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    South Stream: Is Gazprom Willing to Invest Billions in a Project that Could Serve its Competitors?



The European Council of Foreign Relations head in Southeast Europe offers his viewpoint on the progress of the South Stream Pipeline in light of EU's objections

by: Ioannis Michaletos

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Natural Gas & LNG News, News By Country, , Greece, Serbia, Bulgaria, Russia, Pipelines, South Stream Pipeline, Top Stories, Balkans/SEE Focus

South Stream: Is Gazprom Willing to Invest Billions in a Project that Could Serve its Competitors?

The South Stream natural gas pipeline project is in the limelight in Brussels. Gazprom's ability to supply the energy corridor exclusively with its own gas and not allowing its competitors to use it is being questioned. Based on the Third Energy Package, a legislation debate and dialogue between all interested parties has begun, including the national capitals directly involved in the project such as Bulgaria, Serbia, Hungary and Italy.

Dimitar Bechev, head of the influential European Council of Foreign Relations office in Sofia, offers his insights and point of view on the subject, which will occupy the headlines for the forthcoming period.

Energy security and secure supply of natural gas has been on the minds of policy-makers in Brussels and in Southeast Europe for quite some time. In that respect, how do you view the present-day situation in the Balkans, taking into consideration the unfolding major infrastructure projects, such as South Stream and TAP?

All countries in the region are looking for ways to diversify supply of gas and drive down prices at times of economic slowdown or recession. TAP is an opportunity to create the badly needed gas-to-gas competition in the region but it is not a sufficient in and of itself. What's needed is better interconnectivity, especially along the north-south axis, and regulatory reform in line with the EU acquis. South Stream does not bring downstream new volumes, simply redirects already existing flow.

Gazprom needs to comply with the Third Energy Package - and then decide for itself whether the project makes economic sense. I think the message from the Energy Minister Günther Oettinger is very clear. Ideally, one day South Stream can pipe gas from other suppliers, including LNG delivered through Greece and Turkey's terminals in the Aegean and Marmara Seas.

Do you assess that the pending Commission-led actions against Gazprom could affect the South Stream project, both in political and economic terms? In a practical sense, how can the EU motion be applied to member states that engage in bilateral terms with a company like Gazprom?

Commission has threatened member states like Bulgaria, Greece, Hungary and Austria with infringement cases, unless they bring IGAs into conformity with EU law. I think the threat is credible. What I find puzzling is that Russian diplomats are trying to play hard-ball with the Commission at a time when Gazprom is looking for ways avoid a full-blown anti-trust action by Commissioner Almunia (the offer they submitted back in December in relation to the investigation launched by Brussels).

In your opinion which are the main obstacles - if any- that prohibit a diversification policy in South East Europe regarding the natural gas sector?

The obstacles are multiple: the unclear prospects of fresh sources coming onstream (e.g. Eastern Med, northern Iraq, Iran etc), lack of interest by majors in a relatively small market in the Balkans (Nabucco shows it), limited resources to invest into upgrade of cross-border infrastructure (interconnectors), low price of coal slowing down demand for gas, and, not least, vested interests in most countries pushing for strengthening ties with Gazprom - witness the attitude to South Stream in Bulgaria and Serbia.

Do you assess that there is real capability for the establishment of a "regional natural gas hub" in South East Europe where different suppliers will compete for market segments, thus decreasing prices and boosting competitiveness in local markets?

There is lots of talk on this subject but I don't see it happening any time soon. Turkey might have better chances than others but establishing a regional gas hub and the kind of regulatory reform involved might clash with the government's effort to cultivate national champions and keep prices for businesses and households low. Not to mention the large investment needed in storage and distribution grids.

What are the most likely scenarios according to your estimation, for the South East European gas markets in mid-term (up to 2020) and long-term (up to 2035), based on indicators at hand and likely trends emerging?

It is difficult to tell. Much depends on the region's capacity to revert to growth as we are still picking up the pieces of the 2008 crisis - hence demand for energy. Gas is likely to remain a critical commodity and rise in importance in several of the countries in the Western Balkans, where it hadn't been as significant historically. I hope we will move away from long-term contracts into more flexibility and competition on the market resulting in lower prices. We are still being overcharged compared to other regions of Europe. It is all contingent on what happens at the EU level however and global trends such as the shale revolution in the US and growing demand in East Asia come to affect our part of the world.

Do you assess South Stream to be a project that will move along as envisaged by its shareholders or do you foresee changes and alterations either in its timetable, geographical route or capacity?

I don't see a change of route but the project might slow down if Commission continues to put pressure on Gazprom over the IGAs and the third-party access clause. As I said, Gazprom will have to decide whether it is willing to invest billions in a project that can conceivably serve its competitors.

Dimitar Bechev is a senior policy fellow and head of the European Council of Foreign Relations office in Sofia. He is also affiliated with South East European Studies at Oxford (SEESOX), St Antony’s College, Oxford. From 2006-2010, Dimitar was a research fellow at Oxford's European Studies Centre and held a lectureship in International Relations at Worcester College, Oxford, and a visiting professorship at Hitotsubashi University in Tokyo. He is a region head for Central and Eastern Europe at Oxford Analytica, a leading consultancy on current political and economic affairs.