On 3 December 2014, Russian President Vladimir Putin announced officially that South Stream, which aimed to bring some 63 billion cubic meters (bcm) of gas per year across the Black Sea to Bulgaria, on through South-East Europe to Italy, was dead.
For Moscow, South Stream was important for three reasons: to sell more gas to Europe; to reduce reliance on Ukraine as a transit state; and to gain a degree of political leverage over the transit states.
However, the European Commission ruled that the project did not comply with EU regulations in particular with the Third Energy Package, which prevents companies that supply gas from also owning the infrastructure through which it is distributed. This stance is the correct one. Firstly, because unbundling prevents monopolist operations and, secondly, because Russia has proved to be not only an unreliable partner but also ready to use gas as a political tool.
Intergovernmental agreements had been signed with several EU states and preliminary construction had begun in Bulgaria and Serbia as well as substantial work having been completed in Russia.
After a lengthy battle, with Russia’s economic situation deteriorating because of Western sanctions and the dropping oil prices, Russia threw in the towel. To battle on with this project, the economic viability of which was always highly questionable give its estimated $50 billion price tag, would have been an economic suicide.
For those member states that were part of the project it was a blow. Bulgaria has been left feeling particularly bitter. Beyond losing the estimated 400 million euro for transit fees, South Stream offered the country discounts on gas and guaranteed supply. Furthermore, Bulgarians expected billions of dollars in investments and thousands of new jobs from the project with South Stream enjoyed broad public support in the EU’s poorest country. The European Commission has been clear that there are no legal grounds for Bulgaria to claim compensation. Rather the EU will focus on measures to further inter-connect its gas transit system, and take further steps diversify sources.
Russia immediately moved to Plan B, i.e. “Turkish Stream”. If Moscow’s plan is successful, the gas currently flowing from Russia to the EU via Ukraine will eventually be delivered only via Turkey. Gazprom plans to transport gas to a hub near the Turkey-Greece border where it can then be sold on. The cost of an estimated $10 billion is considerably lower than South Stream. EU energy companies would need to invest in new infrastructure by 2019 to bring gas from this hub to their home markets. As Turkey is not an EU member it does not need to comply with EU regulations.
Such is Russia’s eagerness to get cracking it has kept two large pipe-laying ships and their crew on standby in the Black Sea. Negotiations are on-going with a Memorandum of Understanding signed and a decision by Ankara-Moscow on 27 January to step up the process by signing an Intergovernmental Agreement in the second quarter of this year for gas delivery in December 2016. Ankara will play hardball because it is well aware that Moscow cannot afford not to sell its gas.
While Turkey has made it clear that it has no intention of undercutting the Southern Corridor in which they have a key stake, despite some opposition due to the already significant dependence (60 per cent) on Russian gas, it is broadly seen as an exceptional opportunity which goes beyond a purely commercial rationale. The deal would bring the country a step closer to its dream of becoming the key regional energy hub, significantly boosting its geostrategic importance.
Nevertheless, we are far from a fait accompli because unless the EU buys into this project it may prove risky as the gas is aimed for the EU market. Today to say the EU was sceptical would be a gross understatement.
The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.