A colleague asked for my thoughts on Gazprom’s $15 billion South Stream project, which includes a 31 bcm/year pipeline across the Black Sea into Bulgaria, where it would branch to serve Italy and Southern Europe as well as Central Europe. Here are my off-the-cuff reactions:
Gazprom did pretty well on the Blue Stream line, completing it in 4 years (a bit longer than expected, and over budget, but not too badly, I think). That was a key catalyst in drumming up support for the Nordstream line, the experience in undersea construction hopefully translating to the Baltic. But Gazprom is facing more delays and cost overages there, despite an arguable more secure end result (fulfilling rising German demand while tapping into the extensive Northern European gas network more directly than before). 2013 seems reasonable for a timeline at this point for South Stream though my bet would be actual full operation by 2014, but who knows at this point –still lots to work out. But reaching the Bulgaria and ENI deals is pretty good progress.
The Black Sea is still within Russia’s sphere, more so than the Baltic / North Sea, so Gazprom won’t be facing the same protests regarding the use of national sea space that are slowing the Nordstream project. Plus, it has fairly good relations with the countries on the other side of the sea. Putin (and Medvedev) just nailed down the Bulgarian support, though they had to sacrifice the 1% they are used to while negotiating joint ownership of the transport pipes (Gazprom would of course prefer to have 51% control, rather than just 50%, but no luck with Sofia). Their close relationship to Serbia will be key, as routing the pipeline through Serbian territory is both a bargaining stick in Gazprom’s bid for Serbia’s NIS and an opportunity to keep the path of the pipe in a closely allied — and dependent — country.
Gazprom also has a very solid relationship with ENI, both from working together on the Blue Stream project, and through later negotiations. ENI’s head Paolo Scaroni is close with Gazprom management, and is very willing to work with the company. Italy is a huge gas consumer, and Gazprom is willing to edge into the market dominated by Algerian / North African supplies. Italy doesn’t mind because diversification is one of its goals, and unlike Germany and other Northern European countries, it isn’t too heavily reliant on Russian gas yet. And because Italy lacks the nuclear industry of France, Germany and England, it feels more pressure to make good with gas suppliers.
That was one of the issues with Blue Stream — a secure source of demand. Turkey backed down from its original volumes, due to an economic downturn that depressed demand. Nowadays, Turkey is feeling a bit of a pinch from ripples in Central Asian / Iranian supplies, and its economy has developed enough to create a sufficient demand to pretty much fill the pipeline. But Gazprom isn’t expecting that problem with Italy / Southern Europe, and South Stream likely means the end to talks of a laying another pipe along the Blue Stream route. I think that confidence is why Gazprom is pushing for a 30 bcm line, much more ambitious than the Blue Stream, and bigger than the first
line of the Nordstream.
I was talking with someone earlier who asked if I thought that the push for the South Stream, along with the big investment into the Nordstream, is likely to deter Gazprom’s desire to take control of Ukraine’s transit system. While I think that it may very well dampen some of Gazprom’s perceived need (adding over 50 bcm — 80, with Nordstream’s second line — will do that), there’s also a less
tangible desire behind Gazprom’s wish for control over the export lines (and storage sites). Besides making them feel more secure about their exports, Gazprom still feels that the pipelines are “theirs,” since they built them back in the day, and Ukraine shouldn’t deserve them. Maybe not as extreme as that, in reality, but a bit of that sentiment exists, I bet.
On that topic, I really wouldn’t be surprised if there is eventually (in 5 years) a consortium that brings Gazprom into some sort of minority position (25% maybe) in a managing entity for the export lines (a la Gazprom’s deal with Total at Shtokman). Perhaps coinciding with Russia, under European pressure, finally ratifying the Energy Charter, and the further liberalization of Russia’s (and Ukraine’s) domestic gas market. But I don’t want to get too optimistic…