The future of the pipeline is still unclear, however.
Russia and Hungary have agreed the principles of a joint company to build the Hungarian section of the South Stream pipeline. At the same time, however, Hungary explicitly lends its support to the rival alternative to South Stream - the Nabucco pipeline. Experts, however, believe that capacities of both pipelines will not be needed for over ten years due to the decreased demand for gas.
Yesterday, Gazprom Head Alexei Miller and Development Bank of Hungary President János Erős signed a framework agreement on the construction of the South Stream pipeline and Russian gas transit through Hungary. Prime Ministers Vladimir Putin and Ferenc Gyurcsány presided over the signing ceremony. Both parties agreed upon the procedure and mechanisms for establishing a joint venture, which will prepare the grounds for the construction of the pipeline's Hungarian section with a capacity of 10 billion cubic metres per year. According to Mr Miller, the joint venture will be established no later than May 15.
Gazprom also signed an agreement with Hungarian oil and gas group MOL on the construction of an underground gas storage facility within the framework of the South Stream project, with a capacity of 1 to 1.3 billion cubic metres of gas. The final capacity of the facility will be determined during the project's feasibility study. "The capacity is large enough to provide for a stable functioning of Hungary's energy system," Mr Putin said. The underground storage facility will be operational in 2012 or 2013.
The South Stream pipeline, with a projected capacity of 31-47 billion cubic metres of gas per year, will be laid from Russia's Black Sea cost to Bulgaria or Romania, bypassing Ukraine. Additional lines of the pipeline will be laid from Bulgaria or Romania to Italy and Austria. Agreements have already been signed with Bulgaria, Serbia, Hungary, and Greece, authorising construction works on land. Similar agreements will soon be signed with Austria and Slovenia. In addition, Gazprom meets 70% of Hungary's gas needs.
According to Mr Gyurcsány, the Hungarian section of South Stream will be completed by 2015. "The final plan of the project financing will be ready by 2011 and by 2015 the pipeline will be built," explained the Hungarian Prime Minister. Mr Miller clarified that the pipeline will become operational by December 31, 2015.
Prime Minister Putin said that the feasibility study of the pipeline's Hungarian section was expected before the end of this year, most likely in September; the entire project's feasibility study would be completed in June 2010. He said there were no problems with financing the 10 billion euro worth project. What's more, the project cost may decrease due to the price reduction on materials and services.
At the same time, Mr Putin stressed that if South Stream fails to materialise, Europe will be faced with the need to buy the more costly liquefied gas, which is "always about 20 percent more expensive than the pipeline gas."
The Prime Minister expressed doubts about the prospects for the alternative Nabucco project, a planned natural gas pipeline transporting gas from Turkey to Austria, bypassing Russia. "Nabucco, instead of decreasing the number of transit countries, will only increase them - Azerbaijan, Turkey, Georgia. Furthermore, unless Iran joins the project, it will be impossible to fill the pipeline," Mr Putin explained.
The Hungarian side did not seem to share Mr Putin's perspective. Ferenc Gyurcsány said that "the more alternative energy sources, the better for Hungary." "If the demand for gas continues to increase, these two projects should not be considered as competing against each other. For Hungary, it would be the right policy to fully support both pipelines," Mr Gyurcsány said.
However, the forecast for increased gas demand is not so apparent. Experts from WoodMackenzie, for example, believe that South Stream, which has guaranteed sources of gas supply, has more prospects than Nabucco. Their report was released following "the gas war" between Russia and Ukraine. According to WoodMackenzie, before the gas row, Nabucco had very little chances to be realised. The project became more attractive following the row, as it provides an alternative to Russian gas supplies. This, however, does not eliminate the problem of filling the pipeline.
Many experts believe, however, that due to the decreased demand for gas as a result of the economic downturn, Europe will need neither South Stream nor Nabucco until 2015; it may not even need Nord Stream (an offshore pipeline to be laid from Russia to Europe across the Baltic Sea). WoodMackenzie estimates that in 2014, only about 25% of the South Stream initial throughput will be in demand; in 2015 - about 33%; and in 2020 - a little over 50% of the pipeline's capacity.
According to WoodMackenzie, the Nord Stream pipeline (the first phase is due to be commissioned by the end of 2011) will stay idle until 2012; in 2013 it will be filled at less than 20% of its capacity; and by 2020 - at three fourths of the capacity. Consequently, "short-term" projects could be justified only by the need to "ensure energy security in case the transit through Ukraine is interrupted," the WoodMackenzie analysts believe. They believe that Northern and Western Europe can survive a long-term interruption of the Ukrainian transit by means of securing alternative supplies and gas from their own underground storage facilities.
Others have opposing views, however. Denis Borisov from Russian investment bank Solid believes that if the economic recovery starts within one year or 18 months, and if the gas consumption in Europe is increasing by 1.5% to 2% per year, then the South Stream gas will be fully in demand beginning in 2016. According to Mr Borisov, while considering the reduced pipeline construction cost, the gas transit rate will be $2 per 1,000 tonnes for 100 km. Hence, South Stream will be able to compete with the existing pipeline running through Ukraine.
By Natalya Mordyushenko