Anger and Dismay in EU as Russia Scraps $50bn Gas Plan

  • South-eastern Europeans were looking forward to earning money from transit fees
  • But Brussels feared the pipeline would cement Gazprom’s domination of the European gas market
  • Serbian PM: “Serbia has been investing in this project for seven years, but now it has to pay the price of a clash between the great [powers]”
  • Hungarians: “First Nabucco, now South Stream. What are we supposed to do now?”
Change of plans

This article originally appeared at Financial Times


Eastern European nations reacted with shock and anger to Russia’s decision to abandon South Stream, its $50bn gas pipeline across the Black Sea into Europe, as shares in some of the companies involved in the project dived.

Bulgaria, Serbia and Hungary said they had received no advance warning that Moscow was scrapping South Stream, even though they all have substantial financial and political capital invested. Russia said it would export its gas to a trade hub in Turkey instead.

South Stream is so far the biggest casualty of the stand-off between Russia and Europe over Moscow’s military involvement in Ukraine.

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The much-vaunted project, backed by Russia’s state-controlled gas group Gazprom, was designed to bring Russian gas into Europe by bypassing Ukraine. It gained momentum after a series of price disputes between Moscow and Kiev over the past decade led to supply cuts for some of Gazprom’s European customers.

But there were fears in Brussels that the pipeline would cement Gazprom’s domination of the European gas market. The European Commission insisted that other gas suppliers be given access to South Stream, arguing that the idea of Gazprom both providing the gas and owning the pipeline violated EU competition rules.

However, the project was backed by several countries in southeastern Europe, which saw it as a way to improve their energy security. They also looked forward to earning money from transit fees for South Stream’s gas as it crossed their territory.

Countries in the region lost another key supply option last year when a rival EU-backed project that would have carried gas from Azerbaijan into the heart of Europe, called Nabucco, was scrapped.

At a meeting in Brussels of EU ambassadors on Tuesday, the Hungarian representative asked Federica Mogherini, the new EU foreign policy chief: “First Nabucco, now South Stream. What are we supposed to do now?”

Peter Szijjarto, Hungary’s foreign minister, said alternative sources of energy would now have to be explored, including gas from Azerbaijan.

Aleksandar Vučić, Serbia’s prime minister, told the country’s RTS channel that the decision was bad news for Belgrade and said he would urgently seek to speak with Mr Putin.

“Serbia has been investing in this project for seven years, but now it has to pay the price of a clash between the great [powers],” he said.

Italy and Austria have also been vocal supporters of the venture, pitting themselves against the commission.

Shares in companies with contracts for South Stream also suffered. Stocks in Italian oil services group Saipem closed down 10.8 per cent, while Germany’s Salzgitter, whose joint venture is making pipes for the project, was down 7.4 per cent. Other businesses involved in South Stream include Italy’s Eniand Austria’s OMV.

Saipem and Salzgitter said that they had not received any notification from Moscow that their contracts were being terminated.

The dispute over South Stream also sowed such divisions in the EU that it proved difficult to agree on sanctions against Moscow, diplomats said.

The 28-member bloc insisted that its opposition to South Stream was legal, not political.

“Pipelines developed and operated in conflict with EU law endanger the functioning of the internal market and they may also fall short in any expected improvements in security of supply,” said Anna-Kaisa Itkonen, spokesperson for the European Commission.

In addition to its concerns about competition, the commission was also worried that South Stream could fuel corruption and launched an investigation into the legitimacy of the tender process in Bulgaria, where the pipeline was supposed to make landfall.

Ognian Shentov, head of the Centre for the Study of Democracy, a Sofia think-tank, said the cost of the Bulgarian stretch had been inflated from €1.2bn to more than €4bn for the benefit of local construction companies.

South Stream was supposed to have four parallel pipelines, each more than 930km long connecting Russia and Bulgaria under the Black Sea. The pipeline was then supposed to continue overland via Serbia and Hungary to Austria.

The tenders to supply and lay the first two subsea pipelines, each containing 75,000 12-metre pipes, were held this year and the contracts for the other two pipelines were expected to be awarded next year.

In January, Europipe, Salzgitter’s joint venture, won half of a €1bn tender for the first pipeline to supply specialised pipes capable of withstanding depths of 2,200 metres. The other winning contractors were Russia’s United Metallurgical Company (OMK) andSeverstal. Voestalpine supplies steel plates to OMK.

Salzgitter is relying on the project to take up capacity at the Europipe mill in Muelheim until 2015. Low orders previously forced the company to cut the hours of some of its workers. In 2013 Salzgitter made a €489.6m group net loss but forecasts a pre-tax result approaching break-even in 2014.

Ingo Martin Schachel at Commerzbank said the pipeline had not yet been installed under the sea and therefore the “‘sunk costs’ for South Stream offshore were not yet high – so the route could still be changed”.

However, he said because the possible alternative route to Turkey would involve a smaller undersea section “the potential change of plans could have significant negative earnings implications for Salzgitter, even if our assumption is true that the existing contract will be honoured”.

Like Salzgitter, Saipem was also counting on an income boost from South Stream after a dismal year in 2013 when it recorded a €404m net loss.

 

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