Gas Pipelines: South Stream Gets a Boost

Key countries sign on to Russia's South Stream project, giving it an edge over the rival Nabucco pipeline proposal in a race with geopolitical repercussions

By Jason Bush

On May 15, Russia signed deals with Italy, Serbia, Bulgaria, and Greece, bringing the South Stream project, a major new gas pipeline to Europe, one step closer to reality.

At a meeting in Sochi, attended by Russian Prime Minister Vladimir Putin and Italian Prime Minister Silvio Berlusconi, Russia's Gazprom (GAZP.RTS) and Italy's ENI (ENI.MI) agreed to double the planned pipeline's capacity to 63 billion cubic meters. In addition to ENI, Gazprom signed memoranda of understanding with Greek natural gas transmission company DESFA, Serbia's Srbijagas, and Bulgarian Energy Holding.

The participating countries also signed documents needed to start work on the 2,000km (1,243-mile) pipeline. With completion planned by 2015, South Stream eventually will pump natural gas from southern Russia under the Black Sea, bringing it via Bulgaria, Serbia, Hungary, and Greece to terminals in western Austria and southern Italy.

The agreement represents a significant diplomatic coup for Russia in a great geopolitical race that will help determine the source of Europe's energy supplies for decades to come. That race has been visibly gaining pace over recent weeks. Backers of a rival pipeline to southern Europe are now vying to put together the necessary political support. "It's very much down to the wire now," says Chris Weafer, chief strategist at UralSib (USBN.RTS), a Moscow bank. "There's definitely a race on to get all the signatures in place."

Concerns About a Stranglehold

It's no coincidence that the agreements on South Stream come just days after a key summit in Prague designed to give political impetus to Nabucco, a proposed rival pipeline through Turkey that is backed by the European Commission and the U.S. In the eyes of the EU and the U.S., the key advantage of Nabucco is that it would bypass Russia, diminishing Europe's already heavy dependence on Russian gas. Imports from Russia presently account for around 40% of gas imports and 25% of gas consumption in Europe. Concerns about Russia's stranglehold on Europe's energy have only intensified recently, following this January's damaging price spat between Russia and Ukraine, which briefly saw Russia's gas supplies to Europe suspended.

Those fears help explain the recent burst of activity surrounding Nabucco, a project that has been under discussion since 2002. In addition to the Prague summit, the EU has also been busy courting Turkey, a key transit country, which is expected to sign an agreement in June paving the way for Turkey to host the pipeline. Previously, there had been concerns that Turkey would try to use the pipeline as a bargaining chip in EU accession negotiations.

But despite the recent progress on Nabucco, it all still looks to many analysts like a case of too little, too late. "I believe Nabucco still looks very problematic," says Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. "It might work, or it might not, but I don't think it's going to work quickly." He argues that the pipeline probably won't be viable until around 2020—much later than the 2014 starting date currently being advanced.

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