by Dr. Mikhail Korchemkin*, Bulgaria Analytica
“We now need to start the construction of this pipeline in the Black Sea, but we cannot do that until we have Bulgaria’s permission”, said Vladimir Putin on December 1, 2014. “I think it’s clear to everyone that it would be ridiculous to start the construction in the sea, reach the Bulgarian shore and stop. So we are forced to reconsider our participation in this project”, continued president of Russia.
It is worth noting that uncertainty about the point of entry has not stopped Mr. Putin from launching the construction of the Turkish Stream pipeline. “There are still several questions we need to coordinate: the entry point, the route on Turkish territory and environmental security”, he said to president of Turkey Recep Tayyip Erdogan over the phone from a pipe-laying vessel in the Black Sea.
In 2014, Gazprom had several reasons to stop the South Stream project. First, Russia’s annexation of Crimea has affected Brussel’s attitude to the new Russian pipeline venture in which Italian Eni had 20 percent, German Wintershall and French EDF 15 percent each. During a parliamentary hearing in Rome in March 2014, Eni CEO Paolo Scaroni said he saw the future of the South Stream gas pipeline as rather gloomy because the Russian-Ukrainian crisis would put at risk the necessary permissions of the EU.
Second, following the “Crimean sanctions” of the EU and US, many banks have put on hold the plans to finance the South Stream project. Gazprom was unable to raise money for the offshore pipeline construction on time.
Third, the higher cost of borrowed capital and other factors have increased the overall investment expense by 50 percent. Eni, the second major shareholder of the project, has strongly disagreed to pay more than the originally agreed sum of €600 million for the subsea section and warned Gazprom it would step out of the partnership.
On November 24, 2014 – one week before the official death of South Stream – the new CEO of Eni Claudio Descalzi came to Sochi to discuss the problems with Gazprom CEO Alexey Miller. Mr. Miller doesn’t live or work in Sochi, but it is the favorite place of Vladimir Putin in Russia. Apparently, Mr. Putin was to join and successfully conclude the meeting, but Descalzi and Miller have not reached an agreement. The corresponding press release of Gazprom didn’t have the traditional line about the South Stream project progressing successfully.
By the end of November 2014, the project had growing costs, no financing and a major European shareholder stepping out. It was the end. Whatever was happening with the Bulgarian, Serbian and other land sections in Europe didn’t matter because the most important offshore section got stuck.
The scapegoat is usually the weakest link, so a week later, when Vladimir Putin announced the termination of South Stream, he put the blame on Bulgaria. In my view, a clever PR campaign could have pictured it as David’s victory over Goliath. However, Russia has managed not only to make Bulgaria responsible for the death of South Stream, but also made it to look like a shot in the foot.
* Dr. Mikhail Korchemkin is the founder and managing director of East European Gas Analysis, a consulting company that specializes in cost-benefit and financial analysis of natural gas projects in the former Soviet Union. His previous experience includes performing numerous feasibility studies for the USSR Gas Ministry, predecessor of Gazprom. Prior to going into full-time consulting Mikhail taught at the University of Pennsylvania. He has also had visiting scholarships at Harvard University and Erasmus University in Rotterdam. Mikhail has consulted numerous corporate and governmental clients including ABN-AMRO Bank, Amoco, BP, British Gas, Chevron, Conoco, Ernst & Young, ExxonMobil, Gas Strategies, Gasunie, Neste Oy, Osaka Gas, OTA of the U.S. Congress, Ruhrgas, Shell, Statoil , Swedegas, Total, Vattenfall and The World Bank. He has acted as expert witness in arbitration cases concerning natural gas business in Russia and Eastern Europe.