Russia scrapped a proposed natural gas pipeline that the European Union opposed because it would bypass Ukraine, moving forward instead with plans to ship more fuel to Turkey.
The decision to shelve the $45 billion South Stream project is the latest sign that Russia’s economic ties with Europe continue to fray as the crisis in Ukraine persists. The route under the Black Sea would have offered Russia’s OAO Gazprom a more direct path to feed the continent’s gas needs, a plan the European Union objected to because it would reduce Ukraine’s leverage against its neighbor.
President Vladimir Putin is struggling to prevent Russia from falling into recession amid falling oil prices and lingering sanctions from the nation’s annexation of Crimea. In lieu of South Stream, Russia will concentrate on supplying gas to Turkey through a different Black Sea pipeline, Putin said after meeting with his Turkish counterpart in Ankara yesterday.
The decision is “a classic case of bartering energy access for political and economic cooperation,” said Chris Weafer, a partner at Moscow-based consultancy Macro Advisory. “Putin is obviously hoping that an expanded relationship with Turkey will go some way to compensate for the more difficult trade relations with the EU.”
The decision ensures pipelines through Ukraine will remain vital to supplying energy to Europe for years to come. The EU asked member states to stop the construction of parts of the pipeline connecting Russia with Bulgaria. Russia can’t start building an underwater pipeline and stop at Bulgaria, Putin said after meeting with Turkey’s Recep Tayyip Erdogan.
“The project is over,” Gazprom Chief Executive Officer Alexey Miller told reporters in Ankara yesterday.
Gazprom had spent 487.5 billion rubles ($9.4 billion) in the last three years on South Stream and upgrading the Russian pipelines that would have supplied it, according to bond filings. Some of that work can be used for a separate link to Turkey.
Ending the project may save Gazprom from unnecessary spending because there’s already sufficient delivery capacity to Europe, said Mikhail Korchemkin, a former analyst for the Soviet Union’s Gas Ministry.
“There won’t be any new pipeline to Europe,” said Korchemkin, founder of Malvern, Pennsylvania-based East European Gas Analysis. “That may be not the worst news for the company at the end of the day.”
Russia will concentrate on supplying gas to Turkey through the Blue Stream pipeline, increasing deliveries by 3 billion cubic meters a year and offering a 6 percent discount from Jan. 1, he said.
“If Europe doesn’t want to realize this, then it means it won’t be realized,” Putin said of South Stream. “We will redirect the flow of our energy resources to other regions of the world.”
Russia plans to prepare alternatives for companies that signed contracts for the South Stream pipeline, Energy Minister Alexander Novak said. Supply contracts and intergovernmental agreements surrounding the project remain in force, he said.
The nation will also speed other projects to export liquefied natural gas, Putin said.
Gazprom’s partners in the Black Sea section of the pipeline were Eni SpA (ENI), Electricite de France SA (EDF), and Wintershall AG.
In lieu of South Stream, Gazprom and Turkish pipeline company Boru Hatlari Ile Petrol Tasima AS plan to build a pipeline capable of shipping 63 billion cubic meters a year from Russia to Turkey. The infrastructure built in preparation for South Stream will be used for this pipe, Gazprom’s Miller said.
About 20 percent of that capacity, 14 billion cubic meters, will go to Turkey, Miller said. The rest will be shipped through Turkey’s pipeline network to the Balkans, he said.
“This has been Plan B,” Edward Chow, a senior fellow at the Center for Strategic International Studies, said by e-mail. It allows Russia to serve increased demand in Turkey and in the Balkans initially while avoiding Ukraine transit risk, then expand capacity once the route has been established, he said.
“It’s less risky than original South Stream, but still expensive at a time when Gazprom and Russia’s finances are severely constrained,” Chow said.