South Stream pipeline runs into delays in Bulgaria

Written by on July 8, 2013 in Business - No comments

Gazprom’s signature pipeline project, South Stream, was behind schedule in Bulgaria, but company management remains adamant that the pipeline will be operational by the end of 2015, officials said after a one-day visit to Sofia by Gazprom chief executive Alexey Miller on July 8.

A day after securing the terms of a deal to potentially build a South Stream extension to Macedonia, Miller’s trip to Sofia did not result in any new developments, other than a reported order from Prime Minister Plamen Oresharski to “make additional administrative efforts” to ensure that the pipeline becomes operational by 2015 deadline.

The announcement was made by Economy and Energy Minister Dragomir Stoynev, who was also in the meeting with Miller. Oresharski did not attend the media briefing after the meeting, nor were reporters given the opportunity to ask any questions.

Significantly, for Gazprom, Stoynev stopped short of promising Bulgaria’s support in Brussels for Russian efforts to secure an exemption for South Stream from the regulations of EU’s Third energy package. One of the key requirements of the package is that third-party companies should be allowed to use 50 per cent of all pipeline capacities to ship gas.

Russia has been trying for years to secure such an exemption for South Stream and its twin, Nord Stream pipeline under the Black Sea (already in operation, if severely under capacity), but so far has been unsuccessful. Russian officials have made it clear in the past that they hoped to do so by having participating countries – Bulgaria, Serbia and Hungary – designate their respective stretches of the pipeline as “national priority” projects and then getting EU to recognise South Stream as a trans-national project.

“It is important to establish the regulatory framework of [South Stream], meaning a concrete result of the negotiations between Russia and the EU,” Stoynev said.

The EU wants to diversify its sources of gas to diminish reliance on Gazprom, which is estimated to ship between 20 per cent and 25 per cent of the bloc’s annual gas consumption. South Stream does not fit into those plans and, furthermore, there remains little clarity about the exact route that the pipeline will take, a fact that the European Commission seldom forgets to point out.

In Bulgaria, the initial schedule envisioned environmental permits being issued by July 2013. This is yet to happen, with public discussions of environmental impact assessment studies still underway and the issuing of final permits still some way off.

The next major step is the start of construction on the Bulgarian stretch, scheduled to begin at the end of 2013. According to Stoynev, the plans remain unchanged and Bulgaria hopes to catch up so that construction can begin on schedule.

According to Miller, the construction of the Bulgarian stretch of South Steam will cost 3.1 billion euro; over time, figures ranging between three billion euro and 3.3 billion euro have been quoted.

Vague future
Such uncertainty is characteristic for the project as a whole, as its final costs remain unclear, although some estimates put the final price tag on South Stream alone at up to $30 billion. Adding in the cost of expanding the gas grid and infrastructure in southern Russia, which currently could not meet Gazprom’s needs given South Stream’s stated full capacity of 63 billion cubic metres a year, the total amount that Gazprom will have to invest may reach $50 billion, according to pessimistic estimates.

Despite the high costs and the uncertainty of getting EU’s regulatory exemption, Russia remains determined to build South Stream in order to completely cut off gas transit through Ukraine. The project’s critics say that the political arguments outweigh the economic rationale, but Gazprom has always rejected such claims, saying that South Stream was a viable project.

In the past, price disputes between Moscow and Kyiv have led to interruptions of gas deliveries to Europe – in 2006 and 2009, the latter hitting Bulgaria especially hard because it coincided with a bitter cold spell. Some analysts have predicted more potential interruptions this coming winter after Gazprom handed Ukraine a seven-billion-dollar bill, saying that Ukraine failed to buy enough gas under the take-or-pay clause of its contract.

(One of the trademark features of Gazprom’s long-term contracts, in addition to linking the price of gas to oil prices, is that customers are required to buy a certain annual amount of gas; should actual consumption be lower than that threshold, the importing nation still has to pay for the difference up to that threshold.)

Yet other analysts see South Stream as Moscow’s main lever of pressure on Kyiv to effectively hand over ownership of the Ukrainian gas grid and the vast underground gas storage facilities, assets that Gazprom has coveted for more than a decade.

Should Gazprom acquire control of Ukraine’s gas grid and minimise any future transit risks, the reasoning goes, it could then scrap South Stream (a claim that company officials have rejected) or severely curtail its capacity (a prospect that has not elicited much comment from Gazprom). Ukraine’s gas grid still requires large investment for modernisation, but such costs – figures between $4.5 billion and $7.5 billion have been bandied about – would be significantly lower than those incurred by building South Stream.

Given the steady drop in deliveries to Europe and revenues from gas sales, as well as Moscow’s recent decision to further postpone an increase in gas prices for domestic customers, such a scenario would save Gazprom billions, which could then be invested in much-needed exploration of new gas fields, analysts say.

However, the talks between Moscow and Kyiv on the future of Ukraine’s gas grid now appear to have broken down – Ukraine would like to see European companies participate in the consortium that will upgrade and manage its gas grid (a development that Russia has rejected) and opposes Moscow’s calls for Kyiv to leave the European Energy Community, as well as abandon along the way EU regulations that are meant to prevent concentration of energy assets in the hands of one player (in this case, Gazprom).

(South Stream’s official start on December 7 2012 was marked with a welding ceremony in Anapa, on Russia’s Black Sea coast, but little progress has been made outside continental Russia since then. Photo: gazprom.ru)

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About the Author

Alex Bivol is the news editor of The Sofia Globe.