Russia riles Europe Fuming at Gas Pipeline Loss

Russia's surprise cancellation of its South Stream gas pipeline has annoyed Brussels and damaged European energy companies involved in its construction.
Cut off in its prime.

The surprise announcement was no doubt made with a certain amount of smug satisfaction.

On Monday, Russian President Vladimir Putin and Alexey Miller, the boss of the country's state gas monopoly Gazprom, revealed that Russia is ditching its plans to build a gas pipeline under the Black Sea to supply central and southern Europe.

The abandonment of the €40 billion ($50 billion) South Stream project triggered irritation both in Brussels and among European partners of the consortium building the pipeline, which was already under construction.

BASF subsidiary Wintershall, the largest oil and gas producer in Germany, responded with a terse statement saying it would discuss the announcement "with our European and Russian partners within the partners' meeting."

But the companies that Gazprom had brought on board were quietly expressing more direct criticism. Representatives from firms including Italian energy provider ENI and French electric utility EDF, which with Wintershall were Gazprom's partners for the offshore portion of the pipeline, said that the Russians had not provided any advance notice. Seven companies from the countries through which the pipeline would have passed are also affected.

There is a lot at stake for the parties involved. Wintershall, for example, holds 15 percent of the offshore portion of South Stream and has invested €100 million ($124 million) in the project company. There are also indirect consequences. For instance, pipe manufacturer Salzgitter saw a sharp decline in its share price on Tuesday.

There is a lot at stake for the parties involved.

At the same time as announcing it was ditching South Stream, Gazprom revealed plans for a new gas pipeline in Turkey. With a capacity of 63 billion cubic meters, it would exceed the capacity of the Nord Stream pipeline through the Baltic Sea.

The European Commission, the executive arm of the European Union, rejected Moscow's accusations that it was to blame for the failure of the South Stream project. "Grid projects have to be compatible with European law. We had expressed our concerns in this regard over South Stream," said a spokeswoman for Maros Sefcovics, the European commissioner for energy union.

The Commission is not entirely innocent however. After building work on South Stream began in October, it had increased pressure on pipeline host Bulgaria to impose a construction freeze.

The Commission believes that the project violates European law, which bans companies from being both producers and grid operators. Gazprom would have fallen foul of this law, said officials in Brussels. The Ukraine crisis and the E.U.'s concerns over members becoming increasingly dependent on Russian gas probably also played a part.

However, the Commission wants to continue discussing the project with affected member states. The next meeting with them is scheduled for next Tuesday.

The European Union has also been working on its own pipeline plans in an attempt to reduce its dependence on energy deliveries from Moscow. For a long time, it appeared that the Nabucco pipeline project, a competitor to South Stream, would one day bring natural gas from Azerbaijan and Turkmenistan to Europe. But the project was canceled in the spring of 2013 for economic reasons.

Now the E.U. is pinning its hopes on a new project. Plans have been in the works since July 2013 to build the Trans-Adriatic Pipeline (TAP). It will be 870 kilometers (540 miles) long and, starting in 2018, will bring natural gas produced by the Shaz Deniz consortium of BP and Statoil from the Caspian Sea to Italy via Greece and Albania.

 

Jürgen Flauger and Klaus Stratmann cover energy policy for Handelsblatt, Thomas Ludwig is a Brussels correspondent. To contact the authors: [email protected], [email protected], [email protected]