November 2009 Vol. 236 No. 11

Projects

Russia Pushing Hard for South Stream Pipeline Project

Against the European Union’s Southern Corridor project, Russia is redoubling efforts to advertise its own project, South Stream, with Italian backing.

Due to stagnant gas production and aging fields in operation, Russia has been unable to identify any internal gas reserves to supply the proposed South Stream system. Unlike the Nord Stream pipeline project on the Baltic seabed, which has at least some Russian gas resources allocated to it at least in the planning, South Stream has no known resource backup in Russia or elsewhere. Moscow only suggests that it would shift some gas volumes from the Ukrainian transit pipelines into South Stream, though far from meeting South Stream’s declared future capacity.

In 2007-2008 Moscow was offering 31 Bcm annually in future aggregate deliveries to all putative customers of South Stream. In February 2009 Gazprom increased the offer without explanation to 45 Bcm per year; and in May, raised the ante to 63 Bcm annually, even as Russia faced the prospect of gas shortfalls after 2010.

Moscow’s initial cost estimates for South Stream in 2007-2008 hovered around $10 billion. In its February 2009 briefing for Russian and other potential investor companies, Gazprom raised the cost estimate to $19-24 billion. Sources now cite cost estimates of $25-28 billion. Routing the seabed section through the Turkish economic zone means a longer pipeline on a deeper and more complex seabed, thus adding to the ultimate costs.

The project seems academic without dedicated Russian gas volumes, and given Russia’s stagnant production, South Stream appears unbankable at such costs. The costs would have to be passed on to European consumers, if Russia could ultimately deliver the financing and the gas.

Moscow seeks to maximize the number of participant countries and interested parties in South Stream. It also offers various pipeline routes or branch-offs, sometimes incompatible with each other, to various countries along the potential routes. The goal is to keep South Stream alive as a virtual proposition, in virtual competition against the E.U.-backed Nabucco project. Through shifting signals, Moscow seeks to induce countries in Central and Southeastern Europe to compete against each other for future supplies and transit of finite volumes of Russian gas.

Gazprom CEO Aleksei Miller warned “There is little time left. The countries of Central and Southeastern Europe have to make quick decisions as to whether they want to support the South Stream project. Neighboring countries would be more than happy to take the place of any country that declines to participate.”