Russian president Vladimir Putin said on December 1 that state-owned gas monopoly Gazprom would shelve plans to build the South Stream gas pipeline under the Black Sea, meant to bypass the Ukrainian transit route.
“Considering that we still have not received a permit in Bulgaria, we believe that Russia cannot continue the implementation of this project in these circumstances,” Putin said during a visit to Turkey.
“I am talking about the fact that we have to start construction of this pipeline network in the Black Sea. We cannot start the offshore construction until we receive the [construction] permit from Bulgaria,” Putin told reporters after meeting his Turkish counterpart Recep Tayyip Erdogan, as quoted by Russian business daily Kommersant.
He estimated the value of lost revenue for Bulgaria at 400 million euro a year and also blamed the European Commission for “not contributing to the implementation of this project,” as quoted by Russian newspaper Vedomosti.
Instead of South Stream, Gazprom would build a new gas pipeline to Turkey, with an annual capacity of 63 billion cubic metres – the same as the projected full capacity of South Stream, which was meant to cross Bulgaria, Serbia and Hungary before reaching Austria and Italy.
Turkey would use 14 billion cubic metres of the new pipeline’s capacity, with the rest shipped to the border between Greece and Turkey, reports in Russian media quoted Gazprom CEO Alexey Miller as saying. Gazprom and Turkish gas firm Botas signed a memorandum of understanding to build the new pipeline during Putin’s visit.
Putin said that Russia would re-direct gas flows to other markets, with European customers getting less gas than if South Stream had been built. He said that such a development was to EU’s detriment and damaging to bilateral relations.
The European Commission asked, in December 2013, that EU member states renegotiate their bilateral agreements on South Stream with Russia and bring them in line with EU rules – namely the Third energy package regulations that ban gas traders like Gazprom from owning transport capacities, while also mandating pipeline operators to offer up to 50 per cent of all capacity to third parties. The EC has repeatedly said that South Stream was of little interest to European consumers because the project offered no diversification of energy resources, since it would divert gas currently transiting through Ukraine.
The EC refused to make an exception from the rules for South Stream, with talks on overcoming the legal dispute suspended after Russia annexed Crimea and Russian-backed armed insurgency began in eastern Ukraine. Russia later filed a World Trade Organisation arbitration claim against the EU, accusing the European commission of unfairly targeting Gazprom pipelines with its regulations.
The Commission also launched an investigation into Bulgaria’s decision to award the construction of its stretch of the pipeline, citing suspicions that the now-departed Plamen Oresharski administration might have breached public procurement rules.
(The contract was awarded to a company linked to Russian billionaire Gennady Timchenko, subject to US sanctions stemming from the annexation of Crimea and an alleged close ally of Putin. Timchenko later said that his company would exit the project and cede its stake in the construction consortium to a Gazprom subsidiary.)
South Stream remains a controversial project in Bulgaria, despite most political parties backing the proposal – albeit, often with the proviso of “as long as it meets EU rules” – because of uncertainty over costs and fears that it could further increase Russia’s influence in Bulgarian affairs. Construction estimates rose, earlier this summer, to 3.7 billion euro, with no reason offered by Gazprom for the increase.
The total cost of the project was estimated to have increased to 25 billion euro, although some analysts said that the final costs could prove much higher, given Russia’s track record with large infrastructure undertakings (such as the Sochi Winter Olympics earlier this year).
Putin’s announcement also comes just days after Slovak pipeline operator Eustream suggested that countries in South-Eastern Europe targeted by South Stream, could instead be supplied with gas from Western Europe by building a new pipeline that connected the Slovak and Romanian gas grids. The pipeline would have an annual capacity of 20 billion cubic metres and would cost less than one billion euro to build.