Russian Prime Minister Vladimir Putin assured his Italian counterpart Silvio Berlusconi that Russia will not abandon the South Stream project to please Ukraine.
Putin's talks yesterday with Italy and Ukraine clarified the future of the South Stream project. Despite much warmer relations with Kiev, and Ukraine's desire to preserve the main channel of Russian gas exports to EU countries, Moscow will not give up the costly project.
Putin assured Berlusconi that the construction of the South Stream pipeline would be completed in 2015 and explained the need to expedite the project because of "internal political squabbling" in Ukraine. Meanwhile, Moscow promised to compensate losses to the friendly Viktor Yanukovych-led government with investments in the Ukrainian economy, Kommersant reported. In return, Moscow wants Russian capital to have free access to Ukraine's key assets.
Costly project
Putin's negotiations with Berlusconi put an end to doubts about Moscow's real intentions to invest in the construction of the South Stream pipeline, with an annual capacity of 63 billion cubic metres of gas. Many experts are unsure of the project's economic expediency, and even Gazprom CEO Alexei Miller did not dare to name the project's cost this weekend.
Last week, doubts about the project's economic expediency were even stronger. After the Russian and Ukrainian presidents signed a deal in Kharkov on the extension of the lease of the Russian Black Sea Navy base in Sevastopol until 2042 in exchange for a gas price discount, there was much hullabaloo about the need to save not only on the naval base in Novorossiysk, but also on the construction of the pipeline bypassing the now-friendly Ukraine.
Putin's talks with Berlusconi were decisive for the project.
Apart from changes in the political climate, South Stream has stumbled upon quite a few internal problems recently – most significantly, a difference of opinion between the two largest shareholders – Russia's Gazprom and Italy's ENI, each with 50% of the shares. The reason for the dispute was an attempt to invite a third partner to join the project – the French EdF (See p. 11 for more details). In spring, the Gazprom-ENI conflict over South Stream was made public after ENI CEO Paolo Scaroni stressed the need to unite South Stream with its rival – the EU-sponsored Nabucco project (See Kommersant of March 16). This meant Gazprom's key partner had expressed, for the first time in public, doubts about the project that is considered to be of strategic importance for Russia.
Moscow rejected Scaroni's proposal. Unofficially, Kommersant sources at Gazprom said no progress could be achieved with the project until Scaroni resigns. Finally, the "shale gas revolution," i.e. a steep rise in shale gas production in the United States and its discovery in Europe, could also affect South Stream's budget. In the future, these two factors may reduce Russia's share of the EU gas market. Taking all this into account, there were quite a few expectations that the meeting between the prime ministers would be followed by an announcement that the project would be frozen.
Nothing of the sort occurred. Both prime ministers said after the talks that they had no intention to give up South Stream.
"The South Stream project is very important for us as it guarantees Russian gas supplies," Berlusconi said. "Last year, Russian gas transit via Ukraine was stopped for some time, so South Stream will be a guarantee that countries such as Bulgaria, Romania and Italy will not be left without gas."
The Russian prime minister elaborated on this idea: "We have signed agreements with Ukraine and guaranteed hydrocarbon supplies to Europe via Ukraine for another ten years. However, you see for yourself what is happening now in Ukraine. There is political squabbling around these agreements and some opposition members have already said they would annul them if they come to power. So, it would be better not to delay major infrastructure projects enhancing Europe's energy security."
Moreover, he assured Europeans that there were no delays in implementing the project and that Europe's energy security was in the reliable hands of the Russian gas monopoly. Commenting on the Russia-Austria intergovernmental agreement signed this weekend (See Kommersant of April 26), Putin said: "We have completed the formation of a legal framework for South Stream. We have finished nearly all the work in Turkey's special economic zone and nearly all the operations to explore the seabed off the Bulgarian coast. Now, we have to launch (construction) work and complete it in the second half of 2015."
Putin did not say anything about intergovernmental agreements with Italy and Turkey. (These are the very documents that Moscow lacks after having signed such agreements with Austria, Bulgaria, Serbia, Hungary, Greece, Slovenia and Croatia.) However, he said the Gazprom-ENI conflict had been settled. The EdF will receive a stake in South Stream (20% instead of 10%), with the respective agreement to be signed in St Petersburg in June.
In the opinion of Mikhail Krutikhin, a RusEnergy partner, "insurance in the shape of South Stream against instability in Ukraine will cost Russia excessively." "Against the backdrop of warmer relations with Kiev, there is no reason whatsoever to build this gas pipeline," he said. "Even Ukraine's gas pipeline system is not used now to full capacity, and there is the Nord Stream pipeline under construction. Within the next few years, Russia is unlikely to boost gas production to fill these pipes. There is a risk for the South Stream pipeline to remain empty."
Reward for loyalty
The news from Milan could not but upset Putin's next conversation partners, i.e. Ukrainian President Viktor Yanukovych and Prime Minister Mykola Azarov. Putin had held talks with them the night before in Kiev. After Yanukovych won the presidential elections, the Ukrainian authorities repeatedly called on Moscow to reject the costly South Stream project. As a cheaper alternative to the pipeline, the Ukrainians revived the idea of a gas pipeline consortium with Gazprom's participation to manage the Ukrainian gas pipeline system. Ukraine hoped that Western investors would help to modernise the system and increase its annual capacity to 200 billion cubic metres. (Its projected capacity is 140 billion cubic metres, but its real capacity does not exceed 120 billion cubic metres due to problems with wear.) On Sunday, Ukrainian Fuel and Energy Minister Yury Boiko confirmed the timeliness of this idea, stating that Kiev intends to reach an agreement with all participants in the South Stream and Nord Stream projects on guaranteed gas quotas to be transported via the Ukrainian gas pipeline system.
However, the idea of a gas pipeline consortium did not cause much enthusiasm in Russia. A Kommersant source close to Gazprom explained the situation as follows: "We are waiting for the Ukrainians to make amendments to the Constitution permitting the transfer of the gas pipeline system to foreign management. There is nothing to talk about until then. There have been too many promises, but no progress has been made because of legislative problems."
Under these conditions, Putin decided to focus on other questions yesterday. "At the talks, we discussed a whole range of economic relations focusing on projects with the greatest potential for cooperation," Dmitry Peskov, the Russian prime minister's press secretary, told Kommersant. "There are quite a few such projects, as the economic system of our two countries was initially built as a single whole." This may signify that Moscow wants to reward its partners for loyalty with a flow of Russian investments. However, according to a Kommersant source, they will have to pay for them by giving the green light to Russian capital during the privatisation of Ukraine's key economic assets.
Back in March, the prime ministers began to discuss a list of concrete projects, through which Moscow and Kiev intend to restore their economic ties of the Soviet period. Russia's list of wishes includes a joint venture on the basis of the Kremenchug oil refinery (Tatneft lost control over the complex in 2007 and Gazprom Neft now claims the asset), and the return of the Luganskteplovoz locomotive and electric trains producer (which Transmashholding is eyeing). Additionally, Russia's SIBUR is interested in buying the Odessa port plant, and Severstal has set its sights on Zaporozhstal (See Kommersant of April 16).
Furthermore, Peskov confirmed the interest of Russian aircraft builders in cooperation with the Antonov design bureau yesterday (the United Aircraft Corporation would not mind acquiring its shares). Finally, according to a Kommersant source familiar with the course of the talks, Gazprom's lease of the underground gas depots in western Ukraine, which account for nearly 80% of the country's underground gas depot capacity, is now under discussion. There are also a number of proposals in the sphere of nuclear power engineering. Ukraine is ready to sign a contract to buy nuclear fuel from Russia's TVEL and to place an order with Rosatom to build two power units for the Khmelnitsky nuclear power plants.
A Kommersant source close to the talks said Russia hopes to have some of the projects approved by May 17, when Russian President Dmitry Medvedev will head to Ukraine for his first official visit. Together with Yanukovych, Medvedev will chair a meeting of the intergovernmental commission.
Alexander Gabuyev, Natalia Grib