gazprom officials suddenly began claiming that South Stream could deliver 47 billion cubic meters (bcm) of gas annually by 2015.

This time-frame is longer by two years than previously suggested while the volume is larger by 50 percent than the previous offer of 31 bcm per year. Medvedev reiterated these claims in his Moscow presentation on Gazprom’s behalf. The gas source for the volume increase remains as unclear as the source for the original offer.

Gazprom and the Kremlin insist, however, that Russia could at the same time deliver 55 bcm annually through the Nord Stream pipeline on the Baltic seabed to Germany and beyond. That volume would include 27.5 bcm from 2011 onward and another 27.5 bcm per year after 2013. Thus the export volumes through Nord Stream and South Stream would supposedly add up to 102 bcm of gas annually by 2015.

Russia’s gas production outlook in that time frame, however, would almost certainly not allow this increase of some 100 bcm per year in Russian exports. Russia’s gas shortfall (i.e., internal and external commitments relative to production) has set in somewhat earlier than anticipated. After the very slight decrease from 2007 to 2008, Russian gas production and exports look set to decline faster this year and likely to continue downward or at best stagnate in the ensuing years.

According to Medvedev in his presentation, Gazprom expects its production to decline possibly to 510 bcm in 2009, compared with 550 bcm in 2008. It foresees having to reduce exports to 170 bcm in 2009, compared with 179 bcm in 2008. And it reckons with an average export price of $280 per thousand cubic meters by the second half of 2009, compared with average prices of $409 per thousand cubic meters during 2008 (Kommersant, RIA Novosti, February 9).

With the largest Soviet-era gas fields in their declining phase, new giant developments were optimistically expected to produce the first gas by 2011 at Bovanenkovskoye on Yamal and by 2015 at Shtokman. Those plans were made prior to the financial crisis, however. Gazprom’s and the Russian government’s financial difficulties (as well as the credit crisis in the West) will undoubtedly delay those developments. Future exports from Yamal, Yuzhno-Russkoye, and Shtokman are in any case earmarked for Nord Stream, not South Stream.

Feasibility and cost problems aside, Nord Stream at least is being planned as a dedicated pipeline, linked with specific gas fields. South Stream, however, does not seem to be dedicated to or linked with any specific gas resources by its Russian planners.

Gazprom may tacitly count on Turkmen gas to feed those putative 47 bcm per year into South Stream. This would, however, presuppose doubling Russia’s intake of Turkmen gas from the present level. Such a solution would, if accepted, defeat the Nabucco project and overall European goals of supply security and diversification.

According to Medvedev’s presentation, Russian gas exports to Europe would grow to 220 bcm annually by 2015, i.e., some 40 bcm above the plateau level of 2007 and 2008 (now declining). Even if it materializes, however, an increase by 40 bcm would still be less than Nord Stream’s promised deliveries of 55 bcm per year and it would not leave anything for South Stream.

Hypothetically, Russia could feed this pipeline by diverting some volumes from Ukrainian transit pipelines into South Stream. This option was being discussed theoretically even before the January 2009 Russia-Ukraine gas conflict. Gazprom can be expected to consider this non-Ukrainian export route more seriously in the wake of that conflict. Nevertheless, Russian officials claim that Nord Stream and South Stream are intended for new gas flows, not for volumes diverted from the Ukrainian system.

This intention seems real enough with regard to Nord Stream and uncertain regarding the South Stream project. Russia seeks to multiply its options for export routes including Ukraine and would even build surplus transport capacity to that end. Should Moscow succeed in forming a consortium to control Ukraine’s transit system, South Stream would no longer be of much value to Russia as a solution to bypass Ukraine. Pending an outcome of the consortium issue in Ukraine and in Brussels (all of which may take time), Moscow is considering yet another option, namely a return to the Blue Stream Two project. This could nullify South Stream while also checkmating (as would South Stream) the Western-backed Nabucco project.

Originally proposed by Gazprom several years ago, and negotiated until 2006 with several interested governments, Blue Stream Two was to prolong the Blue Stream One pipeline, which now runs from Russia to Turkey on the seabed of the Black Sea. The prolongation overland was to follow approximately the same route as the rival, Western-backed Nabucco pipeline, from Turkey to Austria. The Kremlin dropped Blue Stream Two and introduced South Stream in 2007, so as to bypass Turkey via the Black Sea en route to Europe, rather than deal with Turkey as a transit country. Influential elements in the Turkish government seek a return to Blue Stream Two, as Turkey’s Moscow ambassador Halil Akinji stated with unusual candor on the eve of Minister of Foreign Affairs Ali Babacan’s visit to Moscow (Interfax, February 5).

In current circumstances, Moscow’s preferred solution may well be a return to Blue Stream Two. The South Stream project is proving too ambitious on all counts, unbankable in Europe and unsourceable with Russian gas to the declared volume. Blue Stream Two, however, would enable Gazprom to plug into the Nabucco project in Turkey and use as much as half of Nabucco’s capacity for Russian gas exports (most likely originating in or swapped with Turkmenistan). This option is being discussed as unifying South Stream and Nabucco or as sharing Nabucco’s capacity with Gazprom. In this scenario, Russia hopes to receive that additional transport capacity built with European subsidies, hijack the Nabucco project to invert its rationale, increase Gazprom’s market share in Europe, and still bypass Ukraine through Blue Stream Two.