Publication: Eurasia Daily Monitor Volume: 5 Issue: 110

One of Gazprom’s goals with South Stream is to circumvent the Ukrainian transit system, which traditionally carries some three-quarters of Russian gas exports to Europe. The South Stream pipeline would run from the Russian Black Sea coast across the seabed to Bulgaria, there to bifurcate into a southern branch toward Greece and Italy and a northern branch toward Serbia, Hungary, and Austria. Moreover, Russia has offered to build extensions of this system to several other countries along or near those routes.

Even if significant gas volumes are diverted from Ukrainian transit pipelines into South Stream, and even accounting for Turkmen gas volumes to be resold as “Russian” gas, it seems highly unlikely that Gazprom could satisfy all those would-be customer countries along South Stream routes. Russia faces the prospect of serious gas shortfalls, relative to its multiple, and growing, internal and external supply commitments from a stagnant production. Shortfalls are anticipated for 2010 and thereafter, into the presumed time-frame for South Stream to become operational. After two decades of underinvestment in exploration and production, and failure to open major new fields (while over investing in other areas), Gazprom can only expect large-scale production from new fields in Yamal and Shtokman in the latter part of the next decade.

Given this outlook on Russia’s export capacity, the South Stream project involves elements of a political and strategic bluff. It seeks to preempt the Nabucco transit route, largely duplicating that itinerary, so as to discourage investment in that project. This strategy could foreclose the EU-planned, U.S.-backed Southern Corridor for Caspian gas to Europe, unless Nabucco is built ahead of South Stream. However, full-scale construction seems unlikely in the absence of direct access to either Iranian gas (blocked by U.S. sanctions) or Turkmen gas (blocked by a Russian monopoly).

For its part, Gazprom has yet to show even a pre-feasibility study for South Stream, clarify its proposed routes, credibly estimate its cost (Euro 10 billion seems an improvised underestimate) or demonstrate that it can fill the South Stream pipeline to the planned capacity.

Germany, which has driven itself into heavy and growing dependence on Russian gas as a “strategic” choice, is now showing concern about Russia’s capacity to fill both the Nord Stream pipeline on the Baltic seabed to northern Germany and the South Stream pipeline to south-eastern and central Europe simultaneously. Both pipelines are supposed to be commissioned around 2013, before reaching their declared full capacity at 55 billion cubic meters and 31 cubic meters per year, respectively. Their resource base, however, remains doubtful within their first-stage time frames and almost certainly beyond that also.

Russian President Dmitry Medvedev was queried about this by Chancellor Angela Merkel and other German officials, not without trepidation, during his visit to Berlin on June 5 (see EDM, June 9). Medvedev, until recently the chairman of Gazprom, responded publicly that Nord Stream and South Stream are equally important projects on a European scale; and that Russia would pursue both of them “more or less synchronically” (Interfax, June 5). This is not the answer Berlin wanted to hear. Germany’s relevant business circles and the government almost certainly expected assurances that supply commitments to Nord Stream for Germany would take precedence over South Stream. Yet Medvedev’s answer seemed to play off the two sets of consumer countries against each other, for access to a commodity in limited availability.

This has indeed been Gazprom’s and the Kremlin’s tactic in negotiating with countries along South Stream’s proposed routes and neighboring countries. Bulgaria, Greece, Italy, as well as Serbia, Romania, Hungary, Slovenia, and Austria have each been offered at one time or another the status of a “hub” or the prospect of an extension from the main South Stream pipeline to their respective territories. This tactic has triggered an undeclared but visible contest among most of these countries for the best possible bilateral deal with Gazprom for future supplies of South Stream gas and storage sites.

Awareness of the limits on Gazprom’s supply capacity is a factor that can cut both ways. It can inspire a scramble for long-term supply agreements, pipeline construction projects, and the coveted “hub” status with Gazprom, whereby each country seeks to wrap up a deal ahead of its neighbors. But the prospective shortfalls in gas supply can also inspire skepticism about South Stream and aloofness from Gazprom’s manipulative negotiating processes. This has notably been Romania’s reaction. Romania and Hungary’s MOL company remain loyal to the Nabucco project. Romania’s TransGaz strongly supports MOL’s initiative, known as NETS, to interconnect gas transmission networks among the region’s countries. This could shore up each country’s bargaining position vis-à-vis Gazprom in emergency situations.

(Prime-Tass, APA, MTI,, June 5-7; Die Presse, June 6)