Sochi Agreements and Aftermath Deflate South Stream Hype

On May 15 in Sochi, Gazprom signed bilateral agreements with Italy’s ENI, Bulgarian Energy Holding, the Greek DESFA Corporation, and Serbia Gas -all state-controlled companies- on implementing Gazprom’s South Stream project for gas export to Europe. Russian Prime Minister Vladimir Putin attended the signing of all these agreements; and Italian Prime Minister Silvio Berlusconi joined Putin for the signing of the Gazprom-ENI document (Interfax, May 15, 16).

ENI is supplying the technology for South Stream’s section on the seabed of the Black Sea – the most challenging part of the entire project. The Gazprom-ENI agreement just signed is essentially a political declaration of intent to expand the line’s planned capacity to 63 billion cubic meters (bcm) annually. This document takes the form of an addendum to the Gazprom-ENI agreement of intent signed in 2007 on this project.

The expanded capacity figure seems purely arbitrary and possibly improvised. Planning on the South Stream project had been based since 2007 on a throughput capacity figure of 31 bcm annually. In February 2009, Gazprom upped the ante to 47 billion cubic meters and has now increased this double the initial proposal. Russia, however, has not specifically earmarked any gas resources for supplying South Stream. Declaratory increases in the project’s capacity are at odds with Gazprom’s own anticipation of gas shortfalls within Russia itself from 2010 onwards.

Meanwhile, Moscow has identified some specific gas fields as a resource base for the Nord Stream pipeline project on the seabed of the Baltic Sea to Germany and farther west. Volumes and time-tables are questionable even for that project. By contrast, however, no Russian fields are identified for the South Stream project. South Stream takes second place to Nord Stream in Moscow’s order of priorities, where the quest for a Russo-German strategic partnership outranks Russian relations with South Stream’s potential customer countries.

On the occasion of the signing in Sochi, Gazprom’s CEO Aleksei Miller estimated the cost of South Stream’s seabed section at 8.6 billion Euros. The project’s overall cost has been estimated at $19 billion to $24 billion by Gazprom’s vice-president Aleksandr Medvedev in February of this year (EDM, February 12). The latest, massive increase in capacity will correspondingly add to that cost estimate.

These cost estimates look as unreal as does the throughput capacity hype. The $19 billion to $24 billion figure seems arbitrary or even guesswork, due to its wide approximation and is almost certainly out of range for investors -even in the best of economic times. Meanwhile, Gazprom hopes to see the project underwritten by the Russian government; while the government hopes to persuade the European Union to include South Stream among its priority projects that are eligible for EU funding and soft credits (Interfax, May 22, 23).

Gazprom’s agreements just signed with Bulgarian Energy Holding, Greek DESFA, and Serbia Gas cover the construction of South Stream pipeline sections on the territories of these three countries. Bilateral joint ventures of Gazprom with each of the national companies will build and operate those sections. Feasibility studies are to be drawn up by mid-2010 and the construction work on the overall project is due to be completed by the end of 2015, instead of the previous target of 2013 (Interfax, RIA Novosti, May 15, 16).

Unlike those three national companies, ENI did not sign an agreement on pipeline construction with Gazprom in Sochi. The Italians are demanding rights to sell on ENI’s behalf a substantial portion of the gas in countries along the pipeline route. Although Gazprom will provide the gas in the pipeline, ENI will supply the pipeline’s underwater technology and feels therefore entitled to marketing a portion of the gas directly to participant countries. Moreover, ENI wants to increase the gas volume destined for Italy itself and which the company will sell directly. Serbia also demanded more gas for its consumption and storage than Gazprom had promised prior to the signing event in Sochi.

Russia, moreover, seeks to attract additional countries for political reasons into the South Stream project. To that end it is currently negotiating with Slovenia and Austria as well as making overtures to Romania. In trying to keep participant countries committed and to entice new ones, Moscow constantly raises the overall gas offer without the necessary resource backup.

Moscow’s underlying reasons are political and diplomatic. First, it seeks to slow down the recent momentum of the EU-backed Nabucco and Southern Corridor projects. The signing in Sochi and the hopes to sign further documents in the weeks ahead is intended to upstage the intergovernmental agreements on Nabucco, which is expected in June. By hyping the South Stream project, Moscow seeks to inhibit European investors from making commitments to Nabucco as well as discourage trans-Caspian gas transport projects for the Southern Corridor to Europe.

Hyping South Stream also responds to the recently signed agreement on EU support for the modernization of Ukraine’s transit pipeline system. South Stream, if implemented, will divert a large part of the transit volume away from Ukraine. In effect, Moscow threatens to punish both Ukraine and the EU for their agreement to upgrade and expand the transit system outside Russian control. Russian President Dmitry Medvedev indicated this obliquely, but unmistakably during the summit in Khabarovsk with EU leaders (Interfax, May 22, 23).