Following opposition from the European Commission, Russian President Vladimir Putin said on December 1 that Moscow is scrapping the multi-billion dollar South Stream gas pipeline and will increase gas supplies to Turkey across the existing pipeline. Later Russian gas monopoly could build a new link and possibly work with Turkey on creating a gas hub on the border with Greece, Putin added.
South Stream would have run under the Black Sea to Bulgaria and further on to Serbia and Hungary before reaching Austria and Italy.
Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp, told New Europe by phone on December 2 that Russia’s decision is final. “It’s irreversible,” he said, adding that the reason is that the EU consolidated its opposition to the project and particularly Bulgaria, which is the point of entry.
Gazprom now plans to build a new gas pipeline to Turkey, with an annual capacity of 63 billion cubic metres. “It looks like it’s going to be a huge pipeline with the same capacity as South Stream,” Kokin said.
Turkey would use 14 billion cubic metres of the new pipeline’s capacity, with the rest shipped to the border between Greece and Turkey, Gazprom CEO Alexey Miller said. 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.
Russia has also created a new and important relationship with Turkey. Ankara now joins China as a significant beneficiary of the western sanctions against Russia. “It is a classic case of bartering energy access for political and economic cooperation,” Chris Weafer, a senior partner at Moscow’s Macro Advisory, wrote in an e-mailed response on December 2.
“Putin is obviously hoping that an expanded relationship with Turkey will go some way to compensate for the more difficult trade relations with the EU. Turkish companies will undoubtedly find it much easier to gain access to the Russian market and that may make it more difficult for EU exports to get back in,” Weafer wrote.
Kokin told New Europe that Turkey will become an even bigger gas hub for Russian gas. Turkey wants to be an oil and gas hub and definitely welcomes any transit routes through its territory. “It’s always happy to have a Russian pipeline going through Turkey because it fits with its strategy. I suspect that what Turkey really wants is to be a sort of hub for gas coming from Russia, from Azerbaijan, for Iran so that it will enter the Turkish system and then get exported to Europe,” Kokin said, adding that Turkey could be a huge physical hub that would mix all that gas and then resell it. “Sanctions or no sanctions Turkey has always wanted to be the candidate country for gas and oil so it’s very much in line with their strategy. I’m not sure it’s in line with any of Russia’s long-term visions because Russia has obviously more than one vision,” Kokin said.
Gazprom already has invested nearly $5 billion in building the pipeline on Russian territory, about half of its projected cost. But Weafer wrote that the decision to drop what was clearly going to be a very expensive project for Gazprom is a positive for the company and its shareholders. It probably also reflects the reality that Gazprom needs to prioritise its cash resources rather than opening up too many projects. “The China pipeline is a greater priority because, unlike the EU, China is very eager to receive Russian gas,” he wrote.
South Stream has not only been a contentious issue between Russia and the EU but risked creating a rift between the European Commission and the member states which would have benefited from the direct gas flows. “So the decision to cancel it may be viewed as a concession to Brussels and perhaps an indication that the Kremlin is now looking at ways to start improving its relationship with the EU,” Weafer wrote.
By cancelling South Stream Russia is also, de facto, accepting that it will continue to use the pipeline across Ukraine. “That also is a positive overture to the government in Kiev. Moscow is no longer looking to by-pass Ukraine and cut its transit fees. It means that Ukraine will remain an important part of the transit system to Europe and that should give Kiev some comfort that it will be able to work out a new contract with Gazprom after this temporary deal ends,” Weafer wrote.
The European countries which had expected to boost their energy security by directly importing gas from Russia via South Stream will have to continue relying on the Ukraine transit or a new transit via Turkey. None of them can be happy with the pressure from Brussels to cancel this project. “You’d think they [the EU] would have learned from the problems with Ukraine transit. The Germans did and built their own direct pipeline from Russia,” Weafer wrote, referring to the Nord Stream pipeline from carrying Russian gas to Germany, bypassing Ukraine.
The European Commission’s objection to South Stream was always difficult to understand. Russia was willing to build a new 63 billion cubic-metre pipeline into Europe and free up the Ukraine pipeline to take gas from the Caspian and eventually from Iran, Weafer wrote. “Greater supply options would have given the EU greater pricing power coming into the next decade. That’s just simple supply versus demand economics. The Chinese understand that and this is why they are building pipes from Russia, from Central Asia, and from Myanmar along with multiple LNG terminals. It is a crazy long term strategy form Brussels to have blocked this pipe,” Weafer wrote. “My personal view is that it is the people in the EU Commission who have allowed political prejudice to override common sense economics,” he wrote. “Energy security comes from multiple supply options rather than restricting them because of political paranoia.”