Russia says South Stream project is over

Gazprom's CEO Alexei Miller. Photo: Gazprom's website

Gazprom CEO Alexei Miller [Gazprom]

Russia scrapped the South Stream pipeline project to supply gas to southern Europe, without crossing Ukraine, on Monday (December 1), citing EU objections, and instead named Turkey as its preferred partner for an alternative pipeline, with a promise of hefty discounts.

The EU, at loggerheads with Moscow over Ukraine, and keen to reduce its energy dependence on Russia, had objected to the $40 billion (€32 billion) South Stream pipeline, which was to enter the EU via Bulgaria, on competition grounds.

The proposed undersea pipeline to Turkey, with an annual capacity of 63 billion cubic metres (bcm), more than four times Turkey’s annual purchases from Russia, would face no such problems. Russia offered to combine it with a gas hub at the EU’s southeastern edge, the Turkish-Greek border, to supply southern Europe.

Alexei Miller, the chief executive of Russia’s state-controlled gas exporter Gazprom, told reporters in Ankara, where he was on a one-day visit with President Vladimir Putin, that South Stream was “closed. This is it”.

A Gazprom communiqué says “New pipeline through Turkey would allow to bring about 50 bcm to the hub at the Greek border.” No details are provided for the further route of 50bcm. Greece consumes some 4 bcm/y.

Putin accused the EU of denying Bulgaria, heavily dependent on Russian gas, its sovereign rights, and said that blocking the project “is against Europe’s economic interests and is causing damage”.

Indeed, the Commission has put pressure on Bulgaria to freeze South Stream, citing breaches to EU law in the intergovernmental agreement for the construction of the pipeline.

>> Read: Barroso warns Bulgaria on South Stream

He announced that Russia would grant Turkey a 6% discount on its gas imports from Russia for next year, supplying it with 3 bcm more than this year.

Miller said Gazprom had signed a memorandum of understanding with Turkey’s Botas on the pipeline under the Black Sea to Turkey.

But the plan remains at an early stage. Russian Energy Minister Alexander Novak said that “energy ministers and companies [on both sides] were ordered to look into these proposals in detail […] It is hard to assess the costs, financial mechanisms, terms of fulfilment for now”.

He also said Turkey was seeking a 15% discount for Russian gas.

At odds with EU?

Nevertheless, EU-candidate Turkey’s deepening energy ties with Russia are likely to raise eyebrows in Europe and the United States, coming as Western powers have imposed economic sanctions on Moscow over its actions in Ukraine, and as Europe tries to lower its energy dependence on Russia, which supplies about 30% of its gas needs, half of that via Ukraine.

“As our cooperation develops and deepens, I think we will be ready for further price reductions,” Miller told reporters in Ankara. “As we develop our joint projects … the level of gas price for Turkey could reach the one Germany has today.”

The South Stream pipeline had exposed cracks in EU strategy as Hungary, Austria, Serbia and Bulgaria among others saw it as a solution to the risk of a repeat of supply disruptions via Ukraine, while Brussels and Washington saw the project as entrenching Moscow’s energy stranglehold on Europe. Yet its appeal has waned as economic growth has stalled, and with Azeri Caspian gas due to land in Italy from 2020.

Carlos Pascual, who until earlier this year was the top energy diplomat at the US State Department, said there was no way that the cancellation of the pipeline damages Europe.

“One could actually argue that in the end, this will save European consumers money by eliminating an unnecessary high cost pipeline that would not have added any additional new supply,” he said.

Pascual said Gazprom’s action could show the effects of US and EU sanctions imposed on Russia for its aggression toward Ukraine. “At a point in time when capital was unlimited, perhaps Russia would not have taken this action,” he said.

A Gazprom analyst agreed the sanctions may have been a factor. “By invading Crimea, Putin has created a major barrier for the South Stream project,” said Mikhail Korchemkin, with East European Gas Analysis. “Gazprom was unable to raise money for the project,” after the sanctions went into place, he said.

Russia is already Turkey’s main energy supplier, and Turkey Russia’s second biggest trade partner after Germany. Those economic interests have outweighed deep differences over Ukraine and especially Syria’s nearly four-year-old civil war.

While Russia backs Syrian President Bashar al-Assad, Turkish President Recep Tayyip Erdo?an has become his most vocal critic, lambasting the UN Security Council, and Russia in particular, for stalling on an international response to the war.

“President [Putin] has a different assessment to us,” Erdo?an told their joint news conference. “We agree a solution is needed, but we differ on the means.”

Dnevnik, the EURACTIV partner media in Bulgaria, quotes Russian President Vladimir Putin who criticised the Bulgarian authorities over their handling of the South Stream project.

“If Bulgaria is unable to behave like a sovereign country, then they should at least ask the European Commission for compensation for the lost profits, because only the direct income to the state budget from transit taxes would be of no less than €400 million per year. But at the end, it’s Bulgaria’s choice”, Putin reportedly said.

The Russian president added that his Bulgarian interlocutors had told him many times that South Stream would be built, because it corresponds to the country’s national interests.

Dnevnik also quotes Traicho Traikov, a former energy minister, who said that Putin’s decision to give up South Stream has taken by surprise everybody, including the Russian Duma and Gazprom.

Traikov should seek international arbitration and compensations from Russia.

Vladimir Karolev, an advisor to the Bulgarian minister of economy Bozhidar Lukarski, also said Bulgaria should seek international arbitration. He also said that all those working for the company “South Stream Bulgaria” should take unpaid leave, adding that their salaries were unreasonably high.

Karolev said that Bulgaria had invested hundreds of millions in South Stream, which it was likely to lose.

Dnevnik also quotes Zhelyu Boychev from the Bulgarian Socialist Party (BSP), who said that Russia’s decision to give up South Stream could not be seen as a surprise, because Moscow had asked Sofia many times to make public ist position regarding the project, the last deadline having been for the end of November.

“I’m extremely disappointed, this is a treason vis-à-vis the future generations”, he said. BSP, who is now in opposition, has strongly supported South Stream. 

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.

Russia signed intergovernmental agreements with:

  • Bulgaria – January 18, 2008;
  • Serbia – January 25, 2008;
  • Hungary – February 28, 2008;
  • Greece – April 29, 2008;
  • Slovenia – November 14, 2009;
  • Croatia – March 2, 2010;
  • Austria – April 24, 2010.

Last December, the Commission said that all bilateral agreements (IGAs) for the construction of South Stream are all in breach of EU law and need to be renegotiated from scratch [read more].

EURACTIV has seen a letter sent by the Commission to the Bulgarian authorities, dated 14 August 2013, which analysed the Bulgaria-Russia agreement in great detail. The six-page document, addressed to the Bulgarian deputy energy minister, Evgenia Haritonova, has never been made public, despite pressure by some MPs in the Bulgarian Parliament to disclose it.

Apart from breaches to EU energy market rules forbidding energy producers from simultaneously owning transmission networks (so-called ownership unbundling), which are common to all seven agreements, the letter identifies the following grievances:

  • Bulgaria committed to provide the most favourable tax regime to Gazprom, which according to the EU Commission is in breach of the EU's state aid rules;
  • At one point, the inter-governmental agreement (IGA) stipulates that Bulgarian and Greek companies would be subcontracted, and at another, that preference would be given to companies from the states of the Parties (Bulgaria and Russia), which is against EU competition rules;
  • The IGA stipulates that tariffs for using the pipeline would be established "by the Company", which is in contradiction with the powers of the national regulator to approve transmission tariffs in accordance with EU law.

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