Vying for Customers

The “Southern Stream” Opposed by Many in EU

Vladimir Putin’s successful visit to Bulgaria has drawn fresh attention to the “Southern Stream” project. A tentative agreement with Bulgaria has been signed and shares of participation by the two countries (50/50) have been determined on the new pipeline. The basic technical specifications of the pipe became known in mid-June last year when Russia’s Gazprom and Italy’s Eni signed in Rome a memorandum of understanding on the project of a new 900-kilometer gas pipeline with a capacity of 20 billion cubic meters on its first length across the Black Sea bottom to the Bulgarian coast.

The “Southern Stream” gas pipeline has raised a storm of mostly negative emotion in Europe. Once again the issue of energy dependence on Russia has been raised, the need for diversification of gas deliveries is stressed and it is asserted that Russia might use the pipeline as an “energy weapon”. Such position as advocated in Europe seems nothing short of suicidal. There seems to be a puzzling paradox: the new pipeline is designed to become a new channel for gas deliveries to the European Union but it is most fiercely criticized in Europe itself.

Malcontents’ list

It would be in order to consider carefully the list of those discontented with the project. Most predominant among them are the so-called “Brussels’ bureaucrats” – European officials and politicians who believe that finding an enemy is the main axiom in politics. Russia with its perceived “energy weapon” is chosen for such an enemy. These people’s minds are fairly self-driven and can hardly be changed. This is also lucrative business for other people, for example, those who lobby the construction of alternative projects to Russia’s. A large number of people in Europe these days are occupied with pushing through some fantastic variants of pipeline projects and in the European corridors of power such people are not only heeded but also financed. The important thing is to provide assurances that a new project can become a substitute for Russian deliveries to the European market. It is hardly surprising then that a whole “pipeline mafia” has sprung up which invents some of the most mind-boggling projects, such as the “White Stream”, plays them up and shakes down the EU for money on their technical and economic feasibility. The main passwords that open up European coffers revolve around “diversification of supplies” and “resistance to Russia’s monopoly”.

Dashed Hopes

In reality, however, the struggle against the “Southern Stream” has been largely of no benefit to anyone. Turkey is an example in point. Catching the general anti-Russian wave, the Turkish elite has begun hampering the “Blue Stream-2” project, invoking the theme of political dangers of dependence on Russian deliveries. Turkey has suddenly warmed up to the idea of developing gas exports from Central Asia and from the Caspian Sea region, seriously believing that its help in struggling against Russia’s “energy monopoly” could stand it in good stead when the question of its own EU membership comes up. As a result, Russia was forced to relinquish its plans of building a second pipeline of the “Blue Stream” and came up with a new project via Bulgaria. And Turkey is still on the sidelines of the EU and is learning the hard way “reliability” of Caspian and Central Asian energy suppliers.

Because of the unusually cold weather spell in Turkmenia, it cut back gas supplies to Iran, which in turn tightened gas pumping to Turkey, which for its part left Greece high and dry. In the end, gas shortfalls sustained by Turkey and Greece have been recouped by higher gas deliveries by Gazprom through the “Blue Stream”. In December, 2007 Russian gas deliveries to Turkey increased from 30 to 38 million cubic meters per day to be subsequently raised to 40 million c.m. at the Turks’ request.

This winter’s story with Turkmenia has underscored the fact that Central Asian countries are prepared to promise gas deliveries to all potential customers, without providing truthful information on their reserves.

Picking Up the Tab

While resisting the “Southern Stream”, Europeans tend to forget one simple truth. This project is primarily designed for taking care of gas exports to Europe which faces the harsh prospect of severe gas shortfalls and any project of a new gas pipeline going its way should be happily accepted. European analysts warn that by 2030 the EU’s dependence on gas imports will increase to 70 percent.

Europe, meanwhile, is harboring a strong conviction that Russia buys up gas in the Central Asian region on the cheap and subsequently sells it at exorbitant prices

to the EU. In reality, the Central Asian countries have been steadily hiking the price for their gas. Turkmenia, for example, raised its price to $130 per 1,000 cubic meters and as of this summer it will cost $150. Uzbekistan is not behind its neighbors in price hikes on gas: as of this year it cost $130 and this summer it will rise to $160 per 1,000 c.m. Therefore, allegedly cheap gas for Russia is non-existent.

It would be possible, of course, to lay a pipeline from Central Asia across the Caspian Sea bed to Georgia and Azerbaijan and then on to Turkey and subsequently to Europe. But this will not lead to any cheaper gas. Europe will still have to pay the same high price as elsewhere. Russia in this case will simply lose its share of transit money, which will be funneled into the pockets of the Central Asian states and the new transiting states. The EU does not stand to gain a penny.

The “Southern Stream” is designed to resolve one other important problem. The project will help scale back the volume of gas being pumped to Europe via Ukraine – a country that has been creating transiting risks out of nothing.

Ukrainian premier Julia Timoshenko may have made up her mind to become the next president and found nothing better than to start a highly populist scheme of paying back the country’s debts on the Soviet-era bank investments of its citizens in the Sberbank. The country’s budget has no money for that purpose and it is clear that this policy will also result in accumulating debts for Russian gas deliveries. Such risky social experiments may lead to the resumption of the dubious Ukrainian practice of the so-call “unsanctioned gas diversion”. Europe in this case also has driven itself into a trap: by encouraging the new Ukrainian leadership for its sloganeering in favor a closer European integration, Europe has become hostage to an unpredictable policy of the Ukrainian authorities. Russia, of course, can be held to blame in this case but that will not help sustain the required gas pressure in the pipeline. From 115 to 120 billion cubic meters of Russian gas is pumped annually to Europe via a transit pipeline running across Ukraine.

Here now is a project that would reduce such risks. It quickly ran into a stiff opposition in Europe.

The EU apparently fails to understand one other simple truth. Europe’s main opponent these days is China. The new gas pipeline projects pursued by Russia are targeting Europe and therefore they must be strategically beneficial to the EU. The “Southern Stream”, for example, does not divert gas from the European market just as it happens with the projects from Central Asia diverting gas to China. It is China that is Europe’s primary opponent in the field of energy. Russia, on the contrary, is the EU’s primary gas supplier. But it is consistently not perceived as an ally, having rather an image of an energy adversary. This mistake may yet cost Europe quite dearly.

Konstantin Simonov - PhD in political sciences, director general of the Foundation of National Energy Security

Published: Nezavisimaya gazeta, Jan 16, 2008