South Stream Project on Solid Ground Despite Obstacles
The tense situation in Ukraine and the growing antagonism between the quartet of Russia, Ukraine, EU and USA has brought in mind the fate of the South Stream pipeline project. A number of critics point out that this project is no longer feasible, since its viability is greatly endangered by the opposition of the EU's supranational bodies, namely the Commission, along with geopolitical risk factors. Nevertheless, a plain analysis reveals that in fact the opposite has occurred, and as the rift between Brussels and Moscow widens, so does the probability of South Stream being completed.
Strategic level
The EU's natural gas supplies presently are been filled by the following suppliers: Russia (approximately 1/3) followed by Algeria, Qatar, Norway and Netherlands.
The Netherlands recently announced that they will decrease considerably, up to 15%, their gas production, due to environmental reasons and due to the fact that the decline in reserves is of irreversible and notable nature and the country wants to keep the lifeline of the domestic reserves as long as possible.
Concurrently, Qatar is steadily increasing its exports towards Asian markets (China, Korea, Japan, and Taiwan) where it can get almost 80% more in price per 1,000 bcm equivalent in LNG commodity.
The two aforementioned trends clearly illustrate that less quantities from these countries are to find their way to the EU. Furthermore, Algeria is boosting its own domestic demand, whilst it also retains strong links with Russian Gazprom on future joint projects and its recoverable reserves seem to have reached the maximum of their potentials,
Algerian reserves amount to a total of around 4 tcm, equivalent to 5-6 years of the EU's plus Ukrainian and Turkish consumption, hardly a problem solver from a strategic long-term point of view regarding the supply of gas in massive quantities for the European markets.
Moreover, Norway is reaching a production plateau whilst newer discoveries tend to be more expensive to be exploited and raise the price tag for exports, while eating domestic corporate profits of the companies involved. Strong investments are needed also in the domain of sub water gas pipelines to the Northern European market, while the UK which is Norway’s best import partner, is on an irreversible gas production decline and will request from 2020 onwards far greater quantities than nowadays, perhaps up to 30% increase in imports from the Norwegian fields.
It is of interest to note that Azerbaijan, although deeply involved and committed into opening up the Southern Corridor and supplying Turkey and the EU through the TANAP-TAP system of pipelines, has around 1 trillion proven reserves of gas, whilst its domestic consumption is accelerating.
Thus, while it will be able to offer substantial quantities for Georgia, Turkey and even Greece and Bulgaria, it cannot supply the EU even on a midterm basis.
In parallel the Central Asian states of Turkmenistan and Uzbekistan are oriented towards the gigantic Chinese market and are also closely interlinked with the Russian policy both in terms of economic links, but most importantly through political connections. The legal status of the Caspian Sea is still in limbo and Moscow along with Kazakhstan; effectively oppose any trials to establish a sub water pipeline to connect with Azerbaijan, a political focus which is also backed by Iran and indirectly by Armenia.
In essence, it is only Iran with its 30 tcm proven reserves, that can play a role in becoming a game-changer into the so-called diversification process of the EU.
At this point the open hostility with the Sunni Kingdoms as exemplified in Syria, Lebanon and Iraq and the "Cold War" status between Teheran and Tel Aviv, along with Iran's ambitions of challenging US hegemony in the region, obstruct such a vision, while Iran is also eyeing the Chinese and the Indian Subcontinent markets and it has also great domestic needs and further plans to expand internal consumption to the levels of 400 bcm per annum by 2025. A likely termination of the alleged "peaceful nuclear program" by Iran will further boost the needs for domestic gas consumption.
Last but not least, shale gas should be examined regarding EU's strategic gas relations vis-a-vis Russia. There are a number of European countries that have in theory potential for significant shale gas reserves, such as Poland, Romania and Ukraine according to preliminary and theoretical researches.
For the time being not one technical discovery of any importance has been made, while it is well understood that a 'US shale gas revolution' is unlikely to happen, due to the density of the urban geography in Europe, the limited fresh water resources in most countries and the reliance of a great segment of the EU's economy on real estate, tourism, agriculture and leisure sectors that could take a hit by shale gas production. Coupled with the above is the higher cost of producing shale gas in the first place, which was overdriven in the US by plentiful capital credit lines and of risky nature, an advantage that the EU battered economies and its different manners of finance structures, do not possess.
US shale gas exports on the other hand could have some promise of a limited midterm supply in Europe. In that case also, the head of the American Cheniere Energy, recently noted that it is an excess to assume that US shale gas could have an impact into diversifying European reliance from Russian gas.
From the 20 prospective US LNG export projects only six are viable and there are a number of issues that have to be dealt with. These issues include the cost of creating the necessary infrastructure both in the States and in Europe, the cost of shipping the gas, the impact on domestic prices in US, the higher prices in the Asian-Pacific countries which will lure American exporters and the fact that the US has enough gas reserves (both shale and conventional) for around 13 years of consumption under current proven reserves, which is hardly a reassuring figure for mass exports. We have to bear in mind that a superpower such as the United States does not have the luxury of relying on mass exports for a conduct of foreign policy, since the long-term interest of Washington is to have enough reserves of its own both for industrial and for security reasons.
Tactical level
On a tactical level and in the region of Southeast Europe and the Black Sea from where the by-pass corridor of the Ukrainian territory (South Stream) is scheduled to traverse, the following notes can be made. The Serbian government recently announced that in the second quarter of 2014 the construction of the pipeline in its territory will commence, whilst preparations which started on late November 2013 went ahead despite the Ukrainian crisis and the objections by the EU's Commission. The newly elected Serbian government reiterated its adherence to the pipeline construction and stated that the destabilization in Ukraine actually makes the project more urgent than ever. All information streaming from Belgrade points out that the vast majority of the political and corporate world of that country supports South Stream wholeheartedly.
In Bulgaria similar estimations can be made. The local ministry for energy and national economy in repeated occasions during the Ukrainian crisis stated the need for the establishment of South Stream, which also has the positive node by most leading political figures, both governmental and oppositional ones. Again all reliable information from Sofia indicates that the country views this pipeline as a "strategic asset".
Continuing, Hungary and Slovenia seem also content to proceed with South Stream, with Budapest in particular feeling closer to the Russian factor for reasons of domestic policies regarding Premier's Orban clash with 'Eurocrats' and the presence of an extremely strong far-right party named Jobbik, which calls for strong relations with the 'Eurasian world'.
At the same time the opposition of Romania and Slovakia against the Russian policy as a whole, activates the atavistic tendencies in Hungary regarding the minorities of Hungarians in these countries which have been for years a subject of frictions between those three. Thus by forging closer ties with Moscow, Budapest is also playing a wider role for its national policy.
Lastly the role of Italy should be mentioned as it is of "Janus type" in nature. From one hand it plays a crucial role in all stages of the South Stream's evolution through its ENI national energy champion, while on the other hand it keeps that relation 'secret" from the eyes of both Brussels and Washington. Nevertheless, the role of the Italian corporate world regarding the strong bonds between Europe and Russia is of outmost importance, perhaps even larger than that of the German industrial establishment.
The reason is quite simple, although rarely acknowledged. Italy, like Germany does not have any energy resources of importance but they do rely heavily on their industrial prowess and the ability to have steady, secure, cheap and of high quality natural gas flow. In simple terms it is a "matter of life or death" regarding their posture in the contemporary globalized environment to have access to Russian gas and their tactics during the Ukrainian crisis clearly illustrates that the last on the minds of policy makers in Berlin and in Rome is to jeopardize their "entente" with Gazprom.
Last but not least, Gazprom itself and on a purely tactical level has been rumoured for quite some time in European energy circles that it will proceed into relinquishing 50% of the onshore (Bulgaria to Italy) pipeline section of the South Stream to another EU company, so as to 'outmaneuver' the EU's third energy package regulation and it will also give at least in theory an enchased third party access to its pipeline capacity.
An alternative would be to use half of its designated annual capacity, which is 31.5 bcm and invite interested bidders to fill up the rest, which will basically mean to link TANAP-TAP with South Stream and ship all the quantities through that corridor. In any case that altered South Stream role would in effect terminate Ukrainian territory as a transit route.
Overall, by a quick yet careful monitoring of the present-day strategic and tactical facts & trends at hand, it seems that the South Stream actually has gotten a boost because of the Ukrainian crisis, which tarnished yet once more the "good name" and role of that county as a transit route towards the EU's industrial centers.
Since there are no reliable alternatives at sight for Russian gas to Europe and any competitors lag behind in all terms, then it can be safely assumed that this pipeline will indeed built, albeit with significant changes in its ownership status, perhaps even in its originally planned capacity and its exact route.
In all occasions, it should be stressed that gas pipelines are nothing other than commercial corridors that connect the supplier with a buyer and are not a means to an end, while the reserves are most certainly the vital element.