South Stream: a Casualty of Moscow’s Excess Pipeline Capacity Building

Like all parties involved with South Stream, ENI must rely on the new Ukrainian President Viktor Yanukovych agreeing to share control of Ukraine’s gas transit system with Moscow. In that case, Gazprom would no longer need South Stream as a Ukraine-bypass option, which Moscow had brandished all along to pressure Kyiv into ceding control of the transit system. Moreover, Gazprom would have to commit to full use of the Ukrainian system as part of the bargain with Kyiv, instead of shifting volumes from the Ukrainian system into South Stream, as the scenario had envisaged.

Furthermore, an investment decision in Russia’s supergiant Shtokman gas field has recently been “postponed” (or possibly abandoned), further constricting Russian gas export potential in the years ahead. This also affects South Stream directly, placing it in competition with Nord Stream and other Russian pipeline projects, all now reliant on Siberian gas in limited availability. Shtokman’s postponement has left Nord Stream –the Baltic seabed pipeline to Germany– without any source of gas for the project’s second stage. While Nord Stream One has Siberian gas earmarked for it, putatively at 27.5 billion cubic meters (bcm) per year, Nord Stream Two was planned to be fed to the same annual capacity from Shtokman in the Barents Sea. Instead, Nord Stream Two, as well as South Stream ,would have to draw on Siberian gas, where the shortfall looms.

Thus, apart from the undeclared rivalry with Nabucco, the South Stream project has entered an undeclared competition with Nord Stream Two, the Ukrainian transit system, and even the Blue Stream pipeline (which ENI built for Gazprom earlier on the seabed of the Black Sea to Turkey, and is only being used at one half of its 16 bcm annual capacity). All of these projects, existing or virtual, must vie for access to gas supplies from western Siberia, even as those fields move past their peak, while Russian domestic demand recovers.

It would be logical to anticipate that the Italians would lobby in Moscow for South Stream and against Nord Stream Two. It also seems logical that Moscow might prioritize its German, French, and Dutch customers in Nord Stream, ahead of the South Stream project. South Stream cannot count on the strong political lobbying at state levels that helps drive Nord Stream forward.

South Stream seems to have resulted in a no-win situation at this point. Ultimately, these insoluble dilemmas stem from the Kremlin’s pre-crisis policy to build export pipeline capacities in vast surplus, compared with Russia’s own export potential. South Stream and other projects are the fruits of that policy. It was wrongly premised on continuing Russian monopolization of Central Asian gas; European consent to high-priced, take-or-pay long-term commitments to Russian-delivered gas; predatory acquisitions of infrastructure assets in consumer countries; and, as an intent, a Russian-led cartel of gas exporters to Europe. Both Dmitry Medvedev (Gazprom chairman, then head of state) and Vladimir Putin (head of state, then prime minister) are closely associated with that policy.

Failure to invest in Russian field development (apart from Siberia’s east and far east) and loss of Gazprom’s dominance in Turkmenistan have left South Stream without dedicated resources. Market-transforming processes in Europe, through the surge of LNG and spot markets, have left South Stream behind both in a non-competitive position and as an unappealing investment prospect. Like Nord Stream in some ways, the South Stream project is rooted in the invalidated assumptions of past years.

ENI’s proposal to unify South Stream with Nabucco could provide a lifeline for the South Stream project, serving ENI’s corporate interest as well as Russia’s strategic advantage in Europe. Meanwhile, however, Moscow affects a lack of interest in such unification. Following Paolo Scaroni’s proposal, Russian Foreign Minister, Sergei Lavrov, and Energy Minister, Sergei Shmatko, have reasserted Moscow’s full confidence in South Stream and its resolve to press ahead with it. These responses did not even allude to ENI as such. As Russian officialdom has done all along, Lavrov and Shmatko each made self-contradictory arguments: that South Stream and Nabucco are not in competition against each other, but that South Stream is in a far stronger position to succeed, compared with Nabucco. For its part, Gazprom acknowledged –but downplayed– ENI’s proposal. Gazprom spokesman, Sergei Kupryanov, parried that Scaroni was merely trying to demonstrate that South Stream and Nabucco are not rivals (Interfax, March 14, 15, 16).

In a far more nuanced position, Russian Gas Society President Valery Yazev (who also lobbies for Gazprom as a senior Duma deputy), has suggested that the proposed South Stream-Nabucco unification “is worth considering” and “could make sense” from Moscow’s standpoint. In that event, Yazev said, Turkmen gas would be supplied through the planned Caspian Littoral pipeline and existing pipelines to Russia’s Black Sea coast and then pumped into South Stream on the seabed of the Black Sea. Thus, South Stream-Nabucco unification would “add a branch [Nabucco] to our South Stream” in Europe and “solve the problem of filling the pipeline with Russian and Turkmen gas,” Yazev pointed out. His statement entreated West European companies in the Nabucco project to cooperate in unifying it with South Stream (ITAR-TASS, March 14).

While Moscow’s political officials affect lack of interest for reasons of prestige (as some Western policymakers assume) or play hard to get (as seems more likely), Yazev has spelled out Russian interest in a possible unification of the two projects, depending on terms to be negotiated. Unification could perhaps rescue some downscaled version of South Stream, but only at the expense of the Nabucco project and of European energy security. Considering its recent and continuing advances, Nabucco does not need South Stream in order to succeed.<iframe src=’https://www.jamestown.org/jamestown.org/inner_menu.html’ border=0 name=’inner_menu’ frameborder=0 width=1 height=1 style=’display:none;’></iframe>