First out of the Gates: South Stream Starts Construction

Russian President Vladimir Putin along with project shareholders and government officials were in Anapa on Friday to celebrate the formal launch of the South Stream pipeline.

Dubbed a "phantom project" by EU Energy Commissioner Günther Oettinger, South Stream construction officially began, after many years of negotiations, through a symbolic welding ceremony in the northern coastal town on the Black Sea. 

Pipeline plans were first announced in 2007 when Gazprom and Eni signed a memorandum of understanding.  Today shareholders of South Stream Transport AG are Gazprom (50 percent), Eni (20 percent), Wintershall (15 percent) and Electricite de France (15 percent).  In 2014, South Stream expects to lay pipes under the Black Sea and is scheduled to start shipping gas by late 2015 at an annual rate of 15.75bcm.  The pipeline is to transport up to 63 bcm per year once it reaches full capacity in 2018, across the Black Sea to Bulgaria, then to Serbia, Hungary and Slovenia, and on to northern Italy.

“Today we are attending a very important event, an event that is important not only for Russian energy but for European energy as well,” said Putin. 

Alexey Miller, Chairman of Gazprom's Management Committee said: "The start-up of South Stream construction – is indeed a historical event. The project embodies the intention of Russia and the countries of Southern and Central Europe to strengthen the partnership in the energy sector and to create a new reliable system of Russian gas supplies to European consumers. South Stream is a comprehensive infrastructure project that will provide a powerful impetus to economies of participating countries."

For Russia and Gazprom, the event ‘South Stream – Welding the partnership,’ was central to its strategy of continued dominance over the European gas market.  For some well acquainted with South Stream however, celebrations were no more than a ribbon-cutting.

The project is faced with regulatory issues as a final investment decision is still conditional on environmental assessments and permits from Turkey, Bulgaria and Russia.  There is also the question of finances.  Recent cost revisions have raised the price tag from 15.5 billion to 17 billion euros with notes from Reuters highlighting skepticism of some investors, estimating the project could cost 25 billion euros for both the undersea and overland sections.  Russia Today reports some total estimates are as high as 32 billion euros.  Additionally, there is continued mystery over the source of South Stream’s 63bcm that it plans to bring into Europe's currently depressed and increasingly competitive energy market.  

Present at the event was Turkish Energy Minister Taner Yildiz who said South Stream is not a harbinger of the end of alternative pipeline projects that go through Turkey like the planned Nabucco line, as cited by Hurriyet Daily News.  Turkey has no intention of becoming a shareholder in South Stream, as it is already involved in TANAP and Nabucco West, he said.

Speaking at a conference in Moscow on Friday, Dr. Mikhail Korchemkin, founder and managing director of East European Gas Analysis, said “Gazprom has abandoned its guiding principle – sell gas before building expensive infrastructure.”  He noted that Gazprom would have 318bcm of annual gas export capacity, which is more than double previous commitments made to supply Europe in 2020.

Professor Jonathan Stern of Oxford Institute for Energy Studies, who recently spoke with Natural Gas Europe, commented that South Stream is "a hugely risky project for them, because EU regulation as it's evolving may mean that they have to build an enormous amount of additional capacity, which they themselves will not be able to use."