South Stream and the Southern Corridor: The View from Sofia

With only a few months left until the Shah Deniz consortium chooses between Nabucco West and the Trans-Adriatic Pipeline for sending Caspian gas to Europe, attention among energy pundits is increasingly turning elsewhere. Although the Shah Deniz chapter is finally closing, the story does not end there. Other developments, from Balkan interconnectors to Eastern Mediterranean geopolitics, are increasingly central – as is the role of South Stream.

It was these developments which were under the spotlight at Sofia’s Black Sea Oil and Gas Forum in early March. Both Nabucco and TAP did give presentations at the close of the forum, and – as regular conference attendees would expect – gave little information that couldn’t be gleaned from their respective websites. The contest has seen great strides forward for ‘pipeline PR’, with the rival consortiums pumping out press releases and becoming regulars on the conference circuit: but with things almost wrapped up, both PR departments were staying strictly on message.

Other speakers did of course weigh in on the subject. Peter Poptchev, who advises the Bulgarian Economy, Energy and Tourism Ministry, said that Nabucco West is “by far the more compliant” with the ‘public policy consideration’ criterion set out by the Shah Deniz consortium. TAP has explicitly eschewed a political angle, insisting that it is purely a commercial endeavour – but, as Poptchev observed, the whole Southern Corridor involves “a certain connect between the political aspect and the commercial aspect” and political considerations cannot be ignored. He, like other conference attendees in conversation, seemed to think that Nabucco would beat TAP when the decision is made in June.

Most attention was on the Southern Corridor’s initial 16bcm/a of gas from Shah Deniz, but some discussion did cover the longer-term future of Caspian gas supplies. Andy Lane, BP’s Head of Business Development, was optimistic about Azerbaijan’s potential beyond the second phase of Shah Deniz: including Shah Deniz Deep gas, which will be accessed using existing Shah Deniz infrastructure “once the technology has moved on a little bit”; the Shafag-Asiman field, where BP holds a 50% stake, which Lane suggested “could be on the same scale as Shah Deniz itself”; and deep gas from the Azeri-Chirag-Guneshli field. These supplies mean that whatever form the Southern Corridor takes, scalability will be key.

 The outlook for Turkmen supplies was less positive. Jean-Arnold Vinois, until recently Acting Director for the Internal Energy Market at the European Commission, was involved in the trilateral negotiations between the EU, Azerbaijan and Turkmenistan which began in late 2011, and said that although there was interest in building a Trans-Caspian Pipeline, the challenges were significant. As well as Russian and Iranian opposition, Turkmenistan’s own approach complicates things. Ashgabat is insistent on selling at the border and wants to start big, with around 30bcm/a rather than the 7-10bcm/a which the EU reportedly proposed.

Vinois suggested that to get it done the EU would have to “go Chinese”: simply turn up with the money and the workforce needed and build the pipeline all the way to connecting Turkmen infrastructure. But this will also need a closer political relationship, currently lacking: as Sohbet Karduz noted at the conference, “The EU doesn’t have an office in Turkmenistan but it has one in Tuvalu.”

The most contentious topic was South Stream, and Bulgaria’s decision to work with Gazprom whilst continuing to support the Southern Corridor. Vinois was visibly displeased with Bulgaria’s apparent attempt to work outside the EU on such a critical gas issue. Europe has been trying for years to present a united front against Gazprom through initiatives like the Third Energy Package: if countries like Bulgaria to break that front in the hope of concessions from Moscow, the system breaks down.

Although unstated, there was a sense in Vinois’s comments that Bulgaria’s lack of solidarity was particularly egregious because, as a new EU entrant with plenty of question marks over its accession criteria, it has to work harder to prove its commitment. Plenty of other countries have done bilateral deals with Gazprom, but there is a sense that allowing South Stream is a particularly serious betrayal. It is “a major question mark for the region… [it’s] not how things should happen in the energy sector”, Vinois said sternly.

He was deeply sceptical about South Stream. As he pointed out, even the details of the 63bcm pipeline are unclear, even though construction supposedly started last December. The regulatory framework for the onshore section is also lacking: “look how Nabucco West and TAP are discussed endlessly before making a final investment decision – how can South Stream [make one] when the Environmental Impact Assessments aren’t in place, when the route isn’t known…”

Nor is it clear, Vinois said, who is going to shoulder the huge costs. “Who will pay the $40 billion for the project? European consumers? My friends in Bulgaria?” Usually the consumer paid, he said, and at present with gas “abundant” and demand uncertain, there is no real appetite among EU consumers to pay for a mammoth project like South Stream.

Peter Poptchev, echoed the criticism and put South Stream in its broader context, arguing that it should be seen as simply part and parcel of a broader Russian gas strategy which also involves routes like Nord Stream and Blue Stream. 

But of even more significance, Poptchev suggested, was South Stream’s “unique feature” of enabling Gazprom to take part in midstream and downstream gas sectors of countries along the route. Distribution and marketing is where the money’s at: South Stream is as much a tool to secure Gazprom’s footing in these sectors as it is a grand, geopolitical weapon to crush the Southern Corridor. 

Alex Jackson is an analyst of political, energy and security issues in the Caspian region. He is based in London and can be contacted at ajackson320@gmail.com.