Southeast Europe agrees to search for alternatives after scrapping of South Stream

By bne IntelliNews December 10, 2014

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Energy ministers from countries that would have been part of the now-defunct South Stream gas pipeline agreed on December 9 to work together on alternative ways to diversify their gas supplies and reduce reliance on Russia. A deal was signed on the same day between Bulgaria, Romania and Greece on the Vertical Gas Corridor, an inter-connector linking the three countries’ gas grids, which may help take some of the pressure off the Bulgarian government after the collapse of the South Stream project.

The Vertical Gas Corridor will transport gas from Greece’s Revithoussa LNG Terminal and - when it becomes operational - the Trans Adriatic Pipeline (TAP), which will transport Azerbaijani gas into Europe. Ministers from the three countries said in a joint statement that they reaffirmed their “commitment to promote secure, sustainable energy supplies at affordable and competitive prices ... ending the isolation of member states and promoting diversification of routes".

The deal is of particular importance to Bulgaria, which suffered a severe blow when Russian President Vladimir Putin announced on December 1 that Moscow was dropping plans to build South Stream.

However, Bulgaria is just one of seven EU countries that would have benefitted from South Stream. Energy ministers from Austria, Bulgaria, Croatia, Greece, Italy, Romania and Slovenia agreed at a meeting in Brussels on December 9 to set up a working group on cross-border projects and trans-European projects on the diversification of gas supplies. The group’s first task will be to draw up an action plan to integrate Central and South-Eastern European gas markets and interconnections, an EC statement said.

Options to diversify supplies including building liquefied natural gas (LNG) terminals and developing offshore reserves in the Eastern Mediterranean and Black Sea, as well as pushing ahead with the Southern Corridor project to tap into gas supplies from the Caspian and Middle East. Under this project, the first deliveries of gas from Azerbaijan’s offshore Shah Deniz field are due to arrive in Europe by 2019.

“To achieve this common objective, and in view of the vulnerability of the region as demonstrated in the recent stress tests, it is crucial to swiftly complete projects already underway and speed up development of projects of common interest identified as being of strategic importance,” says an EC statement on December 9.

However, these will not be on the same scale as South Stream, which would have carried 62 billion cubic metres of gas a year into Southeast and Central Europe. The pipeline would have transported Russian gas across the Black Sea into Bulgaria, bypassing Ukraine, but the European Commission pressed Bulgaria to  suspend work on the project on the grounds that it violated EU competition rules that are intended to stop gas supplies being dominated by an export monopoly such as Gazprom. 

On a visit to Ankara on December 1, Russian President Vladimir Putin said that Russia was unable to proceed with construction of the South Stream pipeline. Instead, Russia plans to use the pipeline section already built in Russia to launch a new southward pipeline, running under the Black Sea to Turkey.

EU officials have continued to hope that Moscow’s position might soften. European Commission President Jean-Claude Juncker said at a meeting with Bulgarian Prime Minister Boiko Borisov on December 4 that the “outstanding legal issues” concerning South Stream “are not insurmountable”. However, Gazprom CEO Alexei Miller confirmed in an interview with Russia 24 television channel on December 9 that the decision was final. Russian officials also declined to attend the December 9 meeting of EU energy ministers.

Sergio Matalucci, an Associate Partner at Natural Gas Europe, writes that the EU is unlikely to be able to bring about a change in the Russian stance on South Stream. "It seems that a final decision on the South Stream project will not have to do with Brussels. Moscow could change its mind - retreating from the position announced last week - but this won't probably depend on the EU,” he wrote.

In his initial announcement on December 1, Putin blamed EU sanctions for the decision to scrap South Stream. However, Miller claimed that the responsibility rested with Bulgaria, which had fallen - somewhat reluctantly - into line with EU policy and declined to continue work on the project until given the go-ahead by Brussels.

“Bulgaria did not give a construction permit to build South Stream neither onshore, nor in its territorial waters and economic zone. This doesn’t concern the Third Energy Package, and the European Commission is not the one to blame in this particular situation. It is the Bulgarian government that did not provide us with the construction permits. Therefore, the definitive decision to cancel the project was made,” Miller told Russia 24.

Miller also stressed that along with Ukraine, Bulgaria would lose its status as a transit country for Russian gas once the new pipeline to Turkey becomes operational. Estimates for how much this will cost Bulgaria vary, with MPs from the opposition Socialist party claiming Sofia could lose as much as €600m a year in transit fees in addition to the indirect benefits of the pipeline.

Members of Prime Minister Boiko Borisov’s government and the previous administration under Plamen Oresharski, are each blaming the other for the demise of the project. Former Energy Minister Rumen Ovcharov has accused the government of jeopardising the project through its “incompetence” in negotiations.

Meanwhile, Oresharski took to his Facebook page to defend himself against accusations that his government, which collapsed in July, was responsible for the loss of South Stream. During his 15-month rule, Sofia came in for official censure from Brussels both for the lack of transparency and for continuing preparations for South Stream in defiance of an EU decision to suspend the project.

Fears of energy shortages this winter, and uncertainty over supplies in the longer-term are putting pressure on Borisov’s government, which took power in November after Bulgaria’s second set of snap elections in under two years. The growing acrimony over South Stream now threatens a return to political instability.

The situation “has turned out to be a tricky situation for Prime Minister Boyko Borissov. He did not expect to get all the blame or the threat of legal action if Moscow decides to go to court,” wrote Matalucci.

Serbia is also expected to suffer as a result of the Russian decision. As a non-EU member, Serbia had been preparing to start construction work on its section of the pipeline this autumn. Prime Minister Aleksandar Vucic said after Moscow’s decision was announced that it was “bad news” for Serbia. In addition to providing energy security for Serbia, the government had been counting on the prospect of cheap gas and lucrative construction contracts for local firms to partly offset the impact of ongoing austerity measures and the damage caused by widespread flooding in May to the economy.

However, Russian Prime Minister Dmitry Medvedev has since reached out to both Vucic and Hungarian Prime Minister Victor Orban. Telephone conversations took place between Medvedev and the two East European leaders this week to discuss further interaction in the power sector.

Meanwhile, Croatia, which would have received gas via Serbia, is reconsidering plans to build an LNG import terminal at Omisalj port, on the island of Krk, Reuters reported. The idea had previously been abandoned as gas demand dropped during the recent international economic crisis. Discussions are underway in Zagreb, and Economy Minister Ivan Vrdoljak announced on December 7 that the government will decide by the end of January whether the €600m terminal should be designated a strategic project for the country. If it goes ahead, it could supply gas to Hungary, Slovenia and Serbia as well as Croatia.

Among the countries of Southeast Europe, Romania, which has a poor relationship with Russia, is a potential gainer from the South Stream debacle. Romania was not included in the South Stream route (though the pipeline could potentially have been used to transport Romanian Black Sea gas in future). Romania is not currently able to produce enough gas for its own needs, but with the development of the country’s offshore reserves, it could become an exporter in future. Gas deposits being explored by Petrom and ExxonMobil are expected to fulfil demand in both Romania and neighbouring Moldova by the end of this decade.


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