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Analysis & Opinion
23.03.11 Dreams Of Going South
By Tai Adelaja

Russia has redoubled its efforts to save the South Stream gas pipeline project from imminent collapse, in anticipation of a new boom in gas consumption in the wake of the Japanese nuclear disaster. A few days after interest in South Stream appeared to have waned, Russian Prime Minister Vladimir Putin travelled to Slovenia where he signed a major energy deal, which aims to clear away financial hurdles to the project.

Putin's two-day trip to the Balkans also took him to Belgrade on Wednesday, where he was expected to hold more South Stream talks with his Serbian counterpart Mirko Cvetkovic. The renewed efforts to revive interest in the gas pipeline came just days after Russian state officials hinted that Russia might replace South Stream with a project based on liquefied natural gas (LNG), to be transported by ship across the Black Sea. Analysts said the recent situation in Japan has changed the dynamics in energy supply markets, triggering a rush by major energy suppliers to capitalize on anticipated demand for gas as a preferred energy source. "Russia sees hope of an increase in demand for gas perhaps because of the recent events in Japan," Artem Konchin, an energy analyst at UniCredit, said. "It is more likely that Russia is thinking in terms of supplementing the LNG project with South Stream.

In a crucial deal inked on Tuesday, Slovenian gas distributor Geoplin Plinovodi agreed to form a 50/50 venture with Gazprom, Russia's gas monopoly, to construct and manage the Slovenian section of the planned pipeline that would deliver Russian natural gas to Central and Western Europe. “I am sure this project will bring a certain benefit to all participants, will ensure reliable energy supplies in Slovenia and other European countries,” Putin said in Ljubljana on Tuesday. Putin, who was last in Ljubljana as the Russian president in 2001, also held talks with Slovenian Prime Minister Borut Pahor, President Danilo Turk and other officials.

After recurrent spats with Ukraine over energy transit seriously dented Russia’s reputation as a reliable energy supplier, Putin championed a strong push to diversify Russia’s gas supply routes to Europe, its biggest customer. The South Stream pipeline, estimated to cost as much as $35.4 billion, is expected to pump 63 billion cubic meters of gas per year to lucrative West European markets, if and when completed in 2015. Russia's Gazprom and Italy's Eni first agreed in 2007 to build the roughly 3,600-kilometer pipeline running from Russia, under the Black Sea, through Turkey and the Balkans to Italy and Austria. In addition to circumventing Ukraine, Moscow aims to compete with the EU's Nabucco pipeline, planned to reduce Europe's reliance on Russian gas by tapping Caspian sources.
Slovenia, which buys about 600 million cubic meters of gas a year from Gazprom, has also shown interest in diversifying energy sources to avoid the kind of disruption in supplies that it experienced during the gas dispute between Russia and Ukraine. Serbia has already agreed to let the South Stream pipeline pass through its territory as part of an energy deal made in December 2008 between Moscow and Belgrade. Bulgaria, Hungary and Greece have also signed on to the onshore section of the 900-kilometer South Stream pipeline, but the ambitious project is still beset by various problems, ranging from delays in granting permission by Turkey to new European Union energy regulations.

Russia had requested that Turkey allow the South Stream pipeline's seabed portion to cross Turkey's exclusive economic zone in the Black Sea, from the Russian coast to the Bulgarian coast. Putin and Russian President Dmitry Medvedev discussed this issue with Turkish Prime Minister Recep Tayyip Erdogan repeatedly and in some detail during 2009 and 2010. Turkey consented in principle but dragged its feet in practice. “Ankara missed two deadlines: in November 2009, to allow Gazprom to conduct exploratory work on the seabed; and in November 2010, to allow actual construction work,” said Vladimir Socor, a senior fellow of the Washington-based Jamestown Foundation.

Putin downplayed Turkey’s reluctance to give permission on Tuesday, saying that he saw no threat to the project from that side, Reuters reported. He added that in the next several months Russia will present Turkey with additional documentation on the ecological impact of the pipeline and other materials. However, procrastination by Turkey has been irksome enough for Moscow to consider the option of replacing the South Stream gas pipeline project with a liquefied natural gas (LNG) project that would involve construction of a liquefaction plant on the Russian Black Sea coast, and export of the product via tanker. The Russian prime minister also said that Russia was reviewing two other options, one of which would involve liquefaction of gas at a new plant on the Black Sea coast and sending it to Bulgaria. Another option, he said, is to liquefy gas at the planned plant in the Arctic Yamal Peninsula, controlled by Gazprom's rival Novatek.

Russia’s efforts received a boost on Monday after Germany’s Wintershall decided to take a 15-percent stake in the offshore section of the 584-mile pipeline. Wintershall, the energy arm of the giant BASF chemicals company, will become the first German company to join a project that will compete directly with the European Union’s planned pipeline, Nabucco. Gazprom CEO Alexei Miller told reporters on Tuesday that the deal with Wintershall will influence Turkey's decision. "We are hoping that the project will be implemented in its initial form," Miller said, Reuters reported. "I am sure that the goals we are pursuing with regard to the underwater section will be achieved quicker after BASF entered the project," Miller said, citing joint experience in obtaining permissions for the Baltic Sea gas pipeline. Wintershall has already partnered with Gazprom in building the Nord Stream pipeline that will run under the Baltic Sea. Nord Stream, like South Stream, is designed to enable Russia to reduce its dependence on Ukraine as a principal transit route for sending its gas to Europe.

However, Russia still has to contend with the EU's new energy legislation, known as the “Third Energy Package,” which imposes limits on the ownership of pipeline infrastructure by gas suppliers and calls for splitting supplies and pipeline operators. Energy Minister Sergei Shmatko said on Tuesday that Russia had suggested to the EU exempting trans-border pipelines from the new rules, under which Russia could be forced to sell off parts of its pipeline network in the EU, Reuters reported. Slovenian Economy Minister Darja Radic has also advised Russia to seek an exemption from the new rules. The Kremlin has no illusions on how tough the going could be. One of the documents prepared for Vladimir Putin's visit to Ljubljana and cited by RIA Novosti reads: "One of the most significant and important tasks of the [Gazprom-Geoplin Plinovodi] joint venture ... is likely to be filing a request to receive the right for necessary exemptions from the new gas directive (regulating third party access, setting the tariff for network usage, separating operator and supplier property), which is necessary to guarantee investors' interests."
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