Streetwise Professor

At the onset of the financial crisis, I conjectured that this would jeopardize the South Stream and NordStream pipeline projects.  Bloomberg reports that South Stream is indeed in trouble:  

OAO Gazprom  plans to delay natural- gas deliveries to Europe through its South Stream pipeline as Russia’s largest energy producer cuts investment amid slowing global economic growth and declining energy demand.

Gazprom, which originally said it would start shipping gas through South Stream in 2013, expects a start date at the end of 2014 or 2015, according to a presentation to investors today in Moscow. Gazprom spokesman  Sergei Kupriyanov  couldn’t be reached for comment.

The cost of the project, which will bypass Ukraine by traveling under the Black Sea to Bulgaria, may reach more than 24 billion euros ($31 billion), the company told investors. Russian Energy Minister  Sergei Shmatko  said in July that the project may cost $20 billion.

Russia, which supplies a quarter of Europe’s gas, is seeking new routes to Europe after a price dispute with Ukraine led to a two-week cut in exports via the former Soviet republic. South Stream is the twin of Nord Stream, designed to link Russia directly to Germany under the Baltic Sea.

State-run Gazprom may cut investments by 14 percent this year as the credit crunch squeezes resources and revenue drops because of falling prices and demand, according to today’s presentation. The world’s largest gas producer will invest $29 billion this year, down from $33.6 billion in 2008, according to company estimates.

‘Generally Positive’

“Our takeaways were generally positive, including surprisingly large declines in expected capex outlays,” Moscow- based Alfa Bank wrote in a note to investors after the presentation. “Gazprom is adapting to the new economic reality.”

Gazprom’s  budget  is based on a $50 a barrel price for Urals crude, Russia’s export blend. Other scenarios under consideration assume barrel prices of $40, $30 and $25, according to the presentation. Chief Executive Officer  Alexei Miller  said in June, when the price per barrel hovered at more than $120, that the price may “soon” hit $250.

The 14 percent (“surprisingly large”) reduction in capital expenditure is perhaps a more important fact than the South Stream delay.  It is well known that Gazprom’s existing fields are in decline, and that it is desperate to find new sources of supply.  It has massive reserves, but getting at them is a daunting task, almost certainly beyond the company’s capabilities.  A 14 percent drop in capex will seriously impede the company’s development of new supplies.  This will further increase its dependence on Central Asian sources (esp. Turkmenistan).  This, in turn will intensify the bargaining, bribery, and conflict currently swirling around that region.  

The delay in South Stream may also give the ill-starred Nabucco project a much needed boost, but other difficulties must be overcome.  Given the gas war, however, one hopes that Europe finds the will to make the way.  Sadly, however, I have my serious, serious, doubts.  This means that Ukraine will continue to play a pivotal role in gas transshipment for the foreseeable future.  This, in turn, means that future gas wars are more likely than not.