The agreement last week between Gazprom and OMV of Austria on South Stream shows that the EU and Russia will continue their long-standing energy partnership regardless of the crisis around Ukraine, writes Friedbert Pflüger, Director of the European Centre for Energy and Resource Security (EUCERS) at King‘s College London. According to Pflüger, the mutual energy dependence between the EU and Russia should be regarded as a largely positive development. “It has contributed more to economic and political stability in Europe than any kind of ‘energy independence’ would.”
Despite Western sanctions against Moscow over Ukraine, Gazprom CEO Alexei Miller and Austrian OMV chief Gerhard Roiss signed a Memorandum of Understanding last week to build a section of the controversial South Stream pipeline to Austria instead of Italy. This pipeline, which follows a similar route to the now-abandoned OMV-led Nabucco West gas pipeline, will only have about half the capacity of the initially intended 63 bcm/year and will deliver Russian gas across the Black Sea to the Baumgarten gas hub in Austria via Bulgaria, Serbia and Hungary by 2017.
In choosing to build a smaller pipeline – a South Stream “Lite”, if you will – the project’s principal backer Gazprom has clearly taken new market realities and lower EU gas demand expectations into account. The project’s costs are estimated to drop by as much as USD 1 billion. It is interesting to note that the successful Trans Adriatic Pipeline (TAP) project, which won approval last year, utilized a similar approach by promoting its commercial merits over the much larger Nabucco pipeline.
So, what does this mean for stakeholders? Some critics are already lambasting the project, with the loudest voice unsurprisingly coming from Brussels. The EU Commission, which is concerned about the bloc’s dependence on Russia for a third of its gas supply, insists that EU approval supersedes any bilateral agreements and that South Stream does not comply with its regulations on ownership and third-party access.
Russia and Austria, on the other hand, maintain that the project has legal standing and reference a 2010 bilateral agreement to justify regulatory approval. Moscow obviously intends to circumvent the EU’s Third Energy Package regulations and the probability that it will succeed is high. If the pipeline project goes ahead, it may make the Commission’s recent calls for a joint purchase of Russian gas and a uniform gas price in the common European market significantly more difficult.
Another success story
For Russia, the project can translate into yet another success story following the construction of Nord Stream. Moreover, it is a clear signal to Ukraine that Moscow intends to avoid any future gas disputes and supply disruptions.
The deal can also be regarded as a victory for Austria and OMV, which strongly backed the now-abandoned Nabucco project. Key government officials in Vienna are already touting the new South Stream as a further contribution to the country’s energy security. While this may be debatable, additional flows of gas can certainly help reinforce Baumgarten’s position as a major European gas hub.
Italy may seem as the obvious loser, as it will have to transport any additional gas it wants to purchase from Russia via Austria. However, its gas consumption has decreased by nearly 10 bcm since 2008 and ENI, which is a shareholder in South Stream, last year chose to reduce gas imports from Italy’s largest supplier Algeria in order to cope better with weaker demand. Also, Russia is the country’s second largest gas supplier, so any additional imports via a direct pipeline system would only serve to increase its dependence. Instead, Italy has taken a major step to diversify its gas supplies by backing the TAP project.
Ultimately, the announcement to push ahead with the South Stream project – whether one likes it or not – illustrates that the continuing European – Russian energy partnership is “business as usual”. The deal also reveals a stark reality, namely that the EU, despite all diversification efforts, will in all likelihood continue to rely on enormous amounts of piped gas from Russia for years to come.
Those who criticize this dependency should know that it is mutual. Seventy percent of Russia’s natural gas exports flow to Europe. The concept of energy security has two sides: for the commodity-poor Europeans, it means security of supply; however, for energy producers, this means security of demand. This mutual dependency, this interdependency, founded on the Gas-for-Pipes deal of the seventies, has contributed more to economic and political stability between the EU and Russia over the past half century than the much-heralded concept of energy independence today.
Prof. Dr. Friedbert Pflüger is Director of the European Centre for Energy and Resource Security (EUCERS) at King‘s College London. You can find his archive of Energy Post articles on his Author Page here.