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Energy Diplomacy, Europe, International Relations, Pipeline, Russia, South Stream, Turkey

Who buried South Stream and Why?: EU or Russia?


Source: Facebook page of Russian MFA

Source: Facebook page of Russian MFA

Zbigniew Brzezinski had once described Russia’s energy policy as an initiative “to separate the Central Europe from the Western Europe”; something able to divide Member States’ solidarity on the EU and NATO’s potential enlargement in the post-soviet space. Therefore, the EU was not happy leading its member states’ ‘preferential relationship’ with Russia, notably on the South Stream.

Vladimir Putin’s statement in Turkey on the suspension of the South Stream is a new blow on the region’s energy history, which is interpreted differently. Interestingly, Putin’s statement concerning the South Stream was not unexpected; in June, right after the visit of John McCain, Chris Murphy and Ron Johnson to Bulgaria, the country had already announced the cease of works on the South Stream in Varna, which was the South Stream’s entrance to Europe. What Putin did, was to just give his feedback to this statement in Turkey. 

Russia guessed that its close relations and bilateral intergovernmental energy agreements would prevail over the EU competition law; this would not allow Gazprom to exert its monopoly over pipeline projects that could halt competition in the European energy sector for third party access. However, the EU legislation prevailed, disregarding Article 192 (2) of the Lisbon Treaty (TFEU) which states that “[EU] measures shall not affect a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply”. Meanwhile, Article 4 (2) (i) of TFEU, defines ‘energy’ as a ‘shared competence’, but not ‘exclusive competence’ of the EU. 

The EU tried to bind Russia with an ‘Energy Charter’, which Russia has signed but not ratified yet. Later, the European Commission started a formal investigation against Gazprom for its gas monopoly and anti-competitive practices in Central and Eastern Europe. From 2008 to 2010, Russia had signed intergovernmental agreements with Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia and Austria for implementation of the South Stream pipeline. Then, the European Commission announced that Russia’s intergovernmental energy agreements failed to comply with the EU law. Finally, the EU moved ahead with ‘Third Energy Package’ (TEP) rules, which require companies that supply gas, not to own or control the pipeline, which gas goes through. This was contradicting Russia’s interest as it could undermine Russian monopoly. Instead, Russia decided to abandon the South Stream to avoid falling under the EU’s energy acquis communautaire. Russia used the TEP as an excuse of suspending the South Stream, while in reality it was evident that Gazprom would not be able to proceed with the project because of political and financial issues. 

The ‘Third Energy Package’ has two key elements: “the effective separation of networks from supply (‘unbundling’) and nondiscriminatory access by third parties to the infrastructure”. Therefore, the intergovernmental energy agreements among Russia, Austria, Bulgaria, Croatia, Greece, Hungary, Serbia and Slovenia were invalid due to non-compliance to the EU energy law regarding ‘unbundling’ and ‘third party access’. The EU demanded revision of these agreements, which Russia could not agree. Though Serbia is a not a member state of the EU, it is bound to implement the regulation of the EU because of its Energy Community membership.

On the other hand, Europe is not eager to import more gas from Russia; rather it wants to limit it and diversify not only routes, but also sources. The South Stream intended to bypass Ukraine, like the Nord Stream. Thus, Russia could change the export routes to Europe, without changing the volume. The new pipeline to Turkey is supposed to break Ukraine’s absolute transit status, which will leave a room for Russia for negotiations with Ukraine. Judy Dempsey, Senior Associate from Carnegie Europe, writes that the demise of the South Stream will speed up the diversification of Europe’s energy sources, encourage transparency in the energy sector over prices and contracts, make EU member states ratify the Third Energy Package, would weaken Gazprom’s existing grip on the energy sectors of those who supported the South Stream.

However, the European transit countries (Serbia, Bulgaria and Hungary) will be the losers in terms of potential investment, job opportunities, and contribution to their state budgets, price discounts, as well as alternative route of supply in case of supply disruptions through Ukrainian territories. Therefore, the absence of the South Stream means no price discounts, and no alternative routes in case of recurrence of 2006/2009 Ukraine-Russia gas crisis. Although, the EU relies on shale gas – perspective of which is not defined yet – massive drilling activities have not been observed so far. At the same time the US LNG export is under doubt given the competitive LNG prices in Asian countries. However, officials in Brussels consider it as a diplomatic victory, even though certain member states became victims of opposition from the European Commission. The opening of LNG terminal in Lithuania is the the only positive development that could be considered. Furthermore, three solutions are known to avoid risk of supply disruption. Firstly is linking Slovak gas hub to Balkans via pipeline, which passes through south-west Ukraine and onto Romania and Bulgaria. Secondly the construction of LNG plant in the Croatia’s Krk Island for the regasification potentially imported by the LNG from Qatar, Algeria or the US and further to forward it to Hungary and Balkan countries. While the third option is the well-known Trans-Adriatic Pipeline.

Foreign Policy writes that, Russia’s withdrawal from the South Stream was Putin’s recognition of the financial sanctions imposed by the EU and the US, and their torpedo effect over this project, which had been already blocked by the EU’s competition rules. That was also recognition of a new reality, where the EU can exert its power over Russia. Mikhail Korchemkin described the South Stream as an oversized but failed project in Russian history such as the never-used “Tsar-Canon” and the never-rung “Tsar Bell”. On the one hand, the EU might be a winner in terms of power exertion, but on other South Stream partners, the majority of which are EU members and their companies – are those who have lost. The South Stream is a clear example of what can divide the EU and its member states, as well as the division of the EU energy policies and those of its member states.

The South Stream was not economically viable for Russia from the very beginning. Amidst the fall of the Russian rubble and oil prices, sanctions, the South Stream was a very costly project; the above were factors, which made Russia step back since it could not go forward with its huge financing issues. Rather it was a politically motivated project, which aimed to bypass Ukraine as a transit country because of the 2006/2009 gas crisis, to strengthen Russia’s monopoly in the Central and Southeastern Europe – which so far was successful with long-term energy agreements with Russian friendly European countries – and finally to kill the Nabucco project -which was already buried not because of Russia, but because of similar reasons that the South Stream faced and the selection of TAP. On the other hand, the company considered for the construction – Stronyangaz and potential creditor – Gazprombank were included in the  sanctions lists, while Gazprom’s investment budget for 2015 was decreased because of high costs of the Eastern gas project (Power of Siberia, Vladivostok LNG). All the aforementioned factors were a huge obstacle for the South Stream.

As Fyodor Lukyanov, writes the Nord Stream was implemented because of political resources and Germany’s strong position within the European Union, through which the former wanted to avoid possible risks caused by Ukraine’s transit position. Notably, there was not any overland transit between Russia and Germany to lay down the Nord Stream pipeline. However, the EU prevented Russia to get access to OPAL through the Nord Stream. Whereas, partners and stakeholders of the South Stream could not overcome the EU’s law this time, though German Wintershall (Nord Stream stakeholder) was participating in the South Stream as well and the crisis in Ukraine became the catalyst that allowed the EU to go further.

Original article is published in The GW Post: Who buried South Stream and Why?: EU or Russia?

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