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Mila De Eskita

Russia/Ukraine: Gazprom Guarantees EU Energy Security with South Stream?

The final holdout country, Bulgaria, signed the South Stream deal with Russia’s natural gas behemoth Gazprom on 15 November. “South Stream’s contribution into providing Europe with energy security is very significant. It allows us to create alternative and secure natural gas supply routes to our consumers,” Gazprom’s Chief Executive Officer Alexei Miller said in a statement.

Gazprom logo, author: qwertyuiop, source: Flickr

South Stream is funded by Gazprom, Italy’s Eni, France’s EDF and Germany’s Wintershall and is due to start operating in 2015. It’s planned to pump 63bn cubic metres a year of gas or to the Balkans, Austria and Italy. This equals to approximately 14 per cent of the European Union’s gas consumption

The significance of the South Stream pipeline is mainly twofold.

Firstly, it will provide energy security to Europe by avoiding a historically problematic country Ukraine. A dispute over gas prices in 2006 and 2009 between Russia and Ukraine led to a halt of gas supplies to European countries.  In relation to Ukraine, a Gazprom official commented that the aim of the project is “diversification of supply transport routes” and was “not aimed at avoiding any country”.

Secondly, from a Russian perspective, it not only lessens the dependence on Ukrainian transit pipelines but ensures that Russian gas reaches the southern European market first before rival producers in the Caspian and central Asia. With all the agreements now in place, South Stream will start pumping gas into the region before large Caspian volumes arrive.

Major Russian gas pipelines to Europe, author: Samuel Bailey, source: Wikimedia Commons

Together with the Nord Stream pipeline launched last year, South Stream would expand Russia’s annual export capacity by about 50 per cent to over 300 bcm, providing Gazprom with the opportunity to capture future demand in Europe.

Gazprom is currently struggling to maintain its influence as its dominant position is threatened by the rise of shale gas in the US and increase in renewable energy production in many European countries.

The European Commission’s investigation earlier in the year on Gazprom’s monopolistic and anti-competitive practices in the Central European natural gas market is another clear signal that the EU wants to diversify its suppliers of gas. Signing of the South Stream deal comes at a good time for Gazprom as otherwise it will be hard hit by the new EU competition coming into force in January 2013.

Cuts in gas prices is another sign that Gazprom has lost its bargaining power over countries where historically it had a strong sphere of influence. Upon signing a new ten year gas supply contract with Bulgaria, Gazprom’s chief executive Alexei Miller announced a cut of 20 per cent in gas prices. Furthermore Poland’s PGNiG has also managed to successfully negotiate a discount between 10 to 20 per cent in gas prices over its current rate.

Gazprom’s dominance is clearly declining in Europe. By building the South Stream pipeline, could it be Russia’s way of portraying that they are in fact concerned about EU energy security and are finally willing to play by EU rules?

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