Gazprom terminates South Stream pipeline

Gazprom terminates South Stream pipeline
By Dimitar Koychev in Sofia January 20, 2016

Russia's state-owned natural gas export monopoly Gazprom has officially terminated the contract for the South Stream natural gas pipeline project, which was designed to deliver gas to Europe under the Black Sea, bypassing Ukraine entirely.

According to a TASS report on January 20, Gazprom’s board of directors has approved an agreement with the project company South Stream Transport B.V. for terminating the contract of suretyship concerning obligations of Gazprom Export on the gas transportation agreement signed in October 2013.

South Stream Transport has agreed to free Gazprom from fulfilling all obligations under the suretyship contract and to dissolve the contract.

South Stream Transport, which was established for the construction of the offshore section of the pipeline, is presently wholly-owned by Gazprom.

The South Stream project was frozen personally by Russia's president Vladimir Putin in December 2014, in favour of a potential Turkish Stream pipeline. The move was a heavy blow to Bulgaria, which currently imports almost all of its natural gas from Russia through Ukraine.

Bulgaria, however, did not stop work on South Stream after Putin scrapped it, claiming it had orders that had not been cancelled officially. On January 20, the country’s energy ministry told the Bulgarian News Agency (BTA) that the Bulgarian side has not received official notification of the project’s termination. The ministry pointed out that TASS' report concerns the offshore section of the pipeline and does not affect the Bulgarian side.

Bulgaria's deputy prime minister, Tomislav Donchev, revealed in December that Bulgarian and European Commission officials had been in talks for several months over the possible resurrection of the project.

Although Moscow’s official reason for scrapping the project was Bulgaria’s failure to provide its consent to the construction, the real hurdles are believed to have been related to a legal and political conflict which prevailed over the economic rationale.

The key legal issue was related to EU energy market regulations that require third party access (TPA) to gas infrastructure on EU territory, meaning that Gazprom should provide access to its pipelines for other companies on a competitive basis. However, Gazprom wanted to book and utilise the full capacity of the onshore extension of the South Stream pipeline, which would have reached Bulgaria under the Black Sea, then continued to Serbia, Hungary, and Austria.

Under the initial South Stream proposal, the 63bn cubic metre capacity pipeline was estimated to cost $29.3bn, well above Turkish Stream’s price tag of $11.4bn.