December 10, 2012

South Stream vs Nabucco

In a December 7 article in the Estonian daily Postimees, Evelyn Kaldoja* quoted energy analyst Matthew Hulbert of oilprice.com as saying that Russian President Vladimir Putin’s announcement of the start of construction of Gazprom’s South Stream pipeline (connecting Russia with EU markets in the Eastern Balkans under the Black Sea) marks the death of the Nabucco natural gas pipeline (from Azerbaijan to Austria). The underlying assertion of this comment is that the EU’s strategy of relying on Azerbaijan to reduce its reliance on Russia’s Gazprom has failed. While this may be precisely the impression President Putin seeks to create, this is untrue for several reasons.

In a December 7 article in the Estonian daily Postimees, Evelyn Kaldoja* quoted energy analyst Matthew Hulbert of oilprice.com as saying that Russian President Vladimir Putin’s announcement of the start of construction of Gazprom’s South Stream pipeline (connecting Russia with EU markets in the Eastern Balkans under the Black Sea) marks the death of the Nabucco natural gas pipeline (from Azerbaijan to Austria). The underlying assertion of this comment is that the EU’s strategy of relying on Azerbaijan to reduce its reliance on Russia’s Gazprom has failed. While this may be precisely the impression President Putin seeks to create, this is untrue for several reasons.

First, the EU does not support a specific pipeline project; it seeks instead a Southern Corridor to connect Azerbaijan’s giant Shah Deniz natural gas field with European markets, and which is charging ahead. The Southern Corridor will consist of three elements: an expanded South Caucasus Gas Pipeline that already connects the Shah Deniz field with Georgia and Turkey; a new Trans-Anatolian Pipeline (TANAP) now under development that will transport 16 billion cubic meters (BCM) of new gas from Shah Deniz, (with 6 BCM to Turkey and the remaining 10 BCM to the EU); and a new pipeline to deliver 10 BCM from Turkey to EU consumers, which will either be a version of Nabucco called Nabucco-West or the Trans-Adriatic Pipeline (TAP, connecting Turkey, Greece, Albania, and Italy under the Adriatic Sea); the consortium developing Shah Deniz will choose between the two options in mid-2013. Moreover, the Southern Corridor will be designed to accommodate additional future volumes of natural gas from Azerbaijan, as well as perhaps northern Iraq and Turkmenistan.

Second, despite reports to the contrary, Nabucco is still very much alive. Nabucco-West is strategically attractive to the EU and the Government of Azerbaijan because it would help Southeastern Europe diversify away from heavy dependence on Gazprom, (up to 100% in Bulgaria), while delivering larger volumes of Azerbaijani gas (31 BCM versus TAP’s 20 BCM maximum) to more countries deeper into Europe’s heartland (e.g., Bulgaria, Romania, Hungary, and Austria) than would TAP. Nevertheless, even if the Shah Deniz consortium does select TAP in mid-2013, the EU will still achieve its core goal, a Southern Corridor.

Third, it remains far from clear that South Stream will ever operate in a commercially rational way. Gazprom has yet to identify the source of the gas South Stream will pump, the ultimate cost of South Stream’s construction and operation, or the prices for which South Stream’s gas will be sold to EU consumers. The most likely source of South Stream’s gas will be Turkmenistan; and a series of analyses have shown the cost of delivering Turkmenistani gas to the EU is considerably higher via South Stream than via the Southern Corridor. Moreover, with increased price competition EU markets will enjoy thanks to the Southern Corridor, coupled with monopoly-busting reforms mandated by the EU’s Third Energy Package, Gazprom may find itself selling gas to Europe at a financial loss via South Stream.

Thus, Moscow does not appear driven by profit maximization in rushing to announce construction of South Stream. The Kremlin instead seems intent on intimidating private investors who will develop the Southern Corridor into believing Balkan and Central European gas markets will be flooded by South Stream’s 63 BCM of gas, leaving no space for competitive supplies from Azerbaijan.

Moscow therefore views South Stream as a geo-economic tool aimed to undercut the Southern Corridor (while bypassing troublesome Ukraine). It will be a costly one for the Russian Government, which will be left footing the bill for construction of a loss-making pipeline. The EU and the private investors in the Southern Corridor will therefore do a great service to both European energy consumers and Russian taxpayers by calling Moscow’s bluff and proceeding with the Southern Corridor. Fortunately for Europe, this is precisely what these investors plan to do. Unfortunately for Russian taxpayers, the Kremlin seems equally intent on proceeding with South Stream.

* ELi energiasõltumatus saab järjekordse hoobi

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