South Stream Moving Toward 2015 Completion

While the Western news outlets have been full of information on the Shah Deniz 2 consortium choosing the Trans Anatolian Pipeline (TAP) to deliver Caspian gas to southern Europe, Russia has quietly continued work on the rival South Stream pipeline.  The pipeline, which will cross the Turkish economic zone in the Black Sea, is scheduled to make landfall in Varna, Bulgaria.  After that, plans call for the line to split.  One spur will provide product to Russia's traditional client states in Central Europe; the other will challenge TAP by transiting Greece and ending in Italy.  Italy's biggest energy company, Eni SpA stated it expects to receive the first gas from South Stream by the end of 2015.

The key to the project is Bulgaria:  both the pipeline's landfall and the location of the split.  Bulgaria's Minister of Transport, Daniel Papazov, confirmed the project was a top priority of the government, and that everything was ready to begin construction.  "This project will be implemented very soon," he said.  According to a Gazprom spokesman, the company is ready to begin construction in Bulgaria by the end of 2013, with the first phase completed by 2015. Such planning is ambitious, as the project is already behind schedule.  Gazprom CEO Miller said, "The project has been implemented with certain delays from schedule...We are however certain that the deadlines for the start of construction will be met."  Bulgarian Minister of Economy and Energy confirmed Miller's statement:  "We will speed up work on South Stream as it is important to diversity our natural gas delivery routes and have direct deliveries from Russia without passing via third countries.  We need to have final detailed site development plan, environmental impact assessment and front end engineering design by the end of this year and apply for construction permit."

According to  Deputy Head of Project Management Alexander Syromyatin, the need for South Stream continues.  "South Stream is an answer to the increased demand in natural gas and will enable diversification of the Russian gas supply routes to the EU, decrease transit risks, guarantee stable gas supplies to Central and southern Europe and help improve the environment," he said.

The project has the support of the overwhelming majority of Bulgarians.  According to a survey conducted by World Thinks, 68% of Bulgarians support the project.  "Very few feel opposed or strongly opposed," said company director Ben Shimshon.  "Only 5% felt negative about it and the remainder were either unsure or undecided on how they feel."  Shimshon said the public supported the project primarily for the jobs it would create, with good gas prices in second place.  "The public are much more clear," he said, "that there will be economic benefits:  61%  of people agree that Bulgaria will benefit economically from the pipeline."

One reason support may be so high is that the project will not cost the Bulgarian taxpayer any money.  Gazprom CEO Miller confirmed that Russia was prepared to fully finance the construction of the Bulgarian section.  Russia would lend Bulgaria 3.1 billion euros (approximately 5 billion dollars) to be repaid with transit and gas transportation fees.  Bulgarian Economics Minister Dragomir Stoynev confirmed "The South Stream will be financed on a project principle--there will be no money of the Bulgarian taxpayers to be spent."

Not everyone agrees that the pipeline should go through Bulgaria, however.  Julian Lee, a senior energy analyst at the Center for Global Energy Studies in London, claims that Bulgaria does not need South Stream.  "Bulgaria will still have access to gas from Azerbaijan via TAP and the Interconnector Greece-Bulgaria," he said.  Lee is joined by the citizens of Varna, the city where the pipeline will land.  The townspeople are concerned about noise and air pollution from both the construction and the operation of the pipeline and compressor station, to be built less than one mile from the city's southern suburbs.  The entry point is supposed to be the Pasha Dere Beach, which is a protected area under the EU's Natura 2000 program.  However, the project's environmental impact statement lists a number of advantages for Varna, including 2500 new jobs, profits of 30 million euros for the port, and a local business boom with profits for all.(The job creation figure is suspect, since South Stream Bulgaria's CEO Georgi Gegov claims the construction phase will create 2500 jobs in the entire country, not just in Varna.  Once it is built, South Stream Bulgaria will need an addition 3500 jobs to service and supply the pipeline.

Russia also plans a branch of the pipeline to go to Macedonia.  Russian Prime Minister Dmitry Medvedev ordered the Russian energy and foreign affairs ministries to begin discussions with Macedonia for a feasibility study.  Assuming this study shows the viability of the spur, the two countries would establish a 50/50 joint venture to complete the project, although Russia would retain the right to use the pipeline's full capacity, according to a Russian draft agreement that was signed by both countries on July 23.

Serbia is also excited (73% public approval rating) about the pipeline.  Serbian Prime Minister Ivica Dacic said, "South Stream is the most important international project that Serbia is currently involved in and will be key to the country's economic development, ensuring job creation, and energy security for the region...Our objective is to ensure energy sector supply and develop our partnership with Russia."  The Serbian Minister of Energy predicted the pipeline would create at least 1,000 new jobs.

What is clear is that, with Central Europe mired in a recession, the lure of jobs is stronger than the fear of dependence on a Russian monopoly for energy supplies.

South Stream: Plans Still Premature

Russian President Vladimir Putin travelled to the town of Anapa on the coast of the Black Sea, to participate in the inauguration of the South Stream pipeline.  On December 7, 2012, the first two sections of the long-awaited, multinational, natural gas pipeline were welded together under the gaze of various industry leaders and heads of state.  This fulfilled Putin's December/January directive to Gazprom leader Alexey Miller that the pipeline had to be launched by the end of 2012.  "Today we are attending a very important event, an event that is important not only for Russian energy but for European energy as well," said the Russian President.

Putin's congratulations may be a bit premature.  There are still a number of issues surrounding the proposed pipeline that have yet to be addressed.  The biggest issue, in the middle of the shale gas revolution, is that the pipeline has a capacity that dwarfs any projected European need for Russian gas.  Mikhail Korchemkin, founder and managing director of East European Gas Analysis, noted that once the annual 63 billion cubic meters of South Stream gas is added to Russian current capacity, Gazprom would have the ability to deliver 318 bcm to Europe, twice what the company has promised to Europe by 2020.  "Gazprom has abandoned its guiding principle--sell gas before building expensive infrastructure," he said.   These large infrastructure projects are beginning to pay a toll:  Nordstream is only transporting 30% of its capacity, and Blue Stream is only at 37% of capacity, according to members of the Bulgarian right-wing opposition.

Gazprom currently lacks the supplies to build the pipeline.  According to Jonathan Stern, head of the Natural Gas Research Program at the Oxford Institute for Energy Studies, Gazprom has not yet ordered pipe or organized barges for the pipeline.  He predicts that the offshore section of the pipeline cannot begin until at least 2014.

The gas is being shipped to the European Union, and so the project must meet the demands of the European Commission.  They have not done so, and European Union Energy Commissioner Guenther Oettinger did not attend the ceremony.  Oettinger had previously referred to the pipeline as a "phantom project."

The Commission has, of course, read in the press that South Stream will pass through the Turkish economic zone in the Black Sea, make landfall in Bulgaria, and then proceed though Serbia, Hungary, Slovenia, Austria and Italy.  The reaction from the EC has been telling.  Guenther Oettinger's press spokeswoman Marlena Holzner said, "For the moment we have not seen a plan for South Stream.  We take note of all the media reports but neither our experts nor Commissioner Oettinger have seen a plan where it says South Stream will start here, it will deliver gas to this entry point and it will go exactly following this route and it will deliver gas from Russia.  We have not seen this."  Holzner expanded her comments:  "To the European Commission, it has never been communicated that there is a final route...There is no environmental impact assessment for the whole route.  As far as we can see it, we don't regard this as a final investment decision."  

By 16 February 2013, Russia needs to submit to the EC copies of the intergovernmental agreements it has negotiated with the transit states, and the EC then has nine months to express its concerns.  In addition, before construction can truely get underway each country involved must submit both environmental impact studies, and social impact studies.  Bulgaria, in particular, must submit an environmental impact study on the pipeline's landfall. Countries who are not party to the agreements but who are adjacent to the route also need to weigh in on a transboundary assessment.   Russia appears to be aware of these issues, as the Russian-European Chamber of Commerce President Sergei Shuklin confirmed the 7 December ribbon cutting was only a signal of Russian seriousness about the project.  "Everything will be concluded (according to EU legislation), especially since Russia just became a member of the World Trade Organization."

As of this writing, South Stream consists of two pieces of pipe welded together on Russian soil, with no permission to extend that pipe into European territory.
 

Gazprom Formally Agrees to Build South Stream



The speculation is over:  after years of planning and speeches by Russian President Vladimir Putin, Gazprom has formally committed to the construction of the South Stream natural gas pipeline.  This route, to be filled with natural gas Russia formerly transported to Europe via Ukraine's Cold War-era Peace Pipeline, is expected to deliver 63 billion cubic meters (bcm) annually to Europe.  According to the company, it has signed the final investment agreement with its European partners and will commence construction in December 2012.

The last hold-up before making a financial commitment had been Bulgaria, the first European country the pipeline would transit.  The Bulgarians had little choice except to sign.  They had been receiving Russian gas since 1 April at an 11% discount, but the discount was predicated on Bulgaria's agreement to South Stream.  If Bulgaria had refused to allow Gazprom to build the pipeline, it would have been obligated to repay the discounted funds, estimated at $70 million.  Russia increased the pressure when state-run Atomstroiexport filed a $1.3 billion compensation claim against Bulgaria before the International Court of Arbitration for a planned nuclear power plant at Belene that Bulgaria cancelled.

In the end, the Bulgarians received a sweet deal.  When the government signed the investment agreement with Gazprom, they also signed a long-term gas contract with a 20% price discount beginning January 1, 2013.  While the discount is a plus, Gazprom also got good news:  maintenance of the linkage between oil and gas prices, and a take-or-pay obligation for 80% of the contracted 2.9 bcm annually.  "We've agreed on very preferential prices for Bulgaria," said Gazprom CEO Alexey Miller.  "With South Stream, Bulgaria becomes the biggest transit country for Russian gas in Europe."  Interestingly, Miller denied the price discounts were part of the South Stream negotiations.  "These issues are not related," he said.

Bulgaria does not have to pay anything for construction of its share of the pipeline.  Gazprom will lend the funds to Bulgarian Energy Holding, to be repaid out of dividends earned on the project.

Obtaining financial commitments is not the entire battle, however.  Since the pipeline will go through members of the European Union, the European Commission must approve an environomental impact statement before construction.  Without an official communique to get the review started, the European Commission does not even acknowledge that South Stream is a viable project.  "It was never communicated to the Commision that South Stream has a final route," said EC energy spokesperson Marlee Holzner.  "We don't regard this as a final investment decision."

There have also been various reports that Russia believes a quick start to the project will mean the project does not have to meet the EU's third energy liberalization package, requiring the divestment of the distribution network from the transportation network.  According to the Commission, however, the package is already in effect and South Stream must abide by it.  To that end, it has held meetings with South Stream transit countires to make sure any bilateral agreements with the Russians will comport with EU rules and regulations.

Bulgaria Playing Both Sides

Against all expectations, Bulgaria has emerged as a key player in the battle for control of the Southern Energy Corridor.  This Black Sea country is astride the most logical route between the gas fields and European markets for both South Stream and TANAP.  Bulgaria has agreed to cooperate with both consortiums, while playing for maximum advantage.

 

In August 2012, Bulgaria and Gazprom announced they would conclude an investment contract in November for the construction of South Stream.  Simultaneously, Bulgarian Minister of Energy and Economy Delyan Dobrev announced a new gas-supply contract that featured an 11% price in gas for the remainder of 2012.

 

Once having achieved its goal of obtaining Bulgarian cooperation, however, the Russians appear to have upped the ante.  For construction of South Stream to begin, the Russians declared they wanted $1.3 billion in compensation for the Belene nuclear plant.  This was a project that the former Bulgarian government had contracted with Russia, but that current Prime Minister Boiko Borisov cancelled when he took office last year.  Borisov was outraged.  "We are observing all our commitments on South Stream.  For Belene we continue to negotiate...That is why I think we have been absolutely treacherously surprised by that claim."  Bulgarian observers pushed back, threatening that the government would be forced to cancel South Stream.  Ilian Vassilev of Innovative Energy Solutions said, "There is no way Bulgaria can pay both the claim and let South Stream happen."

 

The dispute has led to a delay in a visit by Russian President Vladimir Putin, who was supposed to be present in Sofia on November 9 for the signing of the South Stream papers.  Instead, Putin has postponed his trip until December, possibly signalling his unhappiness with Bulgaria's recalcitrance.

 

Meanwhile, in September 2012 the European Union criticized Bulgaria for  supporting South Stream while lacking sufficient commitment to the EU's version of a Southern Energy Corridor.  The EU's concern was that South Stream only diversifies supply routes from Russia, but does not diversify the ultimate, Russian source of supply.  "Bulgaria needs to complete the ongoing investment projects on gas interconnectors with Romania, Serbia and Greece, and make reverse flows possible on its interconnector with Turkey...Bulgaria also needs to play a more proactive part in opening up the Southern Gas Corridor, which has the potential to diversify supply sources," said a leaked document.

 

The Bulgarian Prime Minister was non-plussed.  In an interview with Euronews, Borisov said he was commited to the European vision.  "It is very important that the Turkish Tanap-pipeline reaches Bulgaria and that Nabucco-West and the South East Europe Pipeline move closer to Europe...Regarding the Nabucco project, Bulgaria has done all it can:  the parliament approved its construction.  We have signed all the documents that are required and we can start construction work tomorrow if necessary.  I am looking forward to the launch of the Nabucco project."

 

Despite any agreement with Nabucco, however, as of 30 September 2012 there was no agreement between Bulgartransgaz and Turkey's Botas to connect with the Turkish pipeline network.  Without such a connection, any discussion of Tanap or Nabucco is moot.  To give the country some negotiating room, Bularia delayed its plans one year to connect its gas network with neighboring Balkan countries.  Bulgartransgaz announced the connection would take place in 2014, instead of the originally-planned 2013.

 

 

Higher Priced Gas Not Detering South Stream

Faced with competition from TANAP, Nabucco-West, LNG and alternative fuels, Gazprom is coming to grips with lower anticipated revenues from their proposed South Stream pipeline.  Sergei Komlev, head of price formation for Gazprom Export, believes Europe will buy the gas anyway.  In June, he told the World National Oil Companies Congress in London, "Our estimate is that the difference (between hub-priced gas and South Stream supplies) is $2 per million British thermal units," according to Reuters.  Komlev said the price would be attractive because Gazprom would provide South Stream gas via long-term contracts, which would provide more security of supply than spot-priced hub gas.

Revenues will suffer, however, because of price breaks to various countries.  As an example, to keep Bulgaria in the South Stream consortium, Gazprom has agreed to an 11% price discount for the upcoming year, a loss of USD 115 million.  Bulgarian Economy and Energy Minister Delyan Dobrev gave the results of these negotiations to reporters in June.  "Currently, there is no danger of Bulgaria not participating in South Stream," he said.  "We support the South Stream project.  We believe it is profitable for Bulgaria, but we have to specify all the details."

While Dobrev is pleased with the negotiations, there is a question as to whether Bulgaria can finance its share of the pipeline.  According to an unconfirmed source, Gazprom might pay for the Bulgarian section of the pipeline and then repay itself by deducting the gas transit fees the company would otherwise owe the country.  Regardless of the financing, South Stream has begun the Environmental Impact Statement for the 250 kilometer section that will run off the Bulgarian Coast, according to the Sofia News Agency.

South Stream has also recruited a new member of the consortium, Macedonia.  According to Macedonian Vice Premier and Minister of Finance Zoran Stavreski, membership will secure gas supplies for future generations of Macedonians, although the country was not originally considered for membership.  "This was in fact done (through a myriad of contacts and high-ranging talks) from a position where there were no plans to be included in the project," he said.  "There is no more dilemma--Macedonia is joining the international gas pipeline corridor 'South Stream' as it has been agreed between PM Nikola Gruevski and President Vladimir Putin.  We've received the text of the draft-agreement."

Russian President Putin continues to remain optimistic toward the project, and in June said the pipeline could begin natural-gas flows as early as 2014.  This would inaugerate the pipeline years before the Nabucco-West rival, which is scheduled for completion in 2017-2018.

Nabucco Reduced to Rump Project

With the announcement of the proposed Trans Anatolian Natural Gas Pipeline (TANAP) in December 2011, Nabucco has recreated itself as a pipeline proposal that begins at Turkey's western border.  Instead of being the European Union's premier pipeline project in the Southern Energy Corridor, it is now a regional competitor to the Trans Adriatic Pipeline (TAP) and the Interconnector Turkey Greece Italy (ITGI).

The weakness of the original Nabucco proposal could never be overcome:  there was no source for the natural gas that the pipeline was supposed to carry.  In January Sergey Pravosudov, Director of the Russian Institute of National Resources, said, "Europe has long been discussing supply alternatives.  However, nothing is being done in their main project Nabucco.  Europeans themselves admit that the more time passes the fewer chances remain to breathe life into Nabucco."

Because of this inaction, Turkey decided it could not wait for the European actors to get their act together, and Azerbaijan did not want their market to be limited to Russia.  According to a report in Hurriyet Daily News, a Turkish Foreign Ministry official stated, "With the economic slowdown that will reflect in the use of natural gas, Europe put the breaks on."  A Turkish Energy Ministry official added, "Azerbaijan wanted to sell the gas that it will produce from Shah Deniz 2 gas fields.  It did not want to sell it to Russia and did not have the time to wait for the EU to decide."  Azerbaijani parliamentarian Valeh Alasgarov characterized Europe's approach as indifference.  "No one takes care of this project," he said.  The result was TANAP, an abridged Nabucco to carry 16 bcm of natural gas from the fields.  Turkey would consume 6 bcm themselves, and pass 10 bcm to its Western border for onward movement to Europe.

Mark Adomanis, a contributor to Forbes magazine, declared Nabucco a failure.  As a project to demonstrate European unity against Russian energy policy, the pipeline showed the European Union as "almost comically incompetent and incapable."  Adomanis noted that in 2012 Gazprom was arguably more deeply entrenched in Europe than it ever had been.  Jamestown Foundation's Vladmir Socor noted that while the Nabucco shareholders would never leave the consortium, there were chinks in the armor.  German shareholder RWE was making overtures to TANAP, and the Turkish government (owner of the shareholder Botas) was prioritizing TANAP which was "easier to implement" than Nabucco. Hungary's MOL went on record that as long as there was no definite source of natural gas supply, no final investment decision could be reached on the project.   Julian Lee, an analyst at the Center for Global Energy Studies, declared the project dead.  "I think that Nabucco in the way that it was originally envisaged as a pipeline running from Turkey's eastern border all the way to Europe...is probably over.  I don't think that is going to happen.

In April, Hungary's Prime Minister Viktor Orban met with Gazprom CEO Alexey Miller.  Less than a week later, he announced that MOL would leave Nabucco in favor of South Stream.  In an email, they held out hope that they could rejoin a Nabucco in a different format.  MOL cited "uncertain costs and gas sources and, with the current structure and project management, the implementation of the Nabucco project is not secured.  We believe in the South Corridor concept, that could eventually also include a re-considered Nabucco."  

Austrian shareholder OMV began to consider a Bulgaria to Austria version of Nabucco.  It would use the intergovernmental agreements and regulations that had been negotiated for the original Nabucco, and would cost considerably less since the distance would be shorter.  The consortium submitted the modified proposal for a 1,300 km pipeline to the Shah Deniz consortium.  Nabucco's Managing Director Reinhard Mitschek put the best face he could on it:  "We are convinced that we have submitted a competitive and comprehensive proposal...and that this proposal represents a win-win situation for our shareholders and for suppliers alike."  In changing its size, Nabucco West may have lost the support of the EU.  European Commission spokeswoman Marlene Holzner told the press it did not matter whether Nabucco or a rival won, as long as the EU got direct access to the Caspian gas, and that the initial 10 bcm capacity could be increased in the future.

Nabucco's construction costs for a 10 bcm pipeline are now approaching the per kilometer price of the 63 bcm South Stream pipeline, according to Investcafe's Grigory Birt.  Given the convergence in price, he predicted the new Nabucco had little chance for success.  "The lower the capacity of the project, the less profitable that project will be," he said.

While the final decision rests with the Shah Deniz consortium, the question remains if the European Commission will bring enough political pressure to bear to keep Nabucco-West in the game.  The original Nabucco was designed to carry only 5% of the projected natural gas needs of Europe, and Nabucco-West has less than one-third of the original capacity.  The new proposal does little to meet Europe's desire for a modicum of energy independence from Russia.

Russia Buys Bulgarian Support for South Stream

Since coming to power in 2009, Bulgarian Prime Minister Boyku Borrisov has halted every Russian energy project in his country.  Before he was even sworn in, he asked former energy minister Petar Dimitrov to halt negotiation on all energy projects.  Since then, he cancelled his country's involvement in the Burgos Alexandroupolis pipeline, and the partially completed Belene nuclear power plant (one of the largest Russian energy projects in Europe).

As Andrew McDowall reports in his Financial Times blog, however, this has not landed Bulgaria in hot water.  One day after announcing suspension of the power plant, Bulgarian Minister of economy and energy Delyan Dobrev held meetings with Gazprom chief Alexey Miller.  At the end of the meeting, the leaders announced that Bulgaria would receive a price reduction for natural gas purchases of 11.1 percent for nine months.  This is a significant saving, since Bulgaria imports 100% of its natural gas from Russia.

Prime Minister Boyko linked the price reduction to the construction of South Stream.  He said that the only condition for the price discount was "honest and open relations" between the two sides, but that Bulgaria was ready to provide "full cooperation" for the South Stream project.  "You bring in pipes, you bury them underground, you take taxes, for many years, this is budget revenue for decades.  In short, full cooperation on the project," he told Darik national radio. 

By securing Bulgaria's cooperation, South Stream can speed up its construction plans, as Russian President Vladimir Putin has ordered.

Transneft keeps hope for Burgas Alexandroupolis

Russian oil pipeline giant Transneft has decided to wait out the term of Bulgarian Prime Minister Boyko Borisov who has killed the Burgas Alexandroupolis oil pipeline.  Transneft vice chair Mikhail Barkov, who also serves on the Trans-Balkan pipeline consortium advisory board, said that the company will build the pipeline at a more propitious time.  "We will not leave the project behind," he said.  "We are just freezing it, leaving the requisite amount of resources in it."
Referring to the Prime Minister, Barkov told news reporters, "Boykos come and go, but Bulgarians' love for Russia is forever."    Another news source quoted Barkov as stating, "Bulgaria cannot be reduced to Boyko Borisov."

This is not the first time that Transneft officials have stating their continuing interest in the Balkan pipeline project, but it is unusual for the attacks on the Prime Minister to be so personal.  Barkov seems to have learned from the Ukranian experience that a new electoral cycle can put a pro-Moscow man back in the drivers seat--and he is prepared to wait.

South Stream Becoming a Reality

On December 29, 2011, Turkey and Russia signed an agreement to allow the South Stream natural gas pipeline to transit the Black Sea waters in Turkey's economic zone.  This was an important development, in that South Stream now has the necessary permissions to bring the Russian pipeline system to Europe via the Southern corridor.  Russian Prime Minister Vladimir Putin was so excited by the development that he ordered Gazprom to move up the date to begin construction from 2013 to 2012.
There has been much speculation that the pipeline is a bluff--designed to either stop Nabucco construction or to force Ukraine to bend to Moscow's will.  The truth may be more obscure.  US Special Envoy for Eurasian Energy Richard Morningstar commented in a recent speech, "The Russians have...taken to building the South Stream Pipeline, although they are the only ones who know why."
The fact is that, regardless of what the original thoughts may have been concerning the pipeline, Russia has made so many commitments concerning this pipeline that it would be almost impossible for them to back out.  There are three Western European private companies who are partners in this project.  It is extremely doubtful that Germany's Wintershall (a division of BASF), Italy's ENI, and France's EDF would incur start-up expenses in support of a Russian political ruse.  Gazprom still controls 50% of the consortium and could unilaterally kill the project, but it would incur the wrath of its other partners.
The same goes for the various governments that have signed on.  Bulgaria has hired a company for a feasibility study, Slovenia has created a JV to build and operate their share of the pipeline, Serbia looks forward to being a key transit center, Greece (now to be on a spur instead of the main line) has identified the pipeline as a national priority, etc.
Much has been made that South Stream has not identified where it will get the 63 bcm annually it needs to fill the pipeline.  In fact, South Stream never planned to identify new sources of gas, but to use the gas that is presently transiting the Ukrainian pipeline system, according to South Stream CEO Marcel Kramer.  European Energy Review published an interview with Kramer on this subject.  "The basic and overriding target of Russia is to ensure the technical, managerial and economic reliability of its gas supply.  That is where South Stream comes in.  Don't forget that the pipeline system in Ukraine is in a poor state.  It's being said that it is old, dilapidated, without an integrated management system.  To upgrade the entire route through Ukraine would also cost a lot of money.  Then you get into questions of ownership, operatorship, who puts up the money, the chances of political interference.  The bottom line is, is this an arrangement that the buyers of gas in Europe can rely on?  If you put all this together, the answer is clear," he said.
Ukraine, of course, is opposed to the new pipeline.  Energy Minister Yuri Boiko called South Stream a threat to Ukrainian national interests.  "We will always be against it," he said according to UPI.
Another question has been whether there is sufficient demand for Russian natural gas to justify the building of the pipeline.  Andrea Bonzanni, former consultant to the UN and the World Bank, wrote in World Politics Review that the mid- to long-term outlook for gas demand does not seem to justify the construction of both Nabucco and South Stream.
The Russians believe Europe has a long-term need for additional gas, justifying the construction.  After a meeting between Gazprom Chairman Alexi Miller and Bulgargaz executive director Dimitar Gogov, UPI reported the participants issued a statement that both sides "share the opinion that given the inevitable gas demand growth in Europe, timely implementation of South Stream would meet the interests of millions of European consumers."  Miller has said, "It is clear that there will be need for additional pipeline capacities" that would help mitigate risks that could have a serious impact on the European market, according to Platts.  Alexander Medvedev, deputy chair of the Gazprom Management Committee, wrote in Today's Zaman, "The fact that South Stream is primarily an investment in energy security, not in boosting the market share of Russian gas, also means that it does not compete with other pipeline projects that intend to import fresh supply volumes from other possible gas sources.  South Stream does not oppose these projects." RIA Novosti quoted Gazprom's Medvedev, "Even if we take into account the Nord Stream, the South Stream, the Nabucco and liquefied natural gas, all the same, the shortage of gas supplies to Europe will be some 530-700 billion cubic feet."
Some within the European Union appear to agree with this analysis.  European Energy Commission Gunther Oettinger said "we don't want to block South Stream," and arranged for South Stream executives to make their case to the commission in May. At that meeting, the Russians took the opportunity to make the case that South Stream is a continuation of Russian trans-border pipelines, and third parties should not have access to it.  Ths would guarantee a Gazprom monopoly on the project flow. CEO Kramer said requiring the pipeline to open to competitors would affect the project's rate of return, and could make the project more "difficult" to carry out, according to the New York Times.  Oettinger, however, remained adamant:  "If South Stream...gives access to gas independents active in Russia, then South Stream would deliver on two essential criteria:  namely diversification of routes and counterparties.  That means a stronger contribution to European diversification efforts," he said in a speech reported by the Wall Street Journal.
Whether the doubters or the believers are correct, however, it appears that the construction of the pipeline will begin within the next twelve months.

Bulgaria Cancelling Burgas-Alexandropolis Pipeline

After 15 years of planning, the government of Bulgaria has announced it will cancel the Burgas-Alexandropolis Pipeline in the next twelve months, because it is no longer financially viable. The argument is a bit disingenuous, since the costs escalated while the Bulgarian government used environmental concerns to delay approval of the project.

The pipeline was supposed to allow Russian crude to reach the Mediterranean while bypassing the straits of the Bosphorus. Bulgarian Prime Minister Boyko Borisov came to power in 2009 promising to cancel the project which had been opposed by residents of the towns the pipeline would transit. He returned proposals three times for inadequately addressing environmental concerns. Other investors in the project recognized this as a delaying tactic. Transneft spokesman Igor Dyomin said, "The Bulgarian side has three times given negative conclusions on the ecology (of the pipeline project) with the suggestion that the project should be improved. The last time their arguments were totally facitious, and we have got the impression that they intend to play for time instead of working on the project," according to Business Insider. Borisov's ecological bluff was called in November 2011, however, when the Environment and Water Ministry approved the last environmental impact statement.

Bulgaria owed $8.2 million dollars to its partners in the project. As a result of their failure to pay, Russian pipeline operator Transneft announced in July that it was freezing its involvement in the project. "God save anyone from partners like our Bulgarian friends," commented Transneft chief exectuvie Nikolai Tokarev.

Bulgaria is apparently blaming Transneft's freeze for the pipeline problems, rather than its own instransience. The Sofia News Agency quoted Energy Minister Traicho Traikov after a cabinet meeting: "Bulgaria's partners in the pipeline deal accused it of delaying the project quite a long time. But now it turns out it is not Bulgaria, but the other countries, which are at fault and this is the reason why we decided to walk out of this agreement. It is not Bulgaria which should be criticized for failing to meet its commitments." Traikov is proposing the dissolution without penalty of the trilateral cooperation agreement among Russia, Bulgaria and Greece; or, Bulgaria will withdraw unilaterally from the agreement.

For Transneft's part, they are considering other options to transit Greece while bypassing Bulgaria.

Bulgaria offers Lifeline to Burgas-Alexandroupolis Pipeline

The Bulgarian government of Prime Minister Boyko Borisov has thrown an unexpected lifeline to the Trans Balkan Oil Pipeline. Ever since he was elected Prime Minister in 2009, he has been on record as saying that the pipeline would never be built. Now, however, the government has provided the Trans-Balkan Pipeline Company with the minimum amount of money needed to keep the firm operating, according to the Journal of Turkish Weekly. The funds follow an April 2011 decision by the Bulgarian parliament's Law Committee that the contract creating the company does not contain any clauses giving Bulgaria the right to pull out. The situation remains confused, however, in that the Bulgarian Ministry of the Environment rejected the company's environmental impact statement for a third time.

The oil pipeline is designed to allow oil from the Black Sea basin to reach the Mediterranean without transiting the Bosphorus Straits. The pipeline was originally planned in 2007, when Bulgaria, Greece and Russia reached an agreement. The pipeline company was formed shortly thereafter, with 51% of the shares divided among three Russian companies. Today, the Bulgarian Ministry of Finance owns 24.5% of the shares, and the remaining 24.5% are divided among two Greek companies with a token 1% ownership by the Greek state.

Unfortunately for the pipeline, the ruling Socialist party in Bulgaria was replaced in 2009 by the GERB party whose leader has been opposed to the pipeline. The government immediately began setting up regulatory roadblocks, and stopped paying its share of the company's expenses (5 million Euros in 2010, and a total of 8 million Euros since the fourth quarter of 2008.) In November 2010, the Ministry of the Environment rejected the environmental impact statement for the first time. In addition, three municipalities (including Burgas itself) have voted in referendums against the construction of the pipeline because of environmental concerns.

The Greek Deputy Prime Minister, Theodoros Pangalos, rejected the environmental concerns, according to the European Energy Review. Pangalos saw an American-backed conspiracy to cancel the project to hurt Russian interests in the area. "Every time political forces which are under strong Western influence win in Bulgaria, Burgas-Alexandroupolis reaches a dead end," he told a meeting of the Greek-Russian Society. "Multinational oil companies connected with the American government use all means to prevent the realization of the Burgas-Alexandroupolis oil pipeline."

In February 2011, the former director of the Bulgarian branch of the company, Plamen Rusev, predicted the pipeline would be terminated because Bulgaria had not met its financial obligations, according to the Sofia News Agency. "I can confirm that the project is going to an end and this is a good outcome at present because Bulgaria's failure to pay its obligations has created tension between shareholders. As a result, Greece stopped paying its obligations, too. You cannot have only one side paying," he said. (Other analysts such as Vladimir Sokor believe Greece stopped making its payments because of the Greek debt crisis, and not because of Bulgaria's intransience.)

The media soon began to speculate that Russia would cancel its involvement. In response, a spokesman for one of the Russian owners, Transneft, said the shareholders had not agreed to scrap construction. Igor Dyomin, a Transneft spokesman, said that the project would focus on minimising expenses, according to Ekathimerini. The Bulgarian Finance Minister, Simeon Djankov, also denied a Russian withdrawal, according to the Sofia News Agency. "There is a meeting of the project company Trans Balkan Pipeline and the withdrawal of the Russian party is not on the agenda," he said. While not wanting to kill the project, however, the Russians insisted that Bulgaria pay its fair share. In February, Russia's energy minister Sergei Shmatko told Ria Novosti that it may sue Bulgaria if it drops the pipeline. "The status of the project is such that we have practically frozen all activity," he said. "We are waiting for the final official decisions from the Bulgarian government and we will proceed according to the relevant inter-governmental and corporate agreements in place."

Things became dire on February 17, when shareholders voted to lay off staff and give up its rented office space. They also demanded that Bulgaria should repay its debt by March 20, according to Prime-Tass.

But the Bulgarian government neither paid its dues, nor did it reject the company's environmental statement entirely. On March 31, the Ministry of the Enviroment extended the deadline by two months for corrections to its second statement, according to the Sofia Echo. The company submitted a third statement, changing its plans on how to offload the oil in Bulgaria. The environmental ministry again returned the statement, however, seeking additional details. The government again gave the company an additional two months, according to UPI.

In May, 2011, the Greek Deputy Minister for the Environment tried to raise the ante. Yiannis Maniatis told New Europe that the construction of the pipeline was an issue for the entire European Union. He said Greece had agreed with the European Commission to examine the basic environmental issues that Bulgaria was citing as the reason for delay.

Given the Borisov administration's opposition to the pipeline, and its continuing efforts to block its construction by rejecting its environmental statements, it is surprising that the Bulgarians have made a partial payment on its membership dues to the company. While it would be easy enough to starve the company financially, making a partial payment would allow the government to represent itself as a defender of the environment instead of someone opposed to a pipeline for political reasons.

Fischer Accuses Russia of Energy Politics against Ukraine

Former German Foreign Minister took on the Russians at the European Autumn Gas Conference. Fischer said that South Stream is not based on energy reasons, but was a political move. The former Foreign Minister and current Nabucco advisor, leveled the charge that the goal of South Stream is to pressure the Ukraine into returning to Russia's sphere of interest. Fischer also predicted that South Stream would have difficulty obtaining financing, since the cost of the project would be approaching 30 billion euros rather than the 10 billion that South Stream spokesman Marcel Kramer predicts ("Europe's gas industry deeply divided over the future," European Energy Review, 22 November 2010)

In taking such a hard-line position, Fischer has placed himself in clear opposition to his former boss, former chancellor Gerhard Schroeder, who is chairman of a group supporting Nord Stream. Both Nord Stream and South Stream have the same owner, the Russian government-controlled Gazprom.

Despite Fischer's efforts, it would appear that Schroeder's side is winning. In October, Gazprom signed a long term contract with Poland that both Moscow and Warsaw know violates EU energy legislation. In November, they made an agreement with Bulgaria to run South Stream through the country. Separately, but equally alarming for those who would like to see Europe with some wiggle room in the energy sector, Russian-owned Rosneft recently took control of 50 percent of Germany's larget oil refiner, Ruhr Oel ("Russia's Pipeline Deal with Bulgaria Concerns Europe," www.the trumpet.com, November 18, 2010.)

Nabucco supporters have an uphill struggle.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Bulgaria Turns to South Stream

This week, Nabucco has fallen behind South Stream in the race for control of gas deliveries to Europe. Bulgarian Prime Minister Boyko Borisov has announced that Bulgaria and Sofia have agreed upon the South Stream pipeline route through the two countries. (Oil and Gas Eurasia, 09 August 2010). At the same time, Wolfgang Ruttenstorfer from the Austrian energy company OMV told the Wall Street Journal that a final decison on building Nabucco could be delayed until the beginning of 2011. The decision will only follow completion of the "open season" process scheduled to begin in the fourth quarter of 2010. During this period, Nabucco shareholders will be able to purchase long term contracts for the pipeline's throughput capacity. (Oil and Gas Eurasia, 09 August 2010).

Commenting on the future of Nabucco, Atlantic Council senior fellow Borut Gric characterized it as "the project that never seems to stop being planned." Gric referred to Nabucco as a paper tiger that lacks the financing and political support to make itself operational. (Today.AZ, 09 August 2010).

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.