Few developments will have a greater impact on regional dynamics in the Western Balkans than the race to build Russia's South Stream Pipeline as the Western Nabucco Pipeline falls flat.
The countries of the Western Balkans are highly dependent on Russia for gas, with Serbia getting around 85% of its gas from Russia, Bosnia-Herzegovina over 90%, and Macedonia 100%. Croatia, slated to join the EU next year, is much less reliant on Russian gas (less than 40%).
The South Stream pipeline, slated to be operational in 2015, will diversify Russia's natural gas export routes, running under the Black Sea with split arteries through Greece and the Balkans, carrying around 2.2 trillion cubic feet of gas annually.
Since late 2011, Russia has made notable inroads towards the expansion of the South Stream in the Western Balkans. Gazprom and Srbijagas have commissioned the Banatski Dvor underground gas storage facility in Serbia, an important part of the South Stream project as one of Southeastern Europe's largest gas storage facilities, with a 450 million cubic meter capacity.
Gazprom is also in the middle of negotiations with Milorad Dodik, the contentious president of Bosnia's Serb-dominated entity of Republika Srpska, on the possible construction of a gas lateral connecting the Bosnian territory to the South Stream Pipeline.
Turkey is playing both sides fervently, signing an agreement with Azerbaijan in late December for a Trans-Anatolian natural gas pipeline that could connect up with Nabucco, and in January signing a deal to allow Russia to run the South Stream to Europe through Turkish territorial waters, with construction slated to be completed by the end of 2015.
In late March, Gazprom announced it would make a final investment decision for the Bulgaria branch of the South Stream pipeline by November.
In mid-December, Gazprom chose Italy over Austria as the final destination for South Stream, with Moscow saying the decision had been made after the EU blocked its plans to buy a trading platform in Austria.
In Serbia and Bosnia-Herzegovina, both the politics and economics of the South Stream pipeline are highly significant. Serbia, in particular, is a stage on which Russia and the European Union play out the balance of power. Serbia is scheduled to hold parliamentary elections in May, and on some level this is a vote to determine that balance.
Recent polls show that if the elections were held today, the opposition Serb Progressive Party (SNS) and the ruling Democratic Party (DS) would receive most of the votes, but that the pro-EU DS, led by President Boris Tadic, would trail the SNS.
SNS leader Tomislav Nikolic is a very vocal advocate of improved relations with Russia; indeed, he wishes to see Serbia become "Russia's stronghold in Europe". The South Stream pipeline project, in his eyes, is a key development toward this end. A strong showing for NIkolic's SNS party would launch a new chapter in Serbian-Russian relations, the most important aspect presently being South Stream. And few in Serbia would argue with Nikolic on the advantages of the South Stream and connected projects, which could create thousands of jobs and billions in direct investment for the Western Balkan country.
Russia's Gazprom Neft also controls Serbia's Naftna Industrija Srbije AD (NIIS), which plans to increase investments by 45% in Balkan exploration activities in 2012, targeting potential hydrocarbons in Serbia, Romania, Hungary and Bosnia-Herzegovina.
The completion of the South Stream pipeline will affect EU policy in the region, which will reverberate in the Kosovo-Serbia stalemate and the ethno-nationalist political paralysis in Bosnia. South Stream will become even more invigorated now that Vladimir Putin has returned to the presidency in Moscow, and certainly he has won the race with Nabucco, which cannot feasibly compete without Iranian gas.
By Charles Kennedy
Charles is a writer for Oilprice.com More