Gazprom's plans for South Stream gas pipeline become more ambitious

By bne IntelliNews February 13, 2009

Clare Nuttall in Almaty -

Its economic justification may be shaky, but the South Stream pipeline project will allow Russia to further diversify its natural gas export routes. After January's gas war with Ukraine, Gazprom plans to increase the pipeline's capacity by 16bn cubic metres a year (cm/y).

South Stream is intended to deliver Russian and Central Asian gas to Europe. It will run from the Beregovaya compressor station on Russia's Black Sea coast underwater to the port of Varna in Bulgaria. From there, it will divide into two - the south-western route would cross Greece and the Ionian Sea to southern Italy, while the north-western pipeline would go through Serbia and Hungary to end in Austria.

Gazprom's deputy chairman, Alexander Medvedev, announced in late January that South Stream's capacity would be increased from the original 31bn cm/y to 47bn cm/y. "We are not only planning to launch the Nord Stream with a capacity of 55bn cm and the South Stream with 31bn cm capacity, but also to increase South Stream's transit capacity by another 16bn cm," Medvedev said in a television interview soon after the end of the gas crisis with Ukraine, which saw exports to Europe cut off for two weeks.

South Stream will complement the Nord Stream pipeline, which would deliver gas from Siberia under the Baltic Sea to Europe, as well as the Yamal-Europe pipeline though Belarus. All three pipelines bypass Ukraine, and give Russia alternative routes for delivering its gas to European customers.

Cost of giving gas

South Stream will cost upwards of $20bn to build, adding to suspicions this is politically rather than financially motivated project. "The Nord Stream and South Stream pipelines are designed as bypass pipelines without increasing Russian exports or improving the security of gas supply to Europe. On the contrary, these projects are designed to reduce the security of supply to Belarus and the EU member states of Germany, Poland, Hungary, Romania, Bulgaria and Greece. Russia will be able to turn off the gas flow to any of these countries without decreasing other exports," Mikhail Korchemkin, executive director of East European Gas Analysis, tells bne.

"I strongly believe that Gazprom wants to build an excessive export capacity to be able to cut off supplies to any East European country without affecting exports to other EU countries. No other gas exporter has spare pipelines," he adds.

Gazprom insists that South Stream is economically viable even at the higher volumes. "Demand is available and it is more economical to have a gas pipeline with a capacity of 47bn cm instead of 31bn cm," Alexander Medvedev said.

However, the high transportation costs of the South Stream pipeline would make gas exports via the competing EU-backed Nabucco gas pipeline much cheaper for gas producers in the Caspian region. It will also be considerably more expensive than pumping gas to Europe via Ukraine. In addition, under its new agreement with Ukraine's Naftogaz, Gazprom must export a minimum of 110bn cm/y through Ukraine. This would make it difficult for Russia both to fulfil its obligations to Naftogaz and to fill rival pipelines.

Divided opinions

European opinions about the South Stream project are divided. Some countries want to reduce their reliance on Ukraine as a transit state, and South Stream would achieve this. Germany and Italy, in particular, have been strongly in favour of Nord Stream and South Stream as a means of getting gas directly from Siberia and Central Asia to Central Europe.

However, others argue that the real need is to reduce Europe's dependence on Russia as both a supplier and a transit country for natural gas. To this end, both individual governments and the European Commission have been cosying up to the Caspian nations. This has also increased support for the Nabucco pipeline, which would connect Turkey to Austria, via the Balkans, bypassing Russia. "For economic as well as for political reasons, Europe urgently needs to diversify its suppliers and become less dependent on Russia. One way to do that would be to build a transit route that would bypass Russia - the Nabucco pipeline. It has, in fact, the potential to significantly lessen south-eastern Europe's dependency on Russian gas," says Korchemkin.

Completion of South Stream is a long way off. According to Gazprom, first deliveries along the South Stream pipeline are due to start in 2013. Eni subsidiary Saipem is working on a feasibility study, which is expected to be completed this year.

The current economic crisis does, however, cast some doubt about whether Gazprom will be able to push ahead with the work on time. It had originally planned a $30bn capital expenditure programme in 2009, but most of Russia's oil and gas giants have said they will reduce their investment plans for this year. The head of Gazprom's oil producing subsidiary Gazprom Neft said in January that its capex could be cut by up to 45%.

Low energy prices and the devaluation of the ruble will make it more difficult for Gazprom to go ahead with South Stream in the short term at least. "The project cannot fly. It can become the last straw that would break Gazprom's back," argues Korchemkin. "Actually, Gazprom is unable to get financing for the project. Starting from the fourth quarter of 2009, Gazprom is very likely to have losses. The devaluation of the ruble has already increased the debt burden of Gazprom to the level, at which getting new loans is impossible."

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Gazprom's plans for South Stream gas pipeline become more ambitious

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