July has seen a sudden reversal of fortune in Caspian and Black Sea Basin pipeline politics. The Nabucco pipeline project has staged a noteworthy comeback, while a competing Russian-backed route, dubbed South Stream, now seems to be losing steam. Uncertainty surrounding future demand, however, raises the possibility that neither pipeline ever becomes a reality.
Two recent events have helped reshuffle the regional energy game -- the July 13 signing of a Nabucco transit deal, and the early July elections in Bulgaria. [For background see the Eurasia Insight archive]. The Nabucco signing ceremony -- involving Turkey, Bulgaria, Romania, Hungary and Austria -- signaled that after a long period of hesitation, the US- and European Union-backed project is at last gaining traction. Meanwhile, the Bulgarian election brought to power a man, former Sofia mayor Boyko Borisov, who is already on record as wanting to take Bulgaria out of the Russia-led South Stream consortium. Without Bulgaria on board, the South Stream project may well be dead. Russian officials have downplayed Borisov's comments, however, attributing them to post-election "euphoria," Russia's Kommersant business daily has reported.
A major factor that will likely determine which of the two pipelines gets built is connected with natural gas demand. The requirements for either project are daunting. Central Asian producers must be able to ship large quantities of natural gas through multiple countries before energy reaches its final destination. The more countries involved, the greater the degree of difficulty in realizing any given project. Projects like Nabucco and South Stream are doubly challenging, given the environmental concerns involved with constructing energy pipelines. [For background see the Eurasia Insight archive].
Demand must justify the enormous costs of building such pipelines. And if demand is low, as is presently the case, it may not be worthwhile to undertake either Nabucco or South Stream. Since nobody can say when demand and/or low prices will rebound, those involved in building new routes are understandably hesitant to begin. It would now seem unlikely that either Nabucco or South Stream will move forward according to their original, respective timetables. Nabucco is tentatively slated to be operational in 2014, while South Stream aims to be functioning in 2015.
Until recently, Nabucco appeared to be the pipeline in the most danger of falling by the wayside. But now it is South Stream that seems on the verge of heading south. Bulgaria has emerged as the weakest piece in the South Stream puzzle. Trouble in the Kremlin's relationship with Sofia became evident earlier in 2009 when Bulgaria rejected an offer by the Russian government-controlled entity Gazprom to buy a 50 percent equity stake in the Bulgarian distribution network. It remains uncertain whether Russia will have to build new pipelines, or will be able to use Bulgaria's existing network. Borisov's rise to power merely seems to be an additional complication for South Stream's future in Bulgaria.
The future looked relatively bright for South Stream as recently as May of this year. At a grand ceremony in the Russian resort of Sochi, Russian leaders, along with officials from Bulgaria, Greece, Italy and Serbia, signed agreements that at the time seemed to give South Stream a commanding lead over Nabucco. In one pact, the Italian energy concern ENI SpA agreed to more than double South Stream's annual capacity to 63 billion cubic meters of gas. [For background see the Eurasia Insight archive].
But the seeds of South Stream's destruction may have been contained in those agreements signed back in May. Italy's ENI, for example, pushed for the pipeline expansion because it wants to sell gas all along the route, not just in Italy. Therefore, it has made demands for an increased share of South Stream's potential supplies. Those demands have fostered tension with Russia.
Pipeline financing also does not seem as secure as it once did. In April, Gazprom had to buy back its stake in an oil arm from ENI at well above market price, and Italy is now seeking more guarantees from Gazprom for its involvement in South Stream financing. Turkmenistan is blocking the sale of gas to Russia after a Gazprom pipeline blew up in April and is clearly holding out on both Nabucco and South Stream for the best price. And Azerbaijan too has yet to commit itself to Russia. [For background see the Eurasia Insight archive].
Ultimately, Russian greed may be the undoing of South Stream. As currently envisioned, the pipeline would run hundreds of miles under the Black Sea, much of it in difficult deep-water areas. Moscow lacks the complex water and construction technology needed to build the route, as well as the money to pay for construction. Nevertheless, Moscow is fighting for a majority stake in the project, even as it demands that the European participants pay for construction. Under current conditions, Moscow's desired outcome appears highly unlikely.
In addition, South Stream seems to be behind two other large projects -- the development of the Yamal and Shtokman gas fields -- on the Kremlin's list of priorities. Some experts say the Yamal reserves need to be tapped for South Stream to have an adequate supply source. The problem for Russia, though, is that bad economic times have forced Gazprom to cut back on investment by 26 percent in 2009.
The technical and financial challenges facing South Stream will be fully known only after the completion of feasibility studies. Without such studies nobody can verify whether Moscow's parameters for South Stream are accurate. Russia is projecting that South Stream will cost about $15 billion. Some Western experts, however, say construction costs could approach $45 billion.
Financing remains a concern for the Nabucco route too. Indeed, given current conditions, it may well turn out that neither pipeline is functioning any time soon, leaving Europe and Russia dependent on trade through existing routes via Ukraine. That is a prospect that excites no one, given the recent trouble in Russian-Ukrainian relations. [For background see the Eurasia Insight archive]. The only prediction that can be made with any confidence is that the pipelines will continue to be a source of intense geopolitical tension in the Caspian and Black Sea regions.
Editor's note:
Stephen Blank is a professor at the US Army War College. The views expressed this article do not in any way represent the views of the US Army, Defense Department or the US Government.
