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    Central Asia
     Oct 2, 2009
Moscow juggling South Stream pipe dreams
By Vladimir Socor

Against the European Union's Southern Corridor gas pipeline project, Russia is redoubling efforts to advertise its own project, South Stream, with Italian backing. The scene for that advertising is in Bucharest this week.

Due to stagnant gas production and aging fields in operation, however, Russia has been unable to identify any internal gas reserves to supply the proposed South Stream system, intended to carry natural gas by way of the Black Sea from Russia to Bulgaria.

Unlike the Nord Stream pipeline project from Russia to Germany running along the Baltic seabed, which has at least some


Russian gas resources allocated to it - at least in the planning - South Stream has no known resource backup in Russia or elsewhere. Moscow only suggests that it would shift some gas volumes from the Ukrainian transit pipelines into South Stream, though far from meeting South Stream's declared future capacity.

The Russian government and the country's gas monopoly Gazprom have embarked on a high-risk juggling act with quantitative figures on South Stream's future capacity and investment costs. In 2007-2008 Moscow was offering 31 billion cubic meters (bcm) annually in future aggregate deliveries to all putative customers of South Stream. In February 2009, Gazprom increased the offer without explanation to 45 bcm per year; and in May, Russian Prime Minister Vladimir Putin (meeting with the Turkish government leaders in Sochi) raised the ante to 63 bcm annually, even as Russia faced the prospect of gas shortfalls after 2010.

Moscow's initial cost estimates for South Stream in 2007-2008 hovered around US$10 billion. In its February 2009 briefing for Russian and other potential investor companies, Gazprom raised the cost estimate to the range of $19 billion to $24 billion in one stroke; and during Putin's recent visit to Ankara, sources close to the Russian delegation cited cost estimates in the range of $25 billion to $28 billion.

The capacity and investment figures can only be viewed as arbitrary in the absence of even preliminary feasibility studies. The spectacular rise in the estimates, however, makes some sense. Striving to enlist more participant countries and companies in this project for political effect, Moscow must constantly raise the aggregate declared capacity of the South Stream system.

Similarly, with more branch-offs promised or offered in various directions, the system's total costs increase. Finally, routing the seabed section through the Turkish economic zone means a longer pipeline on a deeper and more complex seabed, thus adding to the ultimate costs.

Meanwhile, the project seems academic in the absence of dedicated Russian gas volumes and given Russia's stagnant production. South Stream also looks clearly unbankable at such costs. The costs would have to be passed on to European consumers, if Russia could ultimately deliver the financing and the gas.

Nevertheless, Moscow seeks to maximize the number of participant countries and interested parties in South Stream. The various offered pipeline routes or branch-offs to various countries along the potential routes are sometimes incompatible with each other. The goal is to keep South Stream alive as a virtual proposition, in virtual competition against the European Union-backed Nabucco project. Through shifting signals, Moscow seeks to induce countries in Central and Southeastern Europe to compete against each other for future supplies and transit of finite volumes of Russian gas.

In an illustration of these tactics, Gazprom chief executive Aleksei Miller warned at the latest meeting of the Valdai discussion club [2]: "There is little time left. The countries of Central and Southeastern Europe have to make quick decisions whether or not they want to support the South Stream project ... Neighboring countries would be more than happy to take the place of any country that declines to participate.".

The Bulgarian and Hungarian governments signed up to South Stream last year but have fallen from power since then. Both governments were socialist and Moscow-friendly. Hungary's current caretaker government seems to have shelved the issue, pending elections and an expected landslide success of Western-oriented conservatives. Bulgaria's new government has suspended the implementation of energy projects with Russia, pending a detailed review of their terms, which the new government deems onerous. Russia and Bulgaria have set up expert-level working groups to conduct that review.

In recent weeks, the Russian government and Gazprom have offered to include some new countries and companies in the South Stream project. Thus on September 1, Putin made this offer to Croatia through that country's new Prime Minister Jadranka Kosor. The Russian side proposes creating a joint working group with Croatia's gas transmission system operator, Plinacro, to examine a possible branch-off from the projected South Stream system into Croatia from Serbia. This idea seems designed to unnerve the Hungarians farther downstream as well as to discourage investment in the EU-favored liquefied natural gas terminal project on Croatia's Krk island.

On September 14 and 24, respectively, Miller and Putin offered to include Electricite de France (EDF) as an investor in South Stream with a 10% stake in the project. Apparently this would imply a title to 10% of the gas volume for EDF. Moscow's move seems largely political, hoping to enlist French government backing within the EU for South Stream. Such backing - which Moscow also seeks from the German and Italian governments - consists of lobbying within the EU to give South Stream some kind of status as project of European interest and even make it eligible for financial support.

1. The Southern Corridor is a planned energy supply route from the Caspian region, through Turkey and into Europe. This could comprise a TransCaspian pipeline from Turkmenistan to Azerbaijan, and also the planned Nabucco gas pipeline to run from Turkey, through Bulgaria, Romania, and Hungary and terminating in Austria.
2. The Valdai Discussion Club, according to its website, holds a series of annual meetings after being established with the aim of creating an international framework where the representatives of the Russian elites can share information on the development of the country and society with domestic and foreign experts on Russia. The meetings are organized by the Russian News & Information Agency RIA Novosti, the Council for Foreign and Defense Policy, Russia Profile and Russia in Global Affairs magazines, and The Moscow News newspaper. The club's first summit was held in September 2004 in Veliky Novgorod, near the lake of Valdai.

Vladimir Socor is a senior fellow and long-time senior analyst with the Jamestown Foundation. He was formerly a senior research analyst with Radio Free Europe/Radio Liberty in Munich, and is a specialist in the non-Russian former republics of the USSR, Commonwealth of Independent States affairs and ethnic conflicts.

(This article first appeared in The Jamestown Foundation. Used with permission.)

(Copyright 2009 The Jamestown Foundation.)

Russia plays pipeline politics
(Sep 25, '09)

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