Well, it’s finally coming; Russia is starting construction of the €16bn South Stream pipeline on 7th December to make sure it retains a strong grip over South East European and Central & Eastern European gas supplies. But whether this is in Gazprom’s longer term interests remains to be seen. What’s good for ‘regional control’ is bad for Gazprom’s ‘global posture’.
Russia always had first mover advantage in the Southern Corridor purely by virtue of being able to redirect initial supplies from Ukraine towards South Stream markets. Having bought its way through corrupt SEE and CEE states, that’s exactly what it’s going to do. With final investment decisions in place, Gazprom can start offshore construction across the Black Sea – cutting through Turkish waters – before resurfacing in Bulgaria. Onshore pipes then run through Serbia, Hungary, Slovenia and into the Trans Austrian Gas Pipeline towards Northern Italy. An initial 15.75bcm will flow by 2015, ramping up to 63bcm by 2019, but let’s not beat around the bush: The moment pipeline construction starts next week, the market assumption will be that no other pipelines can compete. The EU inspired Nabucco project designed to bring Caspian and Levantine gas to European markets is ‘officially’ dead. Never to be resurrected. What’s more, Russia has just signed a 30 year supply agreement with Turkey. Gazprom isn’t just knocking out competing sources of upstream supply; it’s keeping transit states firmly under its thumb as well. ‘Russian gas, Russian prices, Russian monopoly of supply and rent’. Full stop.
The only remaining question is whether Europe might be able to squeeze some Azeri gas into Greece and Southern Italy via the Trans Adriatic Pipeline. That’s still technically possible if Gazprom decides to keep to a single South Stream tranche into Austria-Hungary, rather than splitting onshore transit in two directions (Centre and South), and if Gazprom doesn’t acquire DEPA (the main Greek utility) in an EU induced fire-sale on Greek assets. Given Gazprom’s strategic interest to make sure Azeri gas doesn’t reach European markets – and especially not at competitive spot market prices – it’s hard to see any eventuality where Moscow won’t make sure they kill off residual Azeri options in the Southern Corridor. If that’s the case, the Turks might get more Azeri gas than they originally bargained for through the TANAP pipeline, while Azerbaijan will also have to dust down LNG options, either through Turkey or Georgia as potential outlets (or a combination of both). Procrastination comes with serious costs, a valuable lesson Baku must learn for future hydrocarbon production.
Related Article: Let the Fracking Begin in Europe - Very Cautiously
Depressing stuff no doubt, but fear not, Gazprom has missed a major trick. Despite sitting on 30% of global gas supplies, Russian LNG production accounts for less than 5% of global share. Moscow has become a fringe LNG player in a globalising gas world. Gazprom never grasped the most fundamental ‘fundamental’ of all; for Moscow to remain a market maker, able to play off competing Atlantic-Pacific basin price pressures, Gazprom had to get out of pipelines and into LNG. South Stream is merely another regional nail in Gazprom’s global coffin. Rather than putting state capital where it’s most needed to get Gazprom back on track, President Putin is going for strategic ‘quick wins’.
It’s far easier building South Stream pipes to show Europe who’s boss, rather than seriously trying to sell 70bcm of gas to China, or indeed developing elephant fields to dictate terms to new gas players in the Middle East, Australasia and Africa. But until Russia gets a firmer grip on global fundamentals, it remains on the back foot. Pumping vast amounts of gas into saturated European markets via South Stream pipes isn’t just a waste of precious capital; it merely adds to overall gas market liquidity. Whatever pricing terms Gazprom thinks it’s secured, won’t mean much when excess supply makes its way onto wholesale gas hubs and prices tumble. Russia has won the Southern Corridor battle, but in doing so, stands even greater chance of losing the larger gas market war.
By. Matthew Hulbert