South Stream is on the way to becoming a reality

South Stream – a pipeline project designed to bring natural gas from the Russian Federation to the Balkans, Eastern and Central Europe, the proposed route of which lies under the Black Sea. Although this project was in the theoretical stages of negotiation and planning, it now seems that it will become a reality. Yet, what is the story behind this colossal undertaking to build a pipeline under the sea?

The South Stream pipeline project was proposed in 2007, when the Italian CEO of Eni (an energy company) signed a memorandum with Gazprom’s Vice-Chairman, Alexander Medvedev. Since then, several joint-venture companies have been established through bilateral contracts between Italian, Austrian, Serbian energy companies and Gazprom.

On October 23rd, 2010, the Bulgarian Energy Holding (BEH) finalized the negotiations, paving the way for South Stream to become a reality. This was the key deal to the project, since the entry-point for the Russian gas coming into the Balkans would be the South-Eastern EU member state. Yet, most people are not aware of the nature of the BEH and its relationship with Gazprom.

The Ministry of Economics, Energy and Tourism created the BEH in 2008 to oversee the major Bulgarian energy companies. It is 100% state-owned and forms the foundation for all production, transit, distribution and supply of energy. Its subsidiaries include Bulgargaz, which holds the only license for public distribution of natural gas in the country; and Bulgartransgaz, which administers the supply, transit, and storage of natural gas. These two enterprises control this important energy resource, 92% of which is imported from the Russian Federation (the other 8% are produced locally). It therefore makes them major actors in the trade relationship between Bulgaria and the country’s sole natural gas supplier.

Bulgargaz is at a disadvantage in the relationship because of its total dependency on Gazprom for supply of natural gas. In the January 2009 gas crisis, the supply was cut off and Bulgaria was left without this vital energy resource. Yet, being a large international company, Gazprom did not suffer from this action (if we consider Bulgaria only). The size of the two companies is incomparable and that makes the trade relationship asymmetric. Also, because the two companies are state-controlled, there is always the threat that a political crisis between the two countries can spill-over into the energy resource trade relations or vice versa. In both cases, Bulgaria is at a disadvantage in the relationship.

This seemed to be the last hurdle which had to be cleared for the initiation of South Stream – a political tension. On August 11th, 2010, the Serbian Prime Minister, Boris Tadic, visited Sofia and met with his colleague, Boiko Borisov. At their meeting, the South Stream pipeline project was discussed, and the exact location of where the pipeline would cross the border between the two countries was agreed. Following this, Gazprom lashed out, stating that Bulgaria and Serbia can “state their opinions as much as they want… but the final word for the route of the pipeline is Gazprom’s” (Dnevnik News, 2010). A rather strong reaction in anyone’s mind.

It now seems that this political hurdle has been overcome and consensus has been achieved. It is expected that on November 15th, a joint company between the BEH and Gazprom will come into being and the construction of South Stream to bring natural gas to Bulgaria can begin. It is estimated that the pipeline will become functional in 2015.

Yet, what does this mean for Bulgaria? There are three aspects of this story that need consideration. Firstly, the construction of South Stream means that any future conflict between one of the parties and a state which currently transports gas as a transit country will not impact the receiving state as it did in January 2009. In effect, the status quo will not be changed in the direct relationship between Bulgaria and Russia, but some elements constituting unpredictability and raising security concerns will be eliminated.

Secondly, Bulgaria will benefit economically from the project. With the construction of South Stream, and the eventual completion of Nabucco (a rival gas pipeline project from Turkey), and the hopeful coming into operation of a new nuclear power plant, Bulgaria will have an abundance of energy resources at its disposal. This would allow it to become a transit country and reap the benefits of re-exporting the gas that is imported into the country.

Thirdly, Bulgaria is looking to develop a balanced energy mix for its production system. Nevertheless, it is also looking to cut CO2 emissions from energy production. While in most countries, these two problems would be addressed jointly, the Bulgarian government has decided to take it one step at a time. By importing more natural gas, it would allow the production of energy in the country to rely almost completely on the fossil-fuel. Yet, if this means the closing down of the several coal-fired power plants in the country, it would lead to a significant reduction in air pollution. The next step, which is still to be considered, is the replacement of fossil fuels for energy production all together. The new nuclear power plant is one piece of the puzzle, but in the long-term (optimistically after 2025), the country will have to begin its transformation to a ‘greener’ energy production system. It would be interesting to see the position of Gazprom when that time comes.

On the whole, Bulgaria is poised to gain a lot from South Stream, but only if all the other projects continue their development as well. It was recently announced the the new nuclear power plant will not be financed by the Russian Federation alone (as it was until now), but also by a strategic, European investor. It has also come to light that negotiations on the Nabucco pipeline (supported more by the EU than South Stream), are going well. The general outcome of the situation remains to be seen, but one fact remains certain – through South Stream, Russia is being brought even closer to Europe than it already is.

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One response to “South Stream is on the way to becoming a reality

  1. This unique blog, “South Stream is on the way to
    becoming a reality | Lubo Mitev’s Blog” ended up being fantastic. I am printing out a clone to demonstrate to my buddys. Thanks for your time,Corey

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