Streetwise Professor

June 14, 2011

Vapor or Gas?

Filed under: Economics,Energy,Politics,Russia — The Professor @ 7:48 pm

About three and a half years ago I wrote a post discussing how Russia routinely uses “vapor pipelines”, “vapor contracts”, and other “vapor investments” in order to deter entry that would pose a competitive threat to Russian energy businesses, most notably Gazprom.  Today’s NYT runs an article about the South Stream pipeline which asks rhetorically “could the plan to build the world’s most expensive natural gas pipeline turn out to be an elaborate bluff?”  That is, is South Stream a viable investment for transporting gas, or is it so much vapor?

On its face, South Stream makes little economic sense.  For all of the scorn that Putin and Medvedev have heaped on Nabucco’s lack of gas supply, South Stream has the very same problem–only worse, because it is bigger.  It is very expensive to build.  It is getting more expensive and more unrealistic by the day as Gazprom has on multiple occasions boosted the the planned capacity on the line.  It makes sense only as a means of sowing fear, uncertainty and doubt about the prospects of Nabucco, and to put pressure on Ukraine with regards to transit deals and gas prices on sales to that country.

I found two bits in the article entertaining.  South Stream’s CEO scoffed at the idea that Russia is spending real money on the pipeline, and wouldn’t do that if it were merely a bluff:

Marcel Kramer, the Dutch-born chief executive of South Stream, denied during a recent interview that his pipeline was little more than Moscow’s attempt to squash Nabucco.

“To do such a major exercise as a sort of defensive move would be highly irrational,” Mr. Kramer said. “There is no doubt that this is very serious, and money is being spent — considerable amounts of preparatory money is being spent — by Gazprom itself.”

This conveniently overlooks the fact that with Russia generally, and Gazprom particularly, much of that “preparatory money” being spent is likely being vectored into the pockets of those doing the spending, or their buddies.  With Gazprom, wasteful spending is more feature than bug.

Here’s the other amusing bit:

“Frankly, neither of these pipelines make economic sense,” said Massimo Di Odoardo, a senior global gas analyst at Wood Mackenzie, an energy consulting firm. “It would be much cheaper for Russia and Europe to accept their interdependence and get to work making Ukraine an even more reliable gas corridor.”

Yeah.  That will happen.  Back-to-back monopolies located in distinct and highly corrupt countries in which contracts are inconveniences rather than commitments are antithetical to “reliability.”  These conditions are the ingredients in a classic recipe for conflict.  South Stream and Nabucco would make no sense in sensible countries, a category that does not include Ukraine and Russia.

So don’t expect South Stream to die anytime soon.  It creates FUD, and FUD has its uses.  It provides a vehicle that can be used to tunnel funds out of Gazprom.  Those are more than enough reasons for Putin et al to keep it going.

A perhaps more interesting question is whether Nabucco will keep going.  Waiting for it is like waiting for Godot.  I’m not holding my breath–especially given that the Euros have other much bigger fish to fry.  Like whether there’s going to be a Euro or a Euroland, for instance.

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  1. […] Professor questions whether Russian state gas monopoly Gazprom will actually build the Southstream gas pipeline – the […]

    Pingback by Russia: Southstream as a hoax · Global Voices — June 15, 2011 @ 6:01 am

  2. At first, I thought you were talking about “lost” gas – one of the members of the Party of Regions appeared recently on the Savik Shuster show to tell people how Ukraine was being cheated by gas “lost” in the pipelines.

    At any rate, you might have already seen this – Ukraine goes hat in hand to Russia pleading for a reduction in gas prices (despite the “wonderfulness” of the Kharkiv Accords), and Putler responds by insisting on his Customs Union and on ownership by Gazprom of Ukraine’s gas transit system – you know, the way that Germany and Russia have already done it:

    Comment by elmer — June 15, 2011 @ 8:29 am

  3. Elmer — Ah Jamestown, the beating heart of Washington’s anti-Russia lobby and wannabe pathetic spookdom.

    Oddly enough, I find myself agreeing with SWP here. Cheap LNG from Qatar or even the Port of New Orleans probably makes more sense in the immediate term for Italy and other Southstream partners than Russian gas via the southern route. On the other hand, in the long run maybe twenty five years down the road when easy oil is long over and gas globally is no longer so dirt cheap due to Gas-to-Liquids (though that scenario is doubtful if demand stays weak and supply explodes from China and South America), it might look like a great investment.

    Nabucco on the other hand was an exercise in hubris from the start — what, naming a pipeline after the Biblical king of Babylon just shortly before the U.S.-led invasion of Iraq in late 2002? How’s that working out with the Iranians still doing their damndest to keep Iraq from pumping as Darth Cheney envisioned?

    Ultimately you can’t have it both ways. If the shale gas revolution is going to stick it to the Kremlins than Nabucco is also an overpriced white elephant relic of old ZBig’s ‘Grand Chessboard’ strategy of bypassing Russia with as many damn pipelines as possible from the 1990s.

    Comment by Mr. X — June 16, 2011 @ 11:38 pm

  4. […] Professor questions whether Russian state gas monopoly Gazprom will actually build the Southstream gas pipeline – the […]

    Pingback by Official Russia | Russia: Southstream as a hoax — June 22, 2011 @ 1:04 am

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