South Stream launching ceremony draws Presidential support

A recent ceremony to launch the construction of the South Stream pipeline that will provide Russia with a new route to gas markets in Europe whilst bypassing Ukraine, was attended by Russian President Vladimir Putin.

The ceremony in Anapa on the Black Sea coast, where the first joint of the pipeline was symbolically welded together, could force energy analysts who have dismissed the €16 billion project as a stunt designed to force Ukraine to accept Russian terms for gas trading, to reconsider.

The pipeline is designed to carry up to 63 billion m³ across the Black Sea to six countries in southern and central Europe. The offshore section of the South Stream gas pipeline will run under the Black Sea from the Russkaya compressor station to the Bulgarian coast. The total length of the Black Sea section will exceed 900 km, and its maximum depth will be more than 2 km.

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

Whereas Guenther Oettinger, the EU Energy Commissioner, who has been openly sceptical about the project, did not attend the ceremony, representatives from the European gas companies – including Italy’s Eni, Germany’s Wintershall and France’s EDF – that are Gazprom’s partners in South Stream, turned out in a show of support.

Chairman of the Gazprom Management Committee, Alexey Miller commented, “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 gives a powerful impetus to development of the economies in the participating countries,” Miller added.

Analysts and consultants familiar with large gas pipeline project have noted that it still faces regulatory hurdles and have called the launch ceremony no more than a ribbon-cutting event. This is because construction permits along the 1375 km onshore route of the pipeline have yet to be obtained in some regions, and there is still a question mark over the financing of the project that will bring gas into the slow and increasingly competitive European energy markets.

Founder and Managing Director of East European Gas Analysis, Mikhail Korchemkin, noted that once South Stream is completed, Gazprom would have 318 billion m³/yr of gas export capacity, which is more than twice the volume the company has committed to supply Europe in 2020.

“Gazprom has abandoned its guiding principle – sell gas before building expensive infrastructure,” he said at a recent conference at Institute of World Economy and International Relations in Moscow.

Not all reaction to the gas pipeline’s launch was disbelieving. Serbia’s Energy Minister Zorana Mihajlovic has announced that the Law on South Stream should be adopted by the end of the year. Construction of the pipeline, which marks the biggest investment project in Serbia in the last six decades, is set to begin this month.

The pipeline’s capacity through Serbia will reach 40 billion m³/yr and it is expected that Serbia will become a regional hub for natural gas supply for the Republic of Srpska, Hungary, Slovenia and Austria.

The South Stream launch ceremony comes as Miller has faced criticism from Putin for failing to control Gazprom’s spending. The President has taken a personal interest in the pipeline and has added pressure to the project since its inception in 2007 and instigated the 2012 deadline.

Robert Cutler, a research fellow at Carleton University's Institute of European, Russian, and Eurasian Studies in Canada, notes that Gazprom's push to announce the start of construction work on South Stream is indicative of domestic politics.

“On live Russian television, [President] Vladimir Putin gave [Prime Minister] Dmitry Medvedev a direct order: Construction of the pipeline should begin by the end of 2012,” Cutler said. “There's a certain amount of prestige domestically invested now in producing some sort of result, even though physical construction of the pipeline probably was not in the cards then and certainly is not now. If Putin gives this order and Medvedev says, 'We'll do it,' but it doesn't end up happening, it raises questions domestically about their authority within the factions in the Kremlin and about Gazprom's credibility overall internationally.”

Edited from various sources by Cecilia Rehn.

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