The South Stream pipeline, which would carry Russian gas across the Black Sea to southern and central Europe, is strategically important for Gazprom – and, its proponents say, for Europe. The new route would avoid transit through Ukraine, ensuring supplies to the company’s prized European market can not be affected by further friction between Kiev and Moscow. The project was conceived in 2007, two years after a gas dispute between Ukraine and Russia shut down some of Gazprom’s shipments to Europe. Another dispute, in 2009, brought a second interruption, reinforcing South Stream’s rationale. Gazprom holds a 50% stake in the consortium developing South Stream. Italy’s Eni (20%), Germany’s Wintershall (15%) and France’s EDF (15%) are the other shareholders.
Russia exported around 186 billion cubic metres (cm) of gas to Europe and former Soviet Union countries in 2012, according to Cedigaz, around half of which goes through Ukraine’s transit system. Recent tensions between Russia and Ukraine have once again highlighted the vulnerability of Gazprom’s shipments through the country. The developers plan to build four pipelines, transporting up to 63bn cm a year (cm/y) of Russian gas to central and southern Europe. The planned route begins in Anapa, on Russia’s western coast, crossing the Black Sea to reach the Bulgarian port of Varna. The onshore section would then cross Serbia, Hungary, Slovenia and Austria. Gazprom wants gas to start flowing in 2015, and full capacity to be reached in 2018.
Brussels is less enthusiastic, seeing its decision over whether to approve the pipeline as a political tool in the West’s dispute with Russia. Thus, in mid-March EU energy commissioner Günther Oettinger said he would delay talks with Gazprom over the South Stream pipeline following Crimea’s plebiscite to join Russia.
Paolo Scaroni, Eni’s chief executive, told an Italian parliamentary hearing in March that South Stream’s future looked in jeopardy because the crisis would threaten the complex permitting process for the pipeline as the EU seeks to use the issue as political leverage against Russia. “I see a future somewhat murky for South Stream as the Russian issue may put in doubt (acquiring) European permits,” Scaroni said. “I don’t know if it will be built.” Italy gets about 20% of its gas from Russia.
While the European parliament has called for the project to be abandoned, several EU member states that stand to gain from the project, including Bulgaria and Austria, have put their own energy security issues ahead of demands from Brussels. Bulgaria, which will gain from South Stream transit fees and depends on Gazprom for all its gas, has legislated for the Bulgarian section to be reclassified as a gas grid interconnection to avoid EU competition legislation. Austria, which gets about half of its gas from Russia, has also put its energy security ahead of EU concerns.
At the end of April, OMV signed a deal with Gazprom to extend South Stream into Austria. The pipeline would deliver up to 32 billion cm/y of gas into the Baumgarten gas hub, starting from 2017. The companies said that despite US economic sanctions placed on some members of Russia’s elite they were relying on a 2010 intergovernmental agreement as a legal basis for the deal.
Both Eni and Wintershall declined interview requests from Petroleum Economist on the status of the project. However Wintershall said in a statement that construction of the pipeline was on schedule and the company was “operating on the assumption that the applications required continue to be duly processed”. Meanwhile, 200 km from Brussels, production of the first steel pipes are under way at Europipe’s mill near Dusseldorf, in Germany. The German firm will supply 50% of the pipes needed for line one’s subsea section. And the detailed construction planning for South Stream suggests the developers are speeding ahead, whatever the European Commission says.
The offshore section of the pipeline will reach depths of up to 2,200 metres beneath the Black Sea. This is around six times deeper than the Nord Stream project – the northern route, also conceived as a Ukraine bypass, which stretches from Russia to Germany through the Baltic Sea. At this depth, the water pressure can reach up to 2,200 tonnes per square metre – the weight of around five aeroplanes piled on top of each other. To withstand both the external water pressure and the internal pressure from the gas flowing through the pipeline, the walls of the pipeline will 39mm thick and heat-treated for extra strength. Each of the 75,000 individual steel pipes used in the offshore section will have a diameter of 81cm, weighing around nine tonnes. The four parallel pipeline strings will be laid in 12-metre long segments. After the pipes are heat-treated, they are able to withstand not just the external water pressure, but allow operating pressure of up to 284 bar, enough to transport 15.75bn cm/y of gas through each pipeline.
Bulgaria and Australia, have put their own energy security issues ahead of demands from Brussels
The pipes closer to the shore will be coated in concrete for more stability and protection. They are designed to last for around 50 years. Offshore construction will start in autumn 2014 when the first pipes will be welded together onboard a pipe-laying vessel at Burgas, Bulgaria. South Stream aims to have the first pipeline operational by the end of 2015 with the remaining lines in place by late 2017.
While South Stream has all the required permits for the offshore section of the pipeline, it hasn’t yet secured them for the onshore section. Jasper Jansen, a South Stream spokesperson, said the company was confident it would receive all the necessary construction permits in time for first gas next year. He added that economic sanctions imposed on Russia by the US, such as those placed on Rosneft chief executive Igor Sechin, were not affecting either the company’s shareholders or its suppliers.
South Stream’s developers are banking on long-term European gas demand rising by around 160bn cm over the next two decades and on European conventional production falling. It is also assuming there will be no significant shale gas output on the continent over the next 20 years. “We are still on schedule and plan to deliver first gas in 2015. We’re not involved in political discussions so it doesn’t really affect us,” Jansen said. “Although the current political situation may underline the importance of having multiple routes to market, the rationale for the South Stream Pipeline is long-term and not dependent on short-term developments.”
However analysts said the friction now between Russia and Ukraine could have long-term consequences for South Stream. Jonathan Stern, a fellow at the Oxford Energy Institute, told Petroleum Economist that only around 10bn cm of gas was likely to flow through South Stream from around 2020. The lack of permits was one factor, but Gazprom also hasn’t yet received exemption from the EU’s third-party access rules for the pipeline.
Level playing field
These rules, which are part of the EU’s third energy package, state that competing companies must have access to 50% of any gas infrastructure – even if they didn’t pay for its construction. They are aimed at increasing competition and liberalising energy prices in European energy markets.
An exemption is another weapon in Brussels’s armoury as it tries to put pressure on Russia. Stern said the amount of pipeline capacity Gazprom would be able to use would depend on how things play out in Ukraine. Without resolution of the third-party access rules and construction permits, Stern reckons, Gazprom and its partners are likely to build just two of the four lines.
Gazprom told Petroleum Economist that South Stream was still on schedule for first gas to flow by 2015, adding that the company is in negotiations with the EU over the third-party access issue. It hoped to reach a mutually beneficial solution with the EU soon, the company added. In December, Gazprom doubled its costs estimate for the South Stream project.
The company would now spend 738.5bn rubles ($24bn) between 2011 and 2017 on upgrading its domestic gas system to feed the South Stream pipelines. This is up from a previous estimate of around $17bn. The costs of upgrading Russia’s pipeline network, when added to those of building the South Stream pipeline itself, now total around $46bn, twice the original cost estimate.
This dwarfs the cost of other new pipelines into Europe, such as the $10bn Trans-Anatolian gas pipeline, which will connect with the Trans Adriatic Pipeline, taking gas from Azerbaijan to central Europe.
Analysts said that for Russia the benefits of diversifying its transit routes outweigh the costs. “If you just look at the economics, South Stream doesn’t make a lot of sense. But it’s a geopolitical issue,” said Graham Freedman, an analyst at Wood Mackenzie, a consultancy. Russia was willing to pay a premium to avoid relying on Ukraine to transit its gas. If Russia moved further into eastern Ukraine, however, the EU would likely block South Stream altogether. This would be ironic, said Freedman, because South Stream “would support European security of supply as the construction of Nord Stream did”.
South Stream: what’s involved
•The South Stream project was conceived in 2006 when Gazprom and Italy’s Eni signed an agreement entitling Gazprom to supply Russian gas directly to the Italian market, starting from 2007;
•The South Stream Pipeline could transport up to 63 billion cm/y of gas from Russia to central and southern Europe;
•Eni, Wintershall and EDF are Gazprom’s partners in implementing the offshore portion of the project. First gas shipments are scheduled for late 2015;
•The four parallel pipelines to be laid across the Black Sea will consist of around 75,000 individual pipe segments measuring 12 metres long;
•The pipes are made from carbon steel with a thickness of 39mm and a diameter of 32 inches (81cm);
•The total length of the offshore section will be around 900 km reaching a depth of over 2,250m;
•The water pressure can reach 2,200 tonnes per square metre;
•Each pipe string is designed to transport 15.75bn cm/y.
•South Stream’s gas transmission system will total 2,446 km in length;
•To feed gas into the project Russia will have to expand its gas transmission system by 2,500 km and build another 10 compressor stations with a total capacity of 1,516 megawatts;
•The offshore section of the pipeline will run under the Black Sea, from the Russkaya compressor station on the Russian coast, to the Bulgarian coast;
•There are two optional routes for the onshore gas pipeline section: either to the northwest or southwest of Bulgaria;
•Inter-governmental agreements have been signed with Bulgaria, Serbia, Hungary, Greece, Slovenia, Austria and Croatia to implement the onshore section of the gas pipeline; and
•In March 2014, Saipem, a subsidiary of Eni, was awarded the contract for laying the first string and for developing landfall and shallow-water sections for all four strings of the pipeline.
Switzerland’s Allseas Group will use the Pieter Schelte vessel to lay the second string’s almost 900 km of pipes on the seabed starting in summer 2015.