Sochi Agreements and Aftermath Deflate South Stream Hype (Part Two)

Publication: Eurasia Daily Monitor Volume: 6 Issue: 102

Russian Prime Minister Vladimir Putin (R) and Gazprom CEO Alexei Miller (2nd R) speak with Italian Prime Minister Silvio Berlusconi (2nd L) and CEO of Italian ENI S.p.A. oil and gas company Paolo Scaroni (L) during a signing ceremony in Sochi on May 15, 2009.

Despite facing gas production shortfalls (relative to internal and external supply commitments) post-2010, Russia is multiplying its supply offers to European consumer countries through South Stream and other pipeline projects. Gazprom signed bilateral agreements on building South Stream with state-controlled Italian, Bulgarian, Greek, and Serbian companies on May 15 in Sochi, with Prime Minister Vladimir Putin attending, and it is negotiating similar agreements with more countries (Interfax, May 15, 16; EDM, May 27).

As enticements, Moscow is declaring ever-larger design capacities for the putative South Stream pipeline system, rival to the European Union and the United States’ backed Nabucco and Southern Corridor projects. South Stream’s other goal is to threaten Ukraine with diverting gas transit volumes, from the Ukrainian transit system into the South Stream pipeline on the seabed of the Black Sea. The Kremlin will most likely roll back its South Stream project, if Moscow achieves its earlier goal of gaining control over the Ukrainian gas transit system.

During the EU-Russia summit in Khabarovsk, Russian Energy Minister Sergei Shmatko announced that Gazprom is well-advanced in negotiating with Austria and Slovenia toward intergovernmental agreements on their participation in the South Stream project (Interfax, May 22). The Austrian economics ministry has obliquely confirmed this assertion, not without embarrassment; these talks with Moscow are a legacy of ministers previously in office (Der Standard, May 25). Austria’s government-linked OMV is a participant and indeed an initiator in the Nabucco project; but it has come perilously close to compromising it through CEO Wolfgang Ruttenstorfer’s deals with Gazprom and, more recently with the Kremlin-controlled Surgut Neftegaz.

Meanwhile, Gazprom is encouraging the Slovenian Economics Minister Matej Lahovnik’s hopes for an agreement to join South Stream by June. Such a deal will be linked with the renewal of Gazprom’s long-term supply agreement with Slovenia, which expires in 2010. Openly pessimistic about the availability of gas supplies for Nabucco and the Southern Corridor projects, Lahovnik and the national company Geoplin considered signing a supply agreement with Gazprom for another 15 years (STA, May 22).

In Serbia’s case, the Serbia Gas CEO Dusan Bajatovic announced in the wake of the Sochi meeting that South Stream will transport 20 billion cubic meters (bcm) of gas annually through Serbia. The Russian government and Gazprom had made that promise in 2007 in inducing Belgrade to sell majority control in the Serbian Oil Industry at a deeply discounted price to GazpromNeft. Soon afterwards, however, Moscow reduced the promise to a maximum of 10 bcm, much to the Serbs’ indignation. In Sochi with a sleight of hand, the Russian side revised South Stream’s annual capacity upward to 63 bcm and, on that wholly unsubstantiated basis, reverted to the 20 bcm promise to Serbia for transit, supply, and storage (Tanjug, May 22).

Romanian Economics Minister Adriean Videanu led a delegation of the Romgaz, Transgaz (Romanian participants in Nabucco), and RomElectrica companies for talks on May 21 in Moscow. There, Shmatko and Gazprom vice-president Aleksandr Medvedev proposed to examine the possibility of building a section of the South Stream pipeline through Romanian territory, for transit purposes, and possibly for delivering supplies to Romania depending on South Stream’s overall capacity. Considering the declaratory facility of Moscow’s promises to expand South Stream (from an annual 30 bcm declared in 2008, to 47 billion declared in February 2009, to 63 bcm annually as just declared at Sochi), Romania may find it politically difficult to turn down even dubious promises in this election year.

For now, Moscow is willing to build an underground storage site for Russian gas at Margineni in north-eastern Romania to a capacity of 2 bcm, which will double the existing Romanian storage capacity. They also agreed to launch a feasibility study on this project and create a parity joint venture. They also formed a joint group to examine the construction of gas-fueled power plants in Romania, as a joint venture of RomElectrica and Gazprom (Agerpres, NewsIn, March 21; Rompres, May 26; Romania Libera, May 22, 25, 27).

The Margineni storage project is consistent with Gazprom’s recent policy to build storage sites in countries west of Ukraine. The goal is to leapfrog Ukraine in terms of gas storage, corresponding with the Russian goal to circumvent the country with new pipelines under Russian control in some of the same countries. In this new context, Moscow is finally lending an ear to Romania’s long-desired proposals on the Margineni storage. By now, however, Moscow’s capacity to deliver more gas (for storage and electricity generation) seems far from certain, amid growing tensions between stagnant Russian production and growing supply commitments.