South Stream: Russia's 'nyet' and the pipeline to nowhere
The cancellation of South Stream, a proposed gas pipeline to Europe from Russia, comes amid fraying ties between two critical centers of energy supply and demand. It's the clearest signal yet that Russia's grip on European energy markets is slipping.
Sergei Karpukhin/Reuters/File
Pipes made for the South Stream pipeline are seen at the OMK metal works in Vyksa in the Nizhny Novgorod region of Russia.
By David J. Unger Staff writer
@dungerdunger
A pipeline to long-term European-Russian energy interdependence is no more.
In a bold move Monday that reflects the new reality of Russian-European dis-cooperation, Moscow canceled the multibillion-dollar proposed South Stream natural gas project that would have brought Russian gas directly to Southeastern Europe.
The cancellation is the clearest signal yet of Moscow's waning ability to use energy to influence EU policy. Without that political overlay, the economic imperatives for the EU and Russia have become far more clear-cut.
Europe's need for Russian gas is dwindling in the face of expected population decline and measures to boost efficiency, incorporate renewable energy, and find alternatives for Russian gas. For its part, Moscow is more interested in fast-growing markets where gas consumption is forecast to expand rapidly. That's why it has signed major deals with China this year, and has promised to bolster energy ties with Turkey, with an eye for markets elsewhere.
"We consider energy an important area in our bilateral cooperation," Russian President Vladimir Putin said in a press conference Monday. Our relations in this sector have reached a truly strategic level. "[G]iven Turkey's growing demand, we are ready to not only expand the Blue Stream pipeline [an existing pipeline connecting Russia and Europe], but also build another pipeline system in order to cover the growing needs of the Turkish economy. And if it is deemed expedient, we can build an additional gas hub for the South European consumers on Turkish territory, near the border with Greece."
There's some uncertainty as to whether South Stream, the originally planned pipeline, is permanently off the table. Some speculate that Mr. Putin may be using Russia's remaining clout to force the EU to give it better terms on the pipeline.
South Stream, which would have carried Russian gas across the Black Sea and directly into southeastern Europe, certainly would have been a short-term boost for Bulgaria, Serbia, Hungary, and Italy that remain exposed to a cutoff in gas supply from the Ukraine crisis. That's a scary prospect for the EU in the short term. The pipeline would also be an important political win for Russia in its attempts to retain Europe as its largest energy customer.
But in the long term, the pipeline has looked increasingly like a nonstarter in pure economic terms. Western sanctions on Russia over the Ukraine crisis made the project even less feasible, and may have indeed been the straw that broke the camel's back.
"European gas consumption in general is going down, so there have been issues with the pipeline about what market it is going to," says Kristine Berzina, a transatlantic fellow at the German Marshall Fund, a Washington-based think tank. "Europeans are burning coal and building renewables, but they haven't been using all that much gas."
Last year, European gas consumption dropped 0.4 percent compared with 2012, according to European Union statistics, and some of the biggest declines were seen in countries that rely most heavily on Russian imports – namely Lithuania, Slovakia, and Greece. By 2030, the EU aims to cut greenhouse gas emissions 40 percent from 1990 levels, boost energy efficiency by at least 27 percent, and increase the share of renewable energy to at least 27 percent. A successful implementation of that strategy would further drive down consumption of Russian natural gas.
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"[G]as demand increase in Europe will be moderate thanks to energy saving measures and renewables development. Therefore the gaps in supply/demand will be manageable without monstrous Russian projects," Dmytro Naumenko, an energy analyst at the Kiev-based Institute for Economic Research and Policy Consulting, writes via e-mail. "It will allow Europe to avoid additional huge supplies from South Stream and switch to alternative supplies."
Amid a landscape of flat demand, there is rising supply and a push to make it easier to move that supply around. Norway, Qatar, and other major natural gas producers could increase exports to Europe. Major new gas finds in the Eastern Mediterranean Sea could eventually make their way to Europe's undersupplied liquefied natural gas import terminals. Meanwhile, the EU is working to better integrate the complex systems of pipelines and transmission lines within its own borders.
"Since 2008, energy markets in the European Union have become more integrated with increasing trade flows," the Paris-based International Energy Agency concluded in a recent report. "However, the European Union has yet to create a fully integrated EU energy network and energy market."
It's partly why Europe still imports just over half of all the energy it uses, according to the IEA. Russia will continue to play a major role in that, and its pipeline to Turkey may very well end up connecting with Europe. But without South Stream, it loses a structural guarantee that its most important customer base will remain loyal for decades to come.
Assuming South Stream remains permanently mothballed, Europe has more of a clean slate when it comes to thinking about its energy future, Ms. Berzina says.
"There will be a need for talking about what Europe's real pipeline needs are for gas," she says in a telephone interview. "So much has been a response to South Stream – 'Do we need it? Is it good or bad?' And right now it's a great time to look at what are the infrastructure needs in Europe without being distracted by South Stream."
Russia, meanwhile, exchanges a customer with limited future potential and many political hangups for Turkey's strong-arm politician, who is eager for new sources of supply.
"The reasoning of Russia now seems to be: We have had enough of all this rhetoric regarding South Stream in Europe, we will instead focus on Turkey, which is an actual growth market in terms of gas demand, and increase our capacity to deliver through Blue Stream," Tim Boersma, acting director at the Brookings Institution's Energy Security Initiative, writes in an e-mail, noting that the decision on South Stream may not yet be final. "Then in the long run this may well become an alternative supply route to supply southern Europe, in particular Italy, that bypasses Ukraine. And that was from a Russian perspective always the aim."
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