Russia launches construction of South Stream gas pipeline

Russian president Vladimir Putin gave the start to construction of South Stream gas pipeline on December 7, Moscow’s ambitious geopolitical undertaking meant to keep Europe firmly in Gazprom’s embrace while marginalising Ukraine as a transit country.

Putin described the start of construction as “an important event not only for Russia’s energy industry, but for Europe’s energy industry”. When completed, the pipeline will “create the conditions for secure and unconditional delivery of Russian gas to our main customers in Europe,” he said.

But despite the ceremonial welding of the first two pipes near Anapa, on Russia’s Black Sea coast, doubts persist among many analysts whether the project will prove economically viable; others insist that the start of construction on South Stream has dealt a mortal blow to the EU-backed rival project, Nabucco.

Even as Russia’s state-owned gas company Gazprom announced in recent weeks the signing of final investment decisions for South Stream’s land sections in transit countries – Bulgaria, Hungary, Slovenia and Serbia – the EU remained adamant that it has not seen a definitive route for the pipeline or environmental impact assessment studies, reason enough not to take the final investment decisions seriously.

EU’s energy commissioner Guenther Oettinger reportedly declined an invitation to attend the ceremony on December 7, EU news website reported. (He was not alone – while Russian news agency RIA Novosti said that cabinet members and diplomatic representatives from 12 countries attended the event, Bulgaria’s Regional Development Minister Lilyana Pavlova was the only one namechecked by Russian media, in a report by the state-owned English-language TV station Russia Today).

The EU has been looking to decrease it dependence on Russian gas, which now accounts for about a quarter of its annual consumption – as well as investigating Gazprom for alleged abuse of its market dominant position in a number of Eastern European member states, an investigation that could cost the Russian company more than $1 billion in fines if it is found guilty of tampering with the market.

But even without much recent progress on Nabucco, which has now been shortened in half but could see all its problems solved in one swoop if developers of a major gas field in Azerbaijan pick the pipeline to deliver the gas to Europe, Russian exports of gas to Europe have declined this year. At the same time, Gazprom has been forced to offer several European countries, Bulgaria included, price discounts and reductions of the amounts that the countries have to buy under take-or-pay clauses.

This has led to questions whether Russia could use South Stream to its maximum projected capacity, 63 billion cubic metres a year. The questions have clearly been loud enough to warrant a response from Gazprom’s chief executive Alexey Miller, who said on December 7 that the full capacity has already been “distributed”.

South Stream is as much a geopolitical tool as it is an economic enterprise. When completed, it will allow Gazprom to completely avoid using Ukraine’s gas grid to pump gas to European markets. Price disagreements between Moscow and Kyiv have already led to two interruptions of service in January 2006 and January 2009 (the latter found Bulgaria in the grip of a bitter cold snap without its main source of energy resources for heating utilities).

Miller made as much clear with his statement, saying that Gazprom’s main benefit from South Stream would be “increasing the amounts of Russian gas for export and solving the problem of transit risks.”

Ukraine, which has refused to hand its gas grid to Gazprom unless the EU was co-opted in a consortium to modernise its pipelines, has been searching for alternative sources of gas, which has included talks to buy gas from Germany and building a liquefied natural gas terminal near Odessa, on its Black Sea coast.

Although South Stream’s exact route is yet to be determined, the pipeline is expected to be about 2500km long, including a 900km underwater stretch crossing the Black Sea, which will run ashore near Varna in Bulgaria. From there, it will run westward before taking a turn to the north into Serbia and Hungary, turning west again into Slovenia and northern Italy.

Plans to build a branch south into Greece – which would then continue to southern Italy, passing under the Adriatic Sea – have been largely abandoned. Similarly, initial designs envisioned South Stream’s terminus being in Austria, but that plan too has fallen by the wayside. Instead, smaller pipelines branching out to Macedonia and Croatia are envisioned.

The total costs of the project have been set by Gazprom at about 16 billion euro, though some analysts have described the estimate as being on the conservative side. Worst-case scenario forecasts see the price rising as high as 27 billion euro.

The Bulgarian stretch is set to cost 3.3 billion euro. The Government in Sofia has refused to offer any Budget guarantees, so Gazprom agreed to take on the full costs of construction, to be repaid over a period of 15 years using the revenue from transit fees. Construction in Bulgaria, to be carried out by a joint venture between Gazprom and state-owned Bulgargaz, could start as early as 2013.

The pipeline is set to become operational in 2016, reaching full capacity in 2018.




Alex Bivol

Alex Bivol is the Deputy Editor-in-Chief of The Sofia Globe.