After several months of trouble with incompatibility with EU legislation, on 1st of December CEO of Gazprom, Mr. Alexey Miller announced that Gazprom decided to abandon South Stream project and that company will built new pipeline toward Turkey, with the same capacity of 63 billion cubic meters (cbm) annually. Mr. Miller also added that memorandum with Turkey’s BOTAS regarding the deal has been signed. President of Russia, Mr. Vladimir Putin also confirmed that project will be cancelled since no agreement could be found with European Union and European Commission.

“We believe that the stance of the European Commission was counterproductive. In fact, the European Commission not only provided no help in implementation (of the project), but, as we see, obstacles were created to its implementation. Well, if Europe doesn’t want it implemented, it won’t be implemented,” president Putin said. President Putin also mentioned Bulgaria which was the first country to freeze the project, saying that Bulgarian leadership “should demand loss of profit damages from the European Commission”, because the country could be receiving around 400 million euros annually through natural gas transit fees.

This decision came as a surprise not only to EU officials, but also to shareholders, countries and companies involved in the project implementation, which will suffer direct loss for already made investments and loss from failed opportunity to generate profit through construction of the pipeline. Expert estimate that among involved countries, Serbia suffered the most since it gave best conditions to Gazprom for guaranteed construction of South Stream pipeline by signing gas deal in 2008. Gas deal envisaged sale of 51% stake in its Oil Industry of Serbia to Gazprom for 400 million euros, along with exploitation of domestic oil/gas resources and right to use underground gas storage Banatski Dvor as part of the South Stream project. Serbia also formed joint venture company with Gazprom for the development of South Stream project where Gazprom had 50% share (other countries involved in the project formed joint venture companies where Gazprom had 49% stake).

Experts in gas sector think that decision on abandoning of South Stream is not definitive, and that project could continue if Russia and European Commission resolve legislation disputes. Other consider that project was abandoned since EU natural gas demand does not need another route from the same supplier – thus,25 billion euro investment would hardly be repaid and pipeline would operate with losses since it will not be fully utilized.

As a reminder, European Commission decided to block the project since it was not in accordance with EU legislation – contract signed between Gazprom and each transit TSO did not allow participation of 3rd parties, leaving control of the both pipeline and natural gas flowing through it to Gazprom. As a member of EU, Bulgaria was forced to freeze the project in mid-2014. Next country in the chain, Serbia, continued with activities since it was not an EU member, while Hungary adopted additional legislation which could indirectly enable construction of the pipeline.

Gazprom confirmed that Russia will construct another pipeline by using funds and materials  intended for the construction of South Stream project. According to announcements by Gazprom`s CEO, new pipeline will be constructed under Black Sea toward western Turkey, instead toward Bulgaria.  Capacity of the pipeline will be unchanged, or some 63 billion cubic meters annually, where some 14 billion cbm would be supplied to Turkey and remaining amount to Greece – Turkey gas hub. From this hub, natural gas will be supplied to both Bulgaria and Greece. Starting point will remain unchanged – Russkaya compressor station.

However, this plan for many experts seems unlikely, since mentioned region does not require such amounts of natural gas, i.e. there is no market for such huge quantities. Although each country in the mentioned region covers majority of its demand with Russian gas, all countries are looking into diversification projects (LNG and natural gas from Azerbaijan, Turkmenistan, Iran and Israel) and increase of domestic production. On the other hand, significant growth of natural gas consumption is questionable.

Currently, Turkey consumes some 40-43 billion cbm of natural gas annually, out of which some 25 billion cbm comes from Russia via two routes: one via Ukraine-Bulgaria-Greece, and second with direct link under the Black Sea (Blue Stream pipeline). Natural gas consumption in Turkey is increasing, but not sharply as before. There was even sharp decline in 2013 comparing to 2012. Natural gas consumption jumped from 15 billion cbm in 2000 to 37 billion cbm in 2008, and reached record of 43 billion cbm in 2012. In addition to recently agreed increase of Blue Stream pipeline capacity, Turkey is developing TANAP project, which will supply country with 6-10 billion cbm of natural gas annually, it is active in hydrocarbon exploration, considers new links with Iran and it has already contracted additional LNG imports.

With respect to Greece, country currently spends some 4 billion cbm annually, where 50-60% is supplied by Gazprom (via Ukraine). In addition to hydrocarbon exploration, Greece heavily relies on TAP project (extension of TANAP) which will deliver natural gas from Azerbaijan and reduce country`s dependency on natural gas. This project is in advanced stage, and construction is expected to start soon.

Bulgaria still covers 90% of its natural gas demand by natural gas from Russia, via Romania-Ukraine route. Domestic gas production is still low, covering 10% of 2.8 billion cbm annual consumption. In addition to low natural gas consumption and plans for production increase, Bulgaria is determined to construct new interconnection with Greece (IGB project), with a goal to obtain Azeri gas via future TANAP – TAP pipelines.

South Stream Pipeline project envisages delivery of natural gas via Russia via Southern route, avoiding Ukraine. Capacity of the pipeline should reach 63 billion cbm annually, and although construction of the pipeline has officially started in Serbia and Bulgaria, exact route and number of branches remained uncertain. Pipeline would start on the Russian shore of Black Sea, going offshore toward Bulgaria. From Bulgaria, pipeline will go across Serbia to Hungary, and from Hungary Central European Gas Hub at Baumgarten in Austria. Branches for connection of Macedonia, Bosnia & Herzegovina, Croatia and Slovenia were also planned, in addition to rarely mentioned branch toward Greece. It was estimated that pipeline would cover 20% of EU demand. The shareholders in the project are Gazprom (50 % stake), Eni (20 %), Wintershall (15 %) and EDF (15 %).


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