“South Stream” 2.0: Russia ready, but still depends on Washington and Brussels

Ahead of Vladimir Putin’s visit to Greece, the Russian president’s aide Yuri Ushakov said the project of the gas pipeline through the Black Sea has not been abandoned and the “replacement” to the South Stream may be materialized.

“We are working on the project of the gas supply from Russia to Greece and Italy via third countries. The gas pipeline will be laid under the Black Sea and then along the territory of one of the coastal countries, apparently Bulgaria, and farther to Greece and Italy,” the president’s aide said.

Earlier in February, Gazprom, Edison (Italy) and Greece (DEPA) signed a memorandum to organize the southern route of the Russian gas supplies to Greece and Italy.  Gazprom specified that the project will be based on the results of the work Edison and DEPA have done within ITGI Poseidon. It is an old project of gas pipeline running under the sea parallel to the Trans Adriatic gas pipeline that is being built as part of the Southern Gas Corridor which will supply the Azerbaijani gas to Europe. Edison and DEPA participate in ITGI Poseidon on a parity basis.

If the project is implemented, the new route of the Russian gas will near completion parallel to the South Gas Corridor that is considered an alternative to the gas supplies from Russia.

In 2014, Moscow refused from the construction of the South Stream, after the Bulgarian government suspended the construction claiming that the project does not meet with EU requirements. After Turkey shot down the Russian warplane over Syria in 2015, the Turkish Stream project was frozen too. Consequently, the new route is the third project of Gazprom to deliver the Russian gas to the south of Europe.

“The gas pipeline is the reincarnation of the South Stream, but it will run to Greece and Italy instead to Hungary and Austria via Bulgaria. Italy is the third largest consumer of the Russian gas after Germany and Turkey and that market is extremely important to us,” Igor Yushkov, a leading analyst at the National Energy Security Foundation, told EADaily’s correspondent. The capacity of the new route will be half as much as the South Stream but twice as much as the South Gas Corridor – 31.5 billion cubic meters.

Actually, Gazprom will be able to supply 21 billion cubic meters of gas to Italy, another two billion cubic meters to Greece. The remaining 7-8 billion cubic meters are for Turkey, though it is not made public. At present, Turkey received part of the Russia gas through the Blue Stream across the Black Sea and the remaining via Ukraine. Russia has long-term contracts that must be implemented. Therefore, if Russia refuses from Ukraine as a transit country, it needs new routes to supply gas to Turkey. Transportation through the North Stream is inexpedient, as the route is remote and it will increase the cost value of gas.

Yet not so long ago, in February, Gazprom could not unveil the details of the new route. “It is a preliminary project. There is neither feasibility study nor price so far,” a source in Gazprom told RBC. “Maybe, by the end of the year, there will be both,” he said.  In his words, the memorandum of the new southern route to the EU looks to spur Russia’s negotiations with the European Commission for the North Stream-2.  The commission is concerned over the gas supply of the southern countries in Europe (if the transit via Ukraine is stopped).

“We do not know how to cross the Black Sea, it is possible only through the economic waters of Turkey, but the relations with that country are tense now,” the source told RBC. “Alternative talks are underway with Bulgaria and Romania. Both the new route and the Southern Gas Corridor are beneficial for Europe, but both the projects are still at the stage of development. Yet, experts say, the Russian project has some advantages.”

“Both the projects are in demand in the market when it comes to development of competition and preference of gas as fuel,” Alexei Grivach, the deputy head of the National Energy Security Foundation, told EADaily’s correspondent. “Prices of hydrocarbons are low for everyone now. We have a good position for competition, as we have a big resource base ready for recovery and we have laid the groundwork within the South Stream in the field of infrastructures (the Russian overland part of the new project is inherently ready – editor’s note).”

The new gas route will cost more than $20 billion inclusive of the work carried out. The Southern Corridor will be twice as expensive. Its resource base, the Shah Deniz 2 gas field facilities are being built. It will be possible to supply only 16 billion cubic meters of gas to Europe and Turkey, which is half as much as the Russian route’s capacity.

Besides the infrastructures inherited from the South Stream project, the South Stream Company (50% of which belonged to Gazprom, 20% - to Eni (Italy), and by 15% to Wintershall (Germany) and EDF (France)) managed to buy 680,000 tons of pipes for the underwater pipeline for 1 billion EUR, a source close to Gazprom told Vedomosti.

All those pipes have been piled near the port in Bulgaria for over a year, he said. This quantity will be enough to lay the first line of ITGI Poseidon and part of the second line. Two lines may be laid: one with a capacity of 16 billion cubic meters annually to Turkey, and the second with the same capacity to Bulgaria, the source said.

However, experts say, politics – the opinion of Brussels and Washington - will have a crucial role for the new gas pipeline. “The major problem the South Stream has faced is Bulgaria’s stance,” Igor Yushkov said. “As we could see Sofia is not independent in its decision. For instance, Senator John McCain and his delegation travelled to Bulgaria prior to Bulgaria’s decision to stop the project allegedly for not meeting the EU requirements. Although Russians are often blamed for a paranoia of seeing enemies everywhere, we have reasons for that. How, for instance, could we take the statement by Secretary of State John Kerry on the inexpediency of building North Stream 2?”

Therefore, the expert thinks, Moscow will have to settle the problem with Bulgaria directly with Washington and Brussels. “We have enlisted the support of Greece and Italy,” Igor Yushkov said. “Today, these countries are concerned over the situation in the north of Africa. They are afraid of a spillover of the tensions into Algeria, the second largest gas supplier for Italy after Russia. Therefore, Rome is very interested in the southern gas route from Russia. In this light, Vladimir Putin’s article published in one of the Greek newspapers ahead of his visit speaks for itself. The president wrote that Greece suffers from the spoiled relationships of Russia and the EU and the counter-sanctions have affected Greece. However, Moscow cannot make an exception. Therefore, it is within the interests of Greece and Italy to try to influence the decisions made in Brussels.”