rules of the game

Flowing with the Stream

20.12.2013 | Andriy Starostin

The Kremlin keeps using its costly pipeline project to scare Ukraine gasless and surrender national gas transit grid

On the backdrop of Ukraines rejection of joining the EU for the sake of an alliance with Moscow, for the first time the European Commission officially took a negative stance against one of the Russian projects, which raised the concern of Ukrainian authorities

To be sure, Brussels announced restriction of the construction of the South Stream gas pipeline bypassing Ukraine. EU Energy Commissioner Marlene Holzner told the press that all intergovernmental agreements signed by Russia in 2009-2012 with the countries through which the pipeline or its offshoots will pass do not comply with EU legislation. They should be revised, said the representative. Bulgaria, Hungary, Slovenia, Austria, Croatia, Greece and Serbia signed the agreement with Russia. The latter is not an EU member and acts only as an observer in countries that are united by the European Energy Charter, which did not obstruct the European Commission from include it in the request for a review.

It appears from Holzners statement that on December 6 the European Commission sent a letter to the Russian Ministry of Energy suggesting the start of negotiations on the revision of all bilateral agreements between Russia, the EU and Serbia. The letter contains arguments that allowed the European Commission to deem these agreements contradictory to the Third Energy Package.

First of all, Gazprom will be the main owner of the pipeline and delivered gas, contrary to the principle of separation of owners in terms of the scope of their activity. Secondly, a number of agreements do not guarantee access to the pipelines of other suppliers. Thirdly, Gazprom will set the tariffs for the pumping of gas. While the European Commission cannot prohibit the construction of the pipeline, European authorities can prohibit its use, Holzner stressed.

Up until recently Southern Stream was considered the apotheosis of the gas pipeline confrontation between Moscow and Brussels. This project was principally directed against the European gas pipeline project Nabucco of the same capacity and the geographic vector. They are both designed to increase the supply of gas from the Caspian Sea, a rich region where Europe is trying to gain a foothold in money, but which Moscow is still holding onto through the forceful pressure in its classic old fashion.

When in 2011-2012 Nabucco shareholders made a decision to suspend its implementation, Moscow was in a hurry to trumpet its victory, but another failure awaited it. Instead of one pipeline, Nabucco in recent years on the southeastern European borders started the construction of five pipelines a shorter version of the Nabucco West, Trans-Adriatic, Trans-Anatolian and Trans-Arab gas pipelines. Instead of this project temporarily frozen by the Syrian regime, all the rest of the players undertook active construction. The unblocked Iran and Iraq, Azerbaijan and Turkmenistan that were under reconstruction contracted these resources.

Such a turn of events promised to bury Putins reckless pipeline confrontation with the EU. However, the recent political upheaval in Ukraine, which is the second highest gas consumer in Europe after Germany, obviously hardened the hearts of Europeans. First of all, European oil and gas corporations that entered the Ukrainian market in recent years have to deal with Russias Gazprom to gain access to Ukrainian pipelines. Secondly, all the aforementioned projects have a total throughput capacity of more than 60 bn cubic m of gas per year. With the exception of Ukraine no other country in Eastern Europe consumes such an amount of gas and its market gradually started contributing to a return on investments into the newest Asian gas pipeline projects of the European Union.

In recent years, Ukrainian authorities have tended to harshly criticize South Stream as a threat to Ukraine´s revenues from the transit of Russian gas to the EU. Upon closer examination, such criticism looks fake, at the very least because official Kyiv did not make any real steps against the Russian project. For example, there was no inspection of the safety of the underwater section of the pipeline in zones of enhanced seismic activity. No environmental damage from its construction was evaluated.

Finally, there was no formal assessment of the dangerously close location of the route of the pipeline to Ukrainian rocket launching ranges and areas of regular naval training exe rcises (the pipeline will be laid on the border of maritime economic zones between Ukraine and Turkey).

Given such inconsistencies any development of a joint policy between Ukraine, Turkey, Romania and Bulgaria in the South Stream project is out of the question. Moreover, for many Ukrainian politicians the demonization of the pipeline has turned into a perfect weapon in the struggle for surrendering Ukraines GTG to Russian companies in the form of a consortium or a joint venture.

Bringing the verdict on illegality of construction of South Stream, Brussels demonstrated its willingness to compromise. This could be in the form of a shareholders commitment to put up for free sale in the Bulgarian port of Varna at least 50% of the gas that comes out from the underwater pipeline to the European continent after the completion of its construction in 2015. Based on the capacity of the project, the mentioned percentage should be 32.5 bn cubic m of gas per year, which is more than the total consumption of Romania, Bulgaria, Greece and the countries of the former Yugoslavia.

Again, with the exception of Ukraine th ere is no consumer for such a resource in the region and according to the current estimates in a year the prices of gas produced by these companies in Varna will be lower than the price of gas imported from Russian to Ukraine. But Kyiv is no hurry to sit down at the negotiating table with the shareholders of South Stream. Apparently, this dubious Russian project is vitally needed by the Ukrainian authorities as a good excuse for another shady and risky undertaking with the Russian-Ukrainian gas consortium.

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