Clarion Partners - Owner's Engineer

The South Stream Pipeline: Russian power for Europe

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The idea of a South Stream pipeline was born during the course of Russian-Italian talks about the possibility of expanding gas exports to Europe. This led to the signing of an agreement in 2007 between Gazprom and Eni, on a strategic partnership and on establishing a joint project company.

In 2011, South Stream shareholders were joined by two more giants, the French EdF and the German Wintershall. By that time, agreements on participation in the project had been signed by Bulgaria, Serbia, Hungary, Slovenia, Croatia and Austria. Turkey, which had opposed the idea of the pipeline being routed through the Turkish territorial waters before, gave its consent for Gazprom to start exploration work for building a pipeline.

The South Stream Pipeline will run along the bed of the Black Sea from the Russian port of Novorossiysk to the Bulgarian resort of Varna. An alternative destination in Romania is also on the drawing board. The South Stream’s first leg will run from Bulgaria or Romania to Serbia, then to Hungary and Slovenia and the second to Greece and Italy.

The pipeline is to stretch over 2,446 km through 8 Russian regions including the Republic of Mordovia and the Novgorod, Penza, Saratov, Volgograd, Voronezh, Rostov and Krasnodar regions.

Russia also plans to construct 10 compressor stations with the most powerful one on the Black Sea, these to be completed between September 2010 and December 2023.

Gas will be carried underwater from the Beregovaya compressor station on the Black Sea to the city of Varna in Bulgaria. Then the pipe will split in two sections: one going north-east and the other south-west. The Black Sea section will be 900 km long with a 2 km maximum depth.

At first the pipeline’s capacity was estimated at 30 billion cubic meters a year but then it was upgraded to 63 billion. It will carry 35% of Russian gas to Europe with total investments in the project accounting for 8-24 billion dollars.

The offshore section will cost 10 billion Euros and the onshore section is estimated at costing 5.5 billion Euros. 

Two German companies have stakes in the Nord Stream Pipeline, Wintershall Holding and E.On Ruhrgas, with other concerns taking part in the South Stream Pipeline project, such as the German division of BASF, which holds a 15-percent stake in the project and has invested about 2 million Euros in the project, Russia’s Gazprom, Italy’s ENI and France’s EDF are also key players.

Russian Prime Minister Vladimir Putin met with BASF’s management earlier this year, a company that has been working in Russia since 1874, and said the following: BASF is very active in Russia and is one of the leading investors in the Russian economy. They are involved in the Nord Stream and the South Stream Project as well and enjoy the support of the German leadership, in particular German Chancellor Angela Merkel. Russia will remain a reliable gas supplier to Europe for decades to come, which Vladimir Putin said is further proven by BASF’s readiness to take part in the Russian project. This is a very serious and very important event given the ongoing situation on the international energy markets. This project signals stability said Prime Minister Putin.

Recently speaking about the South Stream, Gazprom chief executive Alexei Miller and BASF board chairman Juergen Hambrecht explained that the signing of relevant memorandum of understanding will be followed by the inking of a treaty and an agreement, a process that they assured will be finalized before the end of this year.

Hambrecht pointed to the fact that previous memoranda had always been followed by corresponding contracts and cited the way the Nord Stream Pipeline was created and developed. 

This major advantage may prove decisive, Gazprom President Alexei Miller says. Russia is acting on its gas commitments in full and can supply Europe with as much gas as needed in the 21st century. Undoubtedly, South Stream will meet present-day challenges, satisfy the growing demand for fuel and will provide a sure answer to the current need of using more environmentally safe sources of energy, such as gas. The South Stream Project demonstrates that Russia’s and EU’s energy strategies overlap when it comes to the need to diversify gas transportation routes. In addition, South Stream is rival to none, and what’s more, it is problem-free if we talk about financing.

South Stream’s first leg is due to be put into operation on December 30, 2015, when it will start pumping gas to Europe.  The pipeline’s full annual capacity of 63 billion cubic meters of gas is due to be reached by 2018. The South Stream will guarantee stable energy supplies to the whole of Europe.

Europe needs Russian gas and the Russian Federation is collaborating with its European partners, illustrating such collaboration is Russian-German energy cooperation.

The project is to substitute gas transit through Ukraine which is important for European energy security. A case in point was in January 2009 when the country was bargaining for lower prices and breached gas transportation to Europe. Ukraine is also reluctant to have its pipeline collectively managed alongside Russia and this threatens stable transit.

The pipeline will be an additional source of gas for Europe, the managing director of the project Marcel Kramer told reporters recently. It will promote new economic ties and generate profit. “I was born in Eastern Europe and lived in the EU for a long time and I saw how beneficial certain projects can be even for a single country. Thus, it’s an honor for me to join the South Stream”, the official said.

Kramer believes that Europeans will highly assess the project after some preparatory discussions and explanations by its partners.  However, he is sure that Europe will gain from the pipeline.

The European Union used to view South Stream with skepticism, looking at it as rival to the planned Nabucco pipeline. Now, the situation has changed. Firstly, Nabucco is nearly dead despite preferences from the European Commission. It failed to secure reliable sources of gas. If there is no gas, there are no contracts with buyers, and if there are no contracts, there are no loans.

In May 2011, Gazprom held the presentation of the South Stream Project in Brussels. Russian officials supplied convincing evidence that fears surrounding the project were groundless. As a result, European Commissioner for Energy Gunther Oetiinger assured Russia’s representatives that South Stream would be exempt from restrictions and bureaucratic hurdles.

“We’ll be honest partners”, – the European energy commissioner said during the presentation of South Stream.  



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