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    Canceling South Stream: “Everybody wins”

Summary

Why build additional export capacity to a shrinking market when the existing capacity is already oversized? asks Dávid Korányi of South Stream.

by: Drew Leifheit

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Featured Articles, Pipelines, South Stream Pipeline, News By Country, Russia

Canceling South Stream: “Everybody wins”

Everybody wins in the demise of South Stream, according to Dávid Korányi, Director, Eurasian Energy Futures Initiative at the Atlantic Council - at least from a strategic perspective.

He remarks, “I think it's a win for both Russia and Europe, because it became clear that this was not a project that made commercial or political sense from the European perspective; nor it is the best way to stabilize the European-Russian energy relationship.”

Furthermore, he says the situation is good for facilitating a healthier debate around energy sector reform in Ukraine and will help concentrate minds when the 6-month temporary deal expires between Russia and Ukraine to come up with a sensible, permanent and transparent transit regime that also makes commercial-political sense.

South Stream, he says, has always been a politically-driven project that makes little commercial sense. Mr. Korányi adds, “It's not going to dramatically improve supply security. Russia wanted to use South Stream for dual purposes: to dry up the Ukrainian transit route and to lock in the Central European and Balkans markets. Neither of those are in the interest of Europe.

This move, says Mr. Korányi, is a boon for the Russians as well, considering Russia’s and Gazprom's financial situation. “It means huge cost savings not having to build South Stream. “They can spend that money to diversify their own export portfolio to Asia that requires huge investments into infrastructure.”

“We have known for quite some time that Gazprom itself is not that enthusiastic about South Stream, and it's an excruciatingly expensive, and essentially political. What is more, both gas demand and prices are down in Europe, and the market environment will become even worse with the oil price collapse. Why build additional export capacity to a shrinking market when the existing capacity is already oversized?”

He contends that it is also a sign that the sanctions against Russia may be working, putting additional pressures on Russian finances in general and Gazprom's finances in particular. “It made it more difficult for Gazprom to access financing to get the South Stream project up and running.”

The overall announcement of abandoning South Stream has left Mr. Korányi feeling somewhat surprised.

“I just didn't expect Putin to fold so openly,” he remarks. “I expected him to keep South Stream on the table, try to use it as a battering ram.”

Since the Russian announcement, Bulgaria and Serbia have protested that they were counting on the economic benefits of South Stream: construction jobs, transit fees. Mr. Korányi concedes that on the corporate side there will be losers and particular interests will be hurt. “Many of the commercial players, companies that are supposed to construct the pipeline, will lose out. There's a lot of grumbling, because a lot of people wanted to cash in on such a project. But that does not justify building a commercially unviable pipeline that won’t add significantly to supply security and runs counter to Europe’s strategic interests: stabilizing Ukraine and pushing back against Russian aggression there.  

Just days ago Mr. Korányi spoke to Natural Gas Europe about how Hungary's strategic orientation was veering away from the West and towards Moscow, given its proclaimed allegiance to building South Stream and Russian financed nuclear reactors in Hungary. He now points out how foolhardy the Hungarian government's policy really was.

“Not only was the policy misguided to rely so heavily on Moscow. It flew into the government’s face as Putin did not even bother to notify its ‘closest allies’ about the decision, which apparently caught the Hungarian leadership off guard”.. The Hungarians went out on a limb to support South Stream, while the Russian partner did not even have the courtesy to forewarn them on canceling the project” he explains.

The new pipeline in Turkey he says is at this pont nothing more than a face-saving maneuver for Moscow. “They're saying, 'okay, we're going to bring our gas through Turkey, instead of bringing it directly to the European markets.'

Korányi is skeptical about the prospects of a reincarnation of South Stream via Turkey. “Switching from Ukraine to Turkey does not make much sense, as the transit risk remains. You won't have the same issues and baggage as with Ukraine, but you won't really solve the problem either. As soon as you arrive at the EU border, EU law against which Gazprom so vehemently protested (unbundling, third party access) applies again. There may be chemistry between Presidents Erdogan and Putin but the Turks won’t necessarily be easier transit partners.”

However, he opines that Turkey successfully leveraged Russia’s desperation  to extract price concessions from Gazprom. “The Turkish market is a fast-growing market; they are trying to diversify, but are also happy to buy more Russian gas – if it's cheap.”

He says he could imagine a scenario in which Russian gas flows via the pipelines included in the Southern Corridor, via the Trans Anatolian Pipeline (TANAP) and sent westward, though this is all speculation for now.

“The Azeris could be interested in such an offer because TANAP is a hugely expensive undertaking and they have to foot a big part of the bill. To make it bankable, it makes sense to feed in additional supplies. But it is not going to be 63 billion cubic meters for sure and it should not jeopardize the Southern Gas Corridor’s strategic role in diversifying Europe’s gas supply”.

As for what awaits countries in Central and Southeastern Europe and how they meet their natural gas needs, Mr. Korányi says recent events give a “healthy push towards the right direction.”

“South Stream in many ways represented a very convenient solution – not a good solution in the long-term – but many of these member states considered it the easy way out from the Ukraine conundrum, potentially a very lucrative one for corrupt political elites. So in a way I think the cancellation represents a wake-up call. We should work towards completing the internal EU market through the North-South corridor and pursue real diversification instead of indulging in complacency.”

-Drew Leifheit