South Stream Lite – chances and consequences

South Stream Lite – chances and consequences

South Stream Lite

The fate of two key elements of Russia’s energy ‘streams’ strategy – the Nord and Turkish streams – will be decided this fall. The Damocles sword is hovering above both, and at any moment the U.S. government could impose sanctions that would immediately terminate both projects.


Although such a scenario is probable, it is by no means certain.


President Trump remained deliberately vague on the imminence of the sanctions during his recent press conference at the White House with Polish President Duda.


US Secretary of Energy Rick Perry recently visited Moscow and, among various topics, discussed the sanctions options with his Russian counterpart as part of a broader, more positive package. Both Nord and Turkish Stream have reached a decisive stage, where action is desperately needed.


The only specific mention in recent U.S.-EU energy dialogue is that the U.S. is “working with the EU to end LNG imports from Russia”, i.e. only Novatek’s LNG Yamal terminal could be affected, not Gazprom.


The key strategic line for both ‘streams’ from the Kremlin’s point of view is that Ukrainian transit is a major constraint for Russia when it considers the full range of military options in Ukraine. Once built, the Kremlin will be free to engage in action in Eastern Ukraine and possibly contemplate further invasion westward with far less risk of losing clients in the EU.


During his stay in Moscow, Secretary Perry made it clear that, although sanctions can’t be ruled out, they are not an imminent option. That means, if imposed, the decision will be made at the White House, based on overriding geostrategic and foreign, rather than energy, policy considerations.


The Russian media, specializing in energy matters, floated the positive agenda part of the meeting between the US and Russian energy ministers – the LNG vs pipeline gas swaps that inter alia could help U.S. gas exporters circumvent import barriers in China and Russia, allowing them to reach LNG markets in the Far East.


Shortly afterward, German Chancellor Angela Merkel was quoted in Interfax as having given a positive nod on Nord Stream’s twin, Turkish Stream. Such ‘news’ feature the same information weight as recent reports disseminated by Sputnik International that President Trump has ruled out sanctions against EU companies involved in Nord Stream.


Russian propaganda outlets have recently beefed up the decibels, which makes it hard to distinguish between fact and fake.


Sources in Sofia have confirmed that the German Chancellor has in the past encouraged the Bulgarian PM to use Nord Stream-2 as precedent in pushing forward with the South Stream Lite.


In the meantime, the Kremlin’s prime line has been to court Erdogan and Merkel, seeking a co-modus vivendi with the US with a compromise – Russia would not object to US LNG in Europe, Germany would secure minimum transit flows through Ukraine and, in return, Washington would not impose sanctions on Nord Stream-2. Such a ‘trade-off’ will certainly not jeopardize Russia’s market dominance, as it will take years before U.S. LNG reaches any sizeable volumes and market share. The EC is not particularly enamored with the Russian ‘streams’ policy.


In the interim, President Putin has called to arms all his allies – Victor Orban has persistently challenged ‘Brussels’ bureaucracy’ for its ruling role on South Stream Lite, asserting that Hungary would buy gas and that should be enough for an interstate transaction between EU members on the South Stream Lite path.


The Bulgarian PM meets President Trump this week. He is expected to seek reassurances that sanctions will not be imposed on the South Stream Lite. The scheduled meeting is likely to be a photo op and a short one, yet a more substantive exchange can’t be ruled out. It is beyond doubt that President Trump is unlikely to indulge in specifics on this project. However, this would not preempt Borisov’s public interpretation of the meeting as a ‘green light’ for South Stream Lite. Alternatively, he could assert that the handshake is tacit consent, bonded with an equally remote and vague promise for more U.S. LNG imports to the SEE region.


A key line in the Kremlin’s propaganda salvo during the energy talks in Moscow was the impression that Russia and the U.S. are talking and agreeing, which makes less plausible a confrontational scenario and sanctions on Nord Stream – an encore of Brezhnev’s peaceful co-existence doctrine.


Map of the Pipeline projects in the Southern Stream Corridor – source Bruegel
Map of the Pipeline projects in the Southern Stream Corridor – source Bruegel


Another key feature of the Kremlin’s energy policy in the region is to sow division between Bulgaria and Greece, Bulgaria and Turkey and Bulgaria and Serbia. Russia has consistently used local proxies and its long-time relationship with state gas companies and Russian business to delay the entry of competitors into the transport infrastructure and to discredit the interconnector Greece-Bulgaria as meaningless, while promoting South Stream Lite. Given the critical state of relations between Moscow and Athens, following the autocephaly granted to the Ukrainian Orthodox Church by Constantinople’s Patriarch, the expulsion of the Russian diplomats and the visa restrictions to ROC’s top clergy to Mount Athos, Gazprom had to give up plans to use the TAP as a route to reach Italy and to scrap speculations with the Bulgaria bypass scenario for Turkish stream extensions.


The TAP Turkish Stream extension bypassing Bulgaria
The TAP Turkish Stream extension bypassing Bulgaria


By naming the revived project South Stream Lite, Gazprom aims to profit from work done so far – design, land alienation, permits, studies, etc. and essentially build on an existing institutional and corporate web of dependencies and interests.


South Stream Lite comprises of interconnected national gas pipeline segments in Bulgaria, Serbia and Hungary planned to be developed in parallel by the respective national gas operators.


Russian Foreign Minister Lavrov added a geopolitical blend to the Turkish Stream maneuvering – implicating that the Sochi Idlib agreement between Turkey and Russia, was motivated by the need to finalize Turkish Stream-2 and honor the interests of Turkey and Erdogan. The Kremlin’s patience, however, has its limits – a 30-day deadline. This is essentially the time frame in which Moscow would like to ‘close’ the South Stream Lite project.


The pipe-laying vessel “Pioneering Spirit” is located 100 km offshore of Kiyikoy in Turkey. The daily pipelaying rate is 4-5 km, which means Gazprom desperately needs a resolution in the next 25-30 days. Otherwise, the Turkish Stream-2 line would risk operating at a loss, being used occasionally to cover peak demand in Turkey and for potential swaps.


Pioneering Spirit's location on September 17, 2018
Pioneering Spirit’s location on September 17, 2018


To avoid EC Third Directive hurdles, the South Stream Lite promoters try to replicate the approach used in the original South Stream – subsea sections were presented as an interconnector between the Russian and Bulgarian gas systems. The idea will not work again, as recent changes in EU legislation have closed the loopholes, making advanced project ruling in Brussels explicit and mandatory. South Stream Lite would traverse different EU member countries and would substantially impact the SEE and EU gas market in general.


The onshore segment of Turkish Stream-2 will be connected to the Trans-Balkan gas pipeline at CS Luleburgaz, and henceforth gas is expected to flow northward in a reverse mode, to the Balkan Gas Hub center near CS Provadia.


Russian experts have finally admitted that use of the Bulgarian gas transport system has always been deemed in Moscow as unavoidable. “If we reason that it makes sense that the Turkish Stream should enter into the gas transport system of Bulgaria, which already exists, simply in a reverse mode, then this seems inevitable,” says Sergei Pravosudov, Director of the Russian Institute of National Energy. “No one, as I understand, officially acknowledged it. But it was the inevitable option as the gas transportation capacities will be freed with less gas being pumped through Ukraine.”


After CS Provadia – the Russian gas streams head westward and follow the original South Stream project route.


All national gas grid upgrades within the South Stream Lite concept needed to accommodate the 15.7 bcm from Turkish Stream-2 are not meant to serve indigenous consumption. The volumes are well above the 3 bcm that Bulgaria and Serbia import each year, thereby implying their transit role and impact on the SEE and EU gas market.


Gazprom has little to no chance of an EC exemption allowing it to use more than 50 percent of the pipeline capacity for its gas originating in Turkey. It will neither be capable of funding the Bulgarian segment of the South Stream Lite project – more than 1.2 billion euro, although an interstate credit line might be contemplated. The national grid operator, Bulgartransgaz, on its part, can’t raise such funds via banks, as the debt will exceed almost 10 times its annual income base.


To resolve the zugzwang, Gazprom has tried to involve its Nord Stream partners, notably Engie and Wintershall, in Turkish Stream. Alexei Miller might stand a better chance with Snam and Eni, but the Italian companies are not immune to sanctions. And the logic is not persuasive, given that South Stream Lite does not reach Italy.


The revived lighter version of South Stream toys with the idea that the Bulgarian, Serbian and Hungarian national gas champions would be able to buy and sell gas at each other’s borders, less the national intake. Bulgargaz should buy 15.7 bcm at the Bulgarian-Turkish border and sell 12 bcm at the Bulgaria-Serbian border, while Srbijagas passes on 9 bcm at the Serbian-Hungarian border to MOL. One more distinction between the original and the lite version of South Stream is that, so far, there has not been any agreement between Hungary and Austria on South Stream Lite gas reaching Baumgarten.


Whatever backstage actions take place, the time is short. Nord and South Streams Lite’s futures are by no means guaranteed. Gazprom market shares in the region are certain to tumble, as it loses its monopoly status.


However, gas export volumes from Russia are likely to remain high and stable, which invites a fresh look into Gazprom’s proxies, which ate ready and able to act as third parties, brokering Russian gas in Europe.


Chancellor Merkel and Germany were the first to see the opportunity with the Nord Stream–2 to broker Russian gas sales to Europe. Erdogan, Borisov, Vucic and Orban are simply following suit.


Chacun pour soi. Each man to himself. Where the EU ends.


By Ilian Vassilev

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