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Picture: Gazprom

South Stream’s death a chance for Central Europe to reintegrate?

17.12.2015 | By Eszter Hajdú, Michal Manin, Łukasz Kołtuniak, Bartłomiej Sawicki

The Russian President, Vladimir Putin during his visit in Turkey announced that the proposed South Stream gas pipeline would not go ahead. In return Russia would look at building a gas hub on the Turkish-Greek border. Russia doesn’t quit on its basic objective, which is to prevent the southern corridor from running through Turkey to southern Europe.

Russia has adjusted to new political situation

Since the annexation of Crimea, legal disputes between Gazprom and the European Commission have intensified. The European Commission rules require that a single company cannot both produce and transport oil and gas. However, some EU members, like Austria and Hungary, that were to host the South Stream pipeline signed bilateral agreements with Gazprom. After that, the European Commission proclaimed these bilateral agreements illegal under the EU law. In April 2014, also the European Parliament refused the construction of the South Stream pipeline.

On December 1st 2014, when Russian president Vladimir Putin justified the termination of the project he explained it was due to the failure to reach a deal on South Stream with Bulgaria whose government complied with the European Commission appeal and suspended preparatory works in June 2014, as a protest against the Russian annexation of Crimea. “We believe that the stance of the European Commission was counterproductive. In fact, the European Commission not only provided no help in implementation [of the South Stream pipeline], but, as we see, obstacles were created”, said the Russian president.

Moreover, a significant role could be also played by the US and EU economic sanctions that limited access to foreign capital in Russia, and blocked Western oil companies from participating in Arctic, shale, and deep-sea drilling projects in Russia. In result, Gazprom’s termination of the South Stream is a possible result of the sanctions imposed on Russia. Gazprom was simply unable to find sources in order to finance the project once the sanctions came into force. Therefore, assuming the EU is even interested in continuing the project, the question is: how Gazprom would like to finance it.

The abovementioned implies that some leaders in Europe, led by the European Commission, saw the South Stream project as Moscow’s attempt to reinforce its energy control over Europe. After the Russian annexation of Crimea, they have either become even more suspicious about Russian energy plans in Europe, or they have used the opportunity to punish Russia for its policy in Ukraine. So the first possible explanation of Moscow’s decision is that Russian leaders realized reluctance of the EU towards the South Stream pipeline and they have decided to adjust to these new conditions. The result was the end of the pipeline and creation of a new one that would lead to Turkey.

Russia’s effort to exert pressure on Europe

The second possible explanation of the termination of the South Stream project is that it is all just Mr. Putin’s bluff, or a tactical move whose goal is to exert pressure on the European Union. States like Austria, Bulgaria or Hungary will suffer significant losses because of the termination of the project. Subsequently, these countries can express their disappointment for example by pushing the European Commission to re-implement the South Stream gas pipeline (or other possible new project), or to win concessions from the Commission on other issues when the interests of these states will be at stake. Moreover, if the concessions turn out to be limited or even none, these “disappointed” countries can act against the interests of the EU out of spite, and they can follow purely their national interests, with no regard to the EU as a whole. In such case, these states can divert their foreign policy towards Russia. They can also, for example, oppose Brussels’ foreign policy on Russia or on other significant issues. This can be evidenced by the fact that Mr. Putin appealed to Bulgaria to claim the losses caused by the termination of the South Stream from the European Commission and accused the Commission of depriving Bulgaria of the right to act as a sovereign state.

Furthermore, EU business needs Russia’s relatively cheap gas, too. Therefore, the EU is interested in building a new pipeline that would carry Russian gas to Europe. On December 2nd, the European Union proclaimed it will continue to work with its member states on finding a deal with Russia to build a gas pipeline to South-East Europe, despite Russia’s announcement that the project has been abandoned. The EU’s vice president for energy, Maroš Šefčovič, said that the next meeting on the South Stream pipeline was planned for the 9th December 2014 and it will take place.

Moreover, some significant European companies, especially from Germany, consider Moscow a reliable provider of gas. These won’t be enthusiastic about the termination of the South Stream project and they will push their governments to find a new way to get Russian gas into Western Europe. Therefore, such EU companies can serve as Mr. Putin’s Trojan horse. Their lobbing can lead to changes in foreign policy of their home states, or even in the change of the foreign policy, on particular issues, of the whole EU. In this case, it is worth to mention that the strategic partners of the South Stream pipeline included some of the European giants: the largest chemical company in the world – German BASF, the largest crude oil and natural gas producer in Germany – Wintershall, Italian Eni or French EDF.

South Stream was a significant project to Russia’s state gas giant Gazprom. But the plans were in conflict with the European law (Third energy package) and long term targets of the European Community. Brussels is striving to diversify supply routes and sources and South Stream was in opposition to these plans. The EU also pressured the countries that signed contracts with Russia to kill or freeze the project. However, a few states in Central Europe had huge hopes about the pipeline. Bulgaria, Serbia and Hungary wanted to increase the safety of gas supplies. How will Putin’s decision affect the energy security in countries in Central Europe?

Bulgaria

As much as 85% of Bulgaria’s gas is bought each year from Gazprom. The gas is delivered via the only available pipeline that runs through Ukraine. In 2009 Bulgaria was heavily impacted by the conflict over gas prices between Moscow and Kiev that resulted in Russia cutting gas delivery to South Europe. South Stream would bypass Ukraine, which in Sofia’s opinion would end the risk of supply disruptions. However, despite the EC’s recommendations, Sofia continued the preparations for South Stream. According to the EC, Bulgaria might have broken the EU public procurement law when selecting the project contractor. The main problem was that the consortium, controlled by a Russian company Strojtransgaz, won a contract to design and build the pipeline without a transparent and competitive tender. The EC also voiced its concern about the agreement on South Stream signed between Russia and Bulgaria. In addition, the tender invite to build the Bulgarian part of the pipeline was not published in the Journal of Laws of Bulgaria. After a warning issued by the EU last August, the former Bulgarian Minister of the Economy Energii Vasil Shtonov ordered to stop all activities related to South Stream because the project did not fulfill EU legal regulations. The Ministry also promised to fully cooperate with the EC on the project. Bulgaria expressed its hope that Russia and the EU will reach an understanding about the South Stream’s legal status.The media and politicians were disappointed with Putin’s decisions. They stressed that the Bulgarian economy will suffer great losses, including the lack of potential new investments and new jobs that would be created if the pipe was to be constructed. Temenuzhka Petkova, the Bulgarian Minister of Energy, estimated that Bulgaria’s potential losses were at 400 million EUR, excluding fees and dividends Sofia could have received.

Bulgaria is one of the EU members that is at the highest risk of gas supplies interruptions. Currently Sofia imports between 3 and 4 billion cubic meters (bcm) of gas annually from Gazprom via a pipeline that goes through Ukraine. Paradoxically Putin’s decision might help to enhance Bulgaria’s energy security. Sofia will be forced to invest in integrating its energy network with the European gas system through building gas links with Greece and other EU members. Recently a gas agreement between Greece, Bulgaria and Romania was supposed to be signed. The project’s aim was to build a vertical gas link with a capacity from 3 to 5 bcm a year. The gas was supposed to come from the Trans-Adriatic gas pipeline and the Greek terminal Revithoussa LNG. Sofia might also decide to join the Southern Corridor.

Serbia

The Serbian government is also concerned about South Stream’s future. Belgrade is still waiting for an official confirmation from Gazprom. The media are stressing that the country lost financially because of the shut down. Serbia has spent around 30 million Euro on eminent domain, preparatory activities and conceptual design. This year, the state owned gas concern Srbijagas set up a joint venture with Gazprom called “South Stream Serbia”. Serbia expected profits at the level of around 300 million EUR after the completion of the project. Because of Russia’s withdrawal, the gas agreement that the two countries signed last year is now in question. In October last year, Serbia signed a contract for gas supply until 2021. Sofia buys 1.5 bcm of gas a year. This volume would have increased to 5 bcm if South Stream would be completed in 2016. Similarly to Bulgaria, Serbia could be linked to the Trans-Adriatic gas pipeline as an alternative to South Stream. Serbia is also a member of the European Energy Community, but it is yet to introduce all the regulations from the Third Energy Package. Suspending South Stream means Serbia can find the time to implement the EU energy law and accelerate its negotiations with Brussels.

Despite the fact that Serbs feel let down by both Moscow and Brussels, they are doing their best to avoid burning bridges with either of the parties. According to the President Tomislav Nikolić, Serbia is a victim of a geopolitical clash between the EU and Russia. Whereas Prime Minister Aleksandar Vucić, did not spare Moscow criticism and underlined Serbian engagement in the project that entailed significant costs. It is worth to mention that so far both politicians tried to balance between the engagement in the EU integration process and the continuation of their almost strategic relations with Russia. Moscow perfectly understands that Belgrade needs to swallow a really bitter pill now, so to minimize the damage to its image it is trying to put the blame on the EU. Russian politicians have even suggested that Serbia should demand that Brussels cover its losses.

Hungary

The government in Budapest and especially Prime Minister Victor Orban have significantly engaged in the South Stream project. Last month Hungary even changed the law to facilitate and streamline the construction of the pipeline. South Stream was Budapest’s answer to increase the security of gas deliveries from Russia. For the last couple of years, the deliveries, especially in the winter have been unstable. Despite that, the state-owned energy company MVM has ensured that Putin’s decision will not have any influence on its and the country’s long-term energy security strategy. MVM is a joint venture partner of Gazprom, as part of the “South Stream Hungary”. The general assets of that company were estimated at 5 bn. forints at the end of 2013. Currently, Hungarians are looking for a new project. Budapest believes that the AGRI pipeline can be the alternative. It will transfer gas from Azerbaijan through Georgia and Romania. Last November, Orban signed a strategic partnership agreement with Baku, which promised to transfer – as Orban put it – “several billions of cubic meters” of natural gas to Europe. The shipment would start at the end of this decade. Hungary can also improve its energy security by accelerating the construction of the North-South gas corridor.

Slovenia

According to the last project version, South Stream was not supposed to go through Slovenia, even though the country was to be linked with the pipeline. However, Slovenia’s Prime Minister Miro Cerar was not even surprised about the decision to halt the project. Slovenia is also searching for other ways to enhance their energy independence. The central-leftist government focuses on intensifying the work on renewable energy sources. Slovenia is located close to Italy, so if need be it can purchase gas from its southern neighbor. In the future, it will also be able to purchase gas from the Croatian LNG terminal.

Croatia

Since Croatia is planning to build an LNG terminal on the Krk island, the news about South Stream’s demise was welcomed there. Branko Grcia, vice- prime minister and Minister of the Regional Development and EU Funds, said that this was just another factor that should contribute to speeding up the terminal construction. In these circumstances the value of the project is increasing because it constitutes a real alternative gas source in that part of Europe. Thus, it has a significant impact on the Croatian and neighboring markets. Croatia wants to achieve energy security through its own resources, the terminal and a gas link called TAP that goes through the Balkans. Because of that it is necessary to deepen Zagreb’s cooperation with the Visegrad Group.

One of the most important projects will be to finish the North-South gas corridor. It should be completed in 2018. It will connect the LNG terminal in Świnoujście on the Baltic Sea and the Croatian terminal. After performing all the formal duties required to start the construction, LNG terminal should be completed by mid-2016 and the project should be finished by 2019.The cost is estimated at 600 mln EUR. The endeavor is on the EU Project of Common Interest list, which means it can receive EU funding.Croatia might also posses potentially substantial gas and oil deposits. Ivan Vrdoljak, the Croatian Minister of Economy announced that he expects that within the next five years 2.5 million dollars will be invested in gas and oil exploration in the Adriatic sea. This in turn should ensure an increase of gas output to 9 million m3. Each year Croatia consumes 2.73 bcm of gas, three quarters of which comes from national deposits. This year the first tender for 29 concession blocks on the Adriatic Sea has been completed.

Opportunity for Central and South East Europe

The whole situation around the termination of the South Stream pipeline can be a huge opportunity for Central Europe to become a more visible and relevant player not only within the EU, but also in the context of the EU – Russian relations. The problem of the Union is that any new pipeline that won’t lead through the Ukrainian territory will mean that the EU will leave, not only from the energy security perspective, Ukraine at the mercy of Russian whims. It will mean that EU’s influence on the Ukrainian future will suffer significantly. The Eastring project can be a remedy here, however, its success depends on the broad support from the Union, its member states, and mainly on the cooperation between the Central and South-East European states. The plan can increase security and stability, in general, not only in South-East Europe, that is almost utterly dependent on gas supplies from Russia, but as a bonus also in Ukraine.

Slovak alternative to South Stream

The third possible line of reasoning is that only three days before Russia announced the death of the South Stream project, on 28th November 2014, Slovak company Eustream (gas pipeline operator owned by SPP – Slovenský plynárenský priemysel, “Slovak Gas Industry”), had presented its gas supply plan for South-East Europe. The project titled “Eastring” could be an alternative to South Stream and is much cheaper (estimated cost is 750 million euro).The pipeline should carry natural gas from Western Europe to the Balkans, which would end its almost utter dependency on gas supplies from Russia. The project proposes that the pipeline would stretch from western European hubs via Slovakia’s existing system to Ukraine and then to Romania and Bulgaria. Serbia is also included in the plan. Eustream chairman Tomáš Mareček said that: “Eastring” project would have the ability to transport gas from the West to the Balkans. Mareček thinks that cooperation with Romania is crucial since the pipeline has to be constructed on its territory and because the project envisages a connection with a major Balkan pipeline running close to the Black Sea. “Economically and strategically it is the best solution for this part of Europe. It would cost only a fraction of the proposed South Stream budget, it could transport gas in both directions, provide the region with an alternative route and sources of gas and at the same time it will utilise the existing gas infrastructure in the region.“ added Mareček.

The role of Poland?

South Stream’s demise gives the EU and the countries in Central Europe a chance to speed up the diversification of Europe’s energy sources, implement energy EU law and increase the bloc’s energy security. It is also an opportunity for Central Europe to redefine its energy cooperation, and intensify the construction of gas connectors between members of the Visegrad 4 plus. South Stream was a bone of contention between the countries in the region. Now it is time to integrate the regional gas system on the basis of the European Union Project Common Interests, especially the North – South gas Corridor and the Southern Corridor. Diversification and construction of gas interconnectors would weaken Gazprom’s grip on the energy sectors in many of the countries that supported South Stream. It is also time to fully implement the EU’s third energy package which aims at introducing more competition by breaking up energy monopolies. This basically means that the company that supplies the gas cannot own the pipeline. The pipeline has to be open to third-party access to foster competition. Gazprom tried to avoid this clause when building South Stream. Poland as the biggest country in the region should prepare an agenda for an extraordinary energy meeting with countries from CEE. This idea goes hand in hand with the European union Energy Project supported by president of the European Union Council Donald Tusk. The upcoming European Union Council is a window of opportunity that should be used to fill in the void left after South Stream’s failure.

Picture: Gazprom

About Authors

Eszter Hajdú

Young scholar and researcher in the field of new media devices and the Middle East. Journalist at OrientPress New Agency in Budapest, Hungary. Currently, living in Istanbul, doing her MA thesis about the new media devices' role in the Turkish politics.

Michal Manin

MA student at Jagiellonian University in Krakow - European Studies with specialization in Central and Eastern Europe. The fields of interests include international politics and political economy. Speaks Slovak, Czech, English and Polish.

Łukasz Kołtuniak

Legal counsel trainee, PhD student at the Faculty of Law and Administration at the Jagiellonian University, interested in Eastern and Central Europe and political philosophy.

Bartłomiej Sawicki

Graduated in history at the Pedagogical University of Cracow and international relations at the Jagiellonian University. Postgraduate studies at the University of Mining and Metallurgy in Cracow - Oil and Gas Management. Postgraduate studies at the Tischner European University in Krakow – Multimedia, journalism, social networking. Journalist for the information web portal about shale gas- gazłupkowy.pl. Member of the expert team on European Union at the Jagiellonian Club. Research interests: energy security, former Yugoslavian countries.