Springtime for South Stream, and Gazprom?
Vlad Socor has two pieces on the South Stream pipeline project. Here’s the nub of the analysis:
Despite facing gas production shortfalls (relative to internal and external supply commitments) post-2010, Russia is multiplying its supply offers to European consumer countries through South Stream and other pipeline projects. Gazprom signed bilateral agreements on building South Stream with state-controlled Italian, Bulgarian, Greek, and Serbian companies on May 15 in Sochi, with Prime Minister Vladimir Putin attending, and it is negotiating similar agreements with more countries (Interfax, May 15, 16; EDM, May 27).
As enticements, Moscow is declaring ever-larger design capacities for the putative South Stream pipeline system, rival to the European Union and the United States’ backed Nabucco and Southern Corridor projects. South Stream’s other goal is to threaten Ukraine with diverting gas transit volumes, from the Ukrainian transit system into the South Stream pipeline on the seabed of the Black Sea. The Kremlin will most likely roll back its South Stream project, if Moscow achieves its earlier goal of gaining control over the Ukrainian gas transit system.
Gazprom’s strategy reminds me of the movie The Producers; the company is promising the moon to everybody with little chance that it can deliver. The promised capacity is growing by leaps and bounds, from 30 bcm/year in 2008, to 47 bcm/year in February, to 60 bcm/year this month. It is offering every country in the region a piece of South Stream, with new pipelines wending through southern and eastern Europe, and storage facilities here, there and everywhere. But with nothing really to back it up. There are no sources of gas committed to the project (unlike with Nord Stream, as dubious as those sources are). Cost projections are ballooning along with capacity plans. In the midst of an existential financial crisis, just where is Gazprom–which has seen its market cap plummet, its cash flows decline dramatically, and which has just slashed its dividend by 83 percent–going to get the $24 billion plus to pay for this project? Not to mention the money required to develop the gas fields required to fill it and Nord Stream and meet anticipated growth in domestic demand.
I’ve written before on the vaporware aspect of many Gazprom plans. Just like software companies that announce brand new software initiatives (that never appear) in order to dissuade entry by competitors, Gazprom announces these grandiose expansion plans to deter entry, in this case, entry by Nabucco. (Robert Amsterdam calls this “premature contractualization” but the idea is the same.) The plans and capacities and the like are sort of Monopoly money that Gazprom throws around in an attempt to peel off enough countries to prevent Nabucco from getting the scale and traction it needs. (Nabucco has its own problems, of course, not the least of which being where the gas for it is going to come from, and the indecisiveness of the Europeans.)
The frantic increase in the amount of vapor being pumped out seems to suggest a certain amount of desperation on Gazprom’s part. Nabucco has made some tentative strides of late, particularly getting Turkey more or less onside (even though it still hasn’t resolved the supply issue). In response, Gazprom seems to be making more extravagant promises.
In other gas news which may be closely related to the South Stream saga, is this piece relating to a story I wrote a couple of posts about a few months back. Turkmenistan is threatening to sue Russia over the gas pipeline explosion:
Turkmenistan threatened to take Russia to court over last month’s gas pipeline explosion, RIA news agency reported, escalating a dispute that has severed a vital energy link through Russia to Europe.
Turkmenistan blames Russia for blowing up the pipeline, which carries more than half of its most valuable export, by cutting the gas flows without enough warning.
“When you shut off the flows, you get what is called a vacuum-bomb effect,” Odek Odekov, head of Turkmen state geological institute Turkmengeologia, told reporters during an energy conference in Paris, RIA reported.
“The system has to be prepared for a shut-off three days in advance, and Russia did it in the course of one day,” he said.
Russia’s gas export monopoly Gazprom denies any wrongdoing and it has said it hopes to resolve the issue through talks. The company has avoided making detailed public statements on the matter.
Silence is probably advisable, under the circumstances.
As I originally opined, there is a strong case to be made that the cutoff of gas from Turkmenistan (which led to the explosion) was economically driven. Russia had gotten what it asked for, but came to regret it. In 2008 it agreed to buy all of Turkmenistan’s gas at what seemed to be a bargain price, but what which in the aftermath of the financial crisis turned out to be too much gas at too high a price:
Every month, Turkmenistan is therefore losing between $800 million and $1 billion per month in export revenues, said Mikhail Korchemkin, director of East European Gas Analysis. “Turkmenistan has every right to demand this money,” he said.
U.S. PUSHES FOR BYPASSING RUSSIA
Due a sharp drop in demand for gas in Europe, Russia no longer needs to buy Turkmen gas, because it can meet European demand more profitably by selling its own.
For the short term, therefore, analysts said the explosion played into Russia’s hands by halting imports from Turkmenistan.
Korchemkin estimated that Gazprom is getting an additional $330-450 million per month in net profits out of this situation, while the Russian budget is getting an extra $300-400 million in customs duties.
So there’s another Producers parallel: when their scam failed, the hapless producers blew up the theater to avoid paying off their debts. When its Turkmenistan scheme backfires, Gazprom blows up the pipeline to avoid paying off its debts. LOL.
The cutoff of purchases from Turkmenistan helps Russia out of a short term difficulty, but creates serious longer term ones. First, Turkmenistan has take-or-pay contracts with Russia. Though Russia is likely to claim force majeure due to the pipeline explosion, if this matter gets to a reliable arbitrator, Gazprom may end up on the hook to pay for the gas it didn’t take.
Second, it has made the wily Turkmen president Kurbanguly Berdymukhamedov look for other options:
After the row with Russia, Berdymukhamedov has spoken out about the need to diversify gas exports.
Russia, keen to maintain control over the region’s gas flows, is plowing ahead with its own pipeline project in the region, South Stream
“But South Stream does not open any new markets for Turkmenistan, because Russia would remain its only consumer. Nabucco, however, opens up all of Europe,” Korchemkin said.
And Turkmen cooperation could be just what Nabucco needs to be viable. And that, in turn, could well explain why The Producers at Gazprom have gone into high gear, promising more to every country in Eastern Europe than they can possible deliver.