Bulgaria to ask for South Stream review

Bulgaria’s caretaker Prime Minister Marin Raykov said on April 10 that Bulgaria should review its investment decision on South Stream gas pipeline.

Speaking before the weekly scheduled Cabinet meeting, Raykov said that the issue required “yet another in-depth analysis”, in particular whether it was compatible with the European Union’s Third energy package, the regulations meant to liberalise the gas and electricity markets in EU member states.

In the gas sector, specifically, this means that pipeline owners have to set aside up to 50 per cent of capacity for third-party operators – a provision that Russia’s state-owned gas monopoly Gazprom has consistently opposed whenever it is invoked in connection to its existing and future pipelines.

On South Stream, in particular, the European Commission has held just as steadfastly, saying that the pipeline should conform to Third energy package regulations.

(That is, if the pipeline is ever built – the EC has repeatedly said that having not seen any detailed route map and accompanying environmental assessment studies, it did not regard the investment decision memorandums signed by South Stream transit countries, including EU member states Bulgaria and Hungary, as worth commenting on.)

Raykov said that the most “sensitive aspects around this project” were clear, without going into further details, and said that a working meeting on the project should be held.

Speaking after the Cabinet meeting, Economy and Energy Minister Assen Vassilev said, as quoted by news website Mediapool.bg, that such a review was meant to ensure that Bulgaria was not in breach of EU regulations.

“It is an insurance policy for Bulgaria that we will not be sanctioned by Brussels,” he was quoted as saying.

Bulgaria signed up to South Stream in January 2008 (although the investment decision agreement was only signed in November 2012), before the Third energy package regulations went into force in 2009. Russian government officials and Gazprom have argued that the regulations should have no retroactive effect on projects agreed or built before that time.

Failing that, Gazprom hopes that if individual countries that the pipeline will cross – Bulgaria, Serbia and Hungary – designate their stretches of South Stream as projects of national importance, that would qualify South Stream for an exemption from EU regulations as a trans-national project.

Russia’s energy minister Alexander Novak made the suggestion during recent EU-Russia summits, but the EC, so far, has not agreed to this interpretation. In a speech at a trade show earlier this week in Germany, Novak said that Russia was concerned with the Commission’s intention to review the intergovernmental agreements on cross-border pipelines, South Stream included.

The long game

The EU, which seeks to diminish its reliance on Russian gas – Gazprom currently accounts for about a quarter of annual imports of gas into the bloc – has been reluctant to endorse South Stream and its northern twin, Nord Stream, already in operation and pumping gas into Germany under the Baltic Sea (albeit at only 30 per cent of capacity).

Instead, it has backed the Nabucco project to deliver Azeri gas. After years of failing to secure a source of gas, a shortened version of the pipeline was given a new lease on life earlier this year when the consortium developing the Shah Deniz 2 gas field in the Caspian Sea agreed to take a 50 per cent option on the project.

The Shah Deniz 2 group, which includes Azeri state firm Socar, British Petroleum, French firm Total and Norway’s Statoil, is expected to make a decision later this year, choosing between Nabucco and the rival Trans-Adriatic Pipeline proposal.

South Stream, for its part, has had its own problems, with some analysts raising doubts whether Gazprom could afford to build the pipeline when its exports to Europe, and subsequently its profits, are on the decline.

South Stream alone is estimated to cost between $20 billion and $25 billion, with Gazprom footing the largest part of the bill – Bulgaria and Serbia both agreed to pay their share of the costs from transit revenues, meaning that Gazprom would have to take on their costs initially.

Furthermore, the company plans to spend a further $16 billion on the expansion of the gas grid in southern Russia, including the construction of new gas pumping stations – a necessary undertaking in order to get the gas to South Stream’s starting point and keep it flowing.

Some analysts, both in Russia and outside the country, have questioned the viability of the project given its high costs. Many of them agree that political reasons – bypassing a recalcitrant Ukraine, with whom Moscow engaged in “gas wars” in 2006 and 2009, causing interrupted deliveries to European customers – outweighed the economic ones.

Gazprom, while it denies the political subtext of South Stream, has made it clear that it wants to avoid future disputes with Ukraine over transit. Kyiv has long refused to hand its gas grid to Gazprom, but recent negotiations between Russia and Ukraine on the potential creation of a consortium that would manage Ukraine’s extensive network of pipelines and gas storage facilities may yet result in Gazprom gaining control of the assets it has sought for so long.

Should such a scenario that come to pass, South Stream’s 63 billion cubic metres capacity might not be needed anymore, although Gazprom has kept quiet on whether it would scrap the pipeline project if it were to gain control of the Ukrainian gas grid.

(South Stream’s official start was marked with a welding ceremony in Anapa, on Russia’s Black Sea coast, on December 7 2012. Photo: gazprom.ru)



Alex Bivol

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