EUROPE AND SOUTH
STREAM, Part 1 Gazprom races for EU
loophole By Vladimir Socor
Moscow has confirmed that Turkey will
allow Gazprom's South Stream pipeline to be built
through Turkey's Black Sea exclusive economic
zone, en route to central Europe. Beyond
threatening Ukraine's transit system with
bankruptcy and takeover, Moscow seeks to persuade
European countries along the proposed South Stream
routes that Russia is poised to proceed with
construction. Live on TV on December 30,
Russian Prime Minister Vladimir Putin ordered
Gazprom to start construction work on the pipeline
from Russia to Bulgaria, via Turkey's Black Sea
zone, in "late 2012". Declaratively at least,
South Stream is designed for an ultimate capacity
of 63 billion cubic meters (bcm) of gas annually,
to be reached in four consecutive stages of some
15 bcm annually each.
The stages
correspond to four parallel pipeline strings, to
be laid
on the seabed of the
Black Sea (the four may well be reduced to one,
however, if Russia takes over Ukraine's transit
pipelines). Moscow aims to build South Stream's
first stage and send the first gas flow by late
20150.
That completion target is less
significant or credible, however, than the
starting date of construction. Putin's televised
orders changed this, from 2013 to late 2012. The
undeclared intention is to pre-empt the full entry
into force of the European Union's Third Energy
Package legislation in March 2013. Russia will
claim that South Stream on EU territory (if only
in Bulgaria) pre-dates this EU legislation, and
should therefore not be subject to its
jurisdiction. Moscow would like to make Bulgaria
complicit in this ruse against the EU.
Putin and Gazprom's CEO, Aleksei Miller,
outlined a re-configured version of South Stream
in their December 30 joint appearance. The
Bulgaria-Greece-southern Italy trunkline has now
been dropped. Nevertheless, the total declared gas
offer remains unchanged at 63 bcm per year.
Instead of bifurcating in Bulgaria, a
single trunkline would continue to Serbia,
Hungary, Slovenia, and northern Italy. From that
main line, branch-offs are planned to reach into
Bosnia's Serb entity, Croatia, and Austria. A
branch line from Bulgaria to Macedonia is under
consideration, but Bulgaria has lost a much larger
transit opportunity with Gazprom's scrapping of
the Bulgaria-Greece-Italy line.
The
reconfiguration turns Austria into an ordinary
importer country (undoubtedly for lower gas
volumes), without the advantages of a transit
country and distribution center as originally
planned. This change follows the European
Commission's decision to invalidate Austrian OMV's
sale to Gazprom of a 50% stake in the Baumgarten
distribution center. Gazprom lost interest after
losing part-ownership in that major continental
hub.
From 2009 to date, Moscow has never
identified gas sources (whether in Russia or
elsewhere) for anything near the declared offer of
63 bcm per year. The Kremlin had earlier counted
on third-party gas, from Turkmenistan or a gas
producers' cartel, for the South Stream project.
Russia's own production has remained flat since
the pre-crisis years, with no major new field
development (except in the Far East) since Soviet
times.
Moscow now estimates South Stream's
costs at 16.5 billion euros (US$21 billion)
overall. This includes 10 billion euros for the
920 kilometer underwater pipeline (the four
strings) in the Black Sea; and at least 6.5
billion euros for some 2,100 kilometers of
overland pipelines (without the additional
branch-offs under consideration).
Those
exorbitant investment costs would inevitably be
passed on to consumers through correspondingly
high prices for gas. Gazprom would not have to
face those consumers directly, if the project
materializes even partially. In that case, the
governments and national gas companies would have
to inflict those prices on their own countries,
and face themselves the consumers.
As
planned, South Stream's seabed pipeline is shorter
but more expensive than the Nord Stream One
pipeline on the Baltic seabed. That Baltic line,
completed in November 2011, runs 1,220 kilometers;
and it has cost some 9 billion euros to build,
rather than the 6 billion euros declared at the
start in 2006.
In light of that
experience, cost overruns on South Stream must be
anticipated, and the 10 billion euros initial
estimate questioned accordingly. While Nord Stream
runs on the shallow Baltic seabed, South Stream is
planned to run on the deep to ultra-deep seabed of
Turkey's Black Sea zone, involving higher costs
for materials and construction.
Moscow
proposes to divide South Stream's construction
costs, offshore and onshore, among a multiplicity
of shareholders. Gazprom, however, retains control
of design, construction and future operation on
each section, as well as commercial control of the
overall project as its sole supplier with gas.
For the underwater pipeline with its high
costs and risks, Gazprom has formed an
international consortium in which it holds 50% of
the shares, Italian ENI 20%, and German BASF
(Wintershall's parent) and Electricite de France
20% each. The overland sections are planned as
bilateral, parity joint ventures of Gazprom with
each individual country.
However, Moscow
is playing off its would-be European customers and
Ukraine against each other. Putin demonstratively
instructed Gazprom CEO Miller to keep Ukraine in
the transit business as Russia's long-term
strategic partner. Separately but in the same
vein, Miller declared that "South Stream's
ultimate capacity would depend on Ukraine" - ie,
on Ukraine's decision to yield its pipelines to
Gazprom.
Thus, European countries in South
Stream may get no new gas, or only a trickle of
it, and no new pipeline or storage on their
territories, in the event that Gazprom takes over
Ukraine's transit pipelines and continues using
them at nearly the present throughput levels.
South Stream should not be seen as a
supply project. Its foremost goal is to stop and
roll back the implementation of the EU's Third
Legislative Package on the European energy market.
That anti-monopoly legislation requires separation
("unbundling") of gas production and sales from
transportation and storage. As such, it bars a
vertically integrated monopoly such as Gazprom
from holding ownership stakes in pipelines and
storage sites on EU territory.
South
Stream, however, clashes head-on with that EU
legislation. Through this project, Gazprom would
obtain co-ownership of pipelines in a number of EU
member countries where it currently holds no such
assets. This could nullify the EU's third-package
legislation.
The legal precedent would
enable Gazprom to protect its vertically
integrated assets in other EU countries, including
Germany and the Baltic States. The Kremlin would
cite South Stream, arguing that EU member
countries may override EU legislation on their
territories in partnership with Gazprom.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
