South Stream Pipeline Construction Halted

Russia‘s actions in Crimea and Ukraine have called into question the viability and economic soundness of the South Stream pipeline, which connects Russian gas pipelines with Europe via Bulgaria, Serbia, Greece, Italy, Hungary, Slovenia and Austria.  That said, many of the countries involved in the project (either as prominent gas customers or as transit countries for the pipeline itself) are supportive of the project, causing a divide among EU member states.  Although construction on this project has already commenced, the European Union (EU) is more wary of waiving energy regulations that would permit the existing plan to be fully implemented and has encouraged its members to resist the urge to move forward at Russia’s prompting.  Specifically, the EU’s ‘‘‘third energy package‘ would restrict Gazprom to using only 50 percent of the pipeline‘s capacity, allowing other companies to use the remaining capacity, to which Gazprom has strongly objected.  The EU has taken an aggressive approach to dissuading member states from ignoring EU objections concerning this project. 

As of June 8, 2014, work on the Bulgarian section of the South Stream Pipeline was halted (due to this pressure and the receipt of official objections from the EU), although the Bulgarian government supports the project and has urged — with Russia’s backing — the EU to step out of the way of this project.  The EU‘s Energy Commissioner, G‘_nther Oettinger, has recently indicated that they would not waive the rules and are unconcerned with the related World Trade Organization suit brought against them by Russia in an effort to sidestep EU antitrust laws.  Maxim Medvedkov, Chief Trade Negotiator at Russia‘s Economic Development Ministry, has asserted that the EU‘s recently hardened position on energy laws was a threat to new construction, but that they would press on with construction regardless.

Part of this debate revolves around Ukraine’s invitation of U.S. and EU stakeholders to invest in its pipeline infrastructure to provide capital for upgrading its grid and improve its reliability.  The contention is that South Stream is not necessary, particularly should Ukraine’s existing pathway be modernized with an investment that is more modest than constructing a brand new pipeline.  On September 3, however, Gazprom spokesperson Sergei Kuprivanov asserted that it would take $19.5 billion to modernize Ukraine’s gas transportation system, which, according to Moscow, is more expensive than South Stream.  these numbers are likely inflated, but demonstrate the narrative being constructed by Russia around the economic benefits of moving forward with South Stream.