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09/12/2016

Sinking of South Stream gives Brussels a headache

Central Europe

Sinking of South Stream gives Brussels a headache

Bulgarian PM Borissov will discuss the issue in Brussels on Thursday (4 December). [Dnevnik]

The EU’s success in forcing the Kremlin to cancel its South Stream pipeline has created a new challenge: creating an alternative secure gas supply for southeastern Europe.

Though it became politically toxic after the crisis in Ukraine, the pipeline made sense for countries such as Serbia, Bulgaria and Hungary, because it offered a supply of gas that did not pass through Ukraine and so was at less risk of disruption.

Other ideas have been floated that would give southeastern Europe those secure alternative supplies, but none are as far advanced as South Stream, leaving the region to face several years of uncertainty.

The pipeline would have transported Russian gas under the Black Sea, making land in Bulgaria, and then passing through Serbia and Hungary into Austria. On Monday, Russia announced it was dropping the project.

Moscow fell victim to stalling European demand for gas and plunging energy prices, but also to opposition from the European Commission, which forced Bulgaria to put construction on hold due to the crisis in Ukraine.

In Sofia, Deputy Prime Minister Tomislav Donchev said Bulgaria now expects “special attention” from the EU to mitigate the damage. Prime Minister Boiko Borissov will emphasise that point when he visits Brussels on Thursday (4 December).

“If there is no project, this is a loss for Bulgaria,” Donchev told reporters. “Bulgaria cannot be a bargaining chip in this complex geopolitical situation. It cannot be put in such a role.”

Fragile supplies

For some southeastern European countries, South Stream was an insurance policy against a repeat of January 2009, when a pricing dispute stopped gas transiting Ukraine, leaving them with fuel shortages in sub-zero winter temperatures.

At the time in the Bosnian capital Sarajevo, there was panic buying of electric heaters, while in Bulgaria, schools and kindergartens closed because they had no heating.

“It’s a lose-lose for everybody. There is a bunch of countries, which really have a security of supply problem,” an EU source, who did not want to be identified, said of the decision not to go ahead with South Stream.

South Stream also offered countries along its route – all of them struggling with budget deficits – the prospect of much needed transit fees, and jobs from construction.

The Serbian economy stood to make more than a billion euros just from construction of its leg of South Stream.

“Would it have been better had we had South Stream? Absolutely,” Serbian Prime Minister Aleksandar Vu?i? was quoted as saying by state television. “We are paying the price of a conflict between big powers.”

What next?

The focus in many states is now turning to what could fill the supply gap left by South Stream.

The most viable Western-backed option, the Nabucco pipeline to bring gas from the Caspian Sea through Turkey to Bulgaria and on to Austria, was shelved in part because there was not enough demand to sustain both it and South Stream.

A solution on the agenda now is a proposal to link up Slovakia’s gas hub – which is fed by supplies from a variety of sources – to the Balkans by running a pipeline across the south-western corner of Ukraine and through Romania to Bulgaria.

“Given the circumstances it is the economically and strategically best solution available,” Tomáš Mare?ek, chairman of Slovak pipeline operator Eustream, told Reuters.

A proposal to build a liquefied natural gas plant on the Croatian island of Krk is coming into renewed focus. Tankers carrying Qatari, Algerian or eventually US gas would unload there, and the gas could be shipped on to Hungary and the rest of the Balkans. The US government is a supporter.

“The new development [cancelling South Stream] certainly increases prospects for the Krk terminal to be implemented as a viable alternative supply route,” a Croatian economy ministry source said on Tuesday.

A third option is the Trans-Adriatic Pipeline (TAP). Like Nabucco, it is intended to bring gas from Azerbaijan’s Caspian Sea fields through Turkey and on to Europe. The TAP consortium declined to comment.

Kristalina Georgieva, the European Budget Commissioner, said on Tuesday that the EU would speed up work to help provide more energy security for southeastern Europe, including by financing gas connectors between Bulgaria, Romania and Greece.

Brussels will need to respond quickly because south-eastern Europe will now look to it for help, especially since the EU played a big role in killing off South Stream.

“The onus will be on Europe,” said Emily Stromquist, head of Russian energy analysis at Eurasia Group, a political risk research firm. 

Background

On 1 December, Russia scrapped the South Stream pipeline project to supply gas to southern Europe, without crossing Ukraine, citing EU objections, and instead named Turkey as its preferred partner for an alternative pipeline.

>> Read: Russia says South Stream project is over

South Stream is a Russian sponsored natural gas pipeline. As planned, the pipeline would run under the Black Sea to Bulgaria, and continue through Serbia with two branches to Bosnia and Herzegovina and to Croatia. From Serbia the pipelines crosses Hungary and Slovenia before reaching Italy [see map]. Its planned capacity is 63 billion cubic metres per year (bcm/y).

The key partner for Russia's Gazprom in the South Stream project is Italy's largest energy company, ENI.

Timeline

  • 4 December: Bulgarian Prime Minister Boyko Borissov meets with Commission President Jean-Claude Juncker, Council President Donald Tusk

Further Reading