Thursday, October 23, 2008

ROMANIA IS THE LATEST TARGET FOR GAZPROM’S SOUTH STREAM TEMPTATIONS

http://jamestown.org

By Sergei Blagov

Tuesday, October 21, 2008

On October 17 in Moscow, Gazprom president Alexei Miller conferred in the presence of the Romanian ambassador with the general managers of Romania’s Transgaz and Romgaz companies,. Gazprom’s communiqué implied, and subsequent leaks to the Russian media corroborated, that the Russian side proposed including Romania in the South Stream gas pipeline project. In that case, Gazprom would modify the planned route and build a section of the pipeline through Romania, instead of bypassing that country as the existing plans envisaged. (Interfax, October 17; Ziua [Bucharest], October 18; Kommersant, RossBusinessConsulting, October 20).

Gazprom grafted the South Stream offer onto an agenda that included Russian gas supplies to Romania and the possible construction of a gas storage site at Margineni (northeastern Romania). Senior Gazprom managers will pay a return visit to Romania to continue the discussions after the country’s parliamentary elections in November.

The offer to Romania appears designed to increase Russia’s leverage vis-à-vis countries that have already signed up for South Stream and are now negotiating the commercial and financial terms separately with Gazprom. The Russians propose to include more countries in South Stream than the pipeline could possibly reach. By the same token, Russia offers to include more countries than it could possibly supply from Russian gas reserves in the years ahead.

Gazprom is tempting the maximum possible number of countries, playing them off against each other with the prospect of individual package deals around South Stream. Package deals would include supply contracts, transit revenue, and storage sites that could confer on this or that recipient country the coveted status of a gas-trading “hub.” Mostly aware of Gazprom’s limited gas export potential in the years ahead, the countries are vying to wrap up supply contracts ahead of their neighbors and to make the most out of any possible transit and storage opportunities.

Romania is only the latest addition to Gazprom’s list of candidate countries for the proposed South Stream. Originating on Russia’s Black Sea coast, the pipeline would run across the seabed to Bulgaria, there potentially to bifurcate into a southern branch to Greece and southern Italy and a northern branch into Serbia, Hungary, and Austria, with a potential detour to Slovenia and northern Italy. The plans for various routes have not been finalized at this stage; but for the most part are mere lines on maps.

Most countries along these routes have reason to worry about being short-changed on the deal if Russia reduces the scope of supplies, transit, and storage, or scraps some pipeline sections for any reasons (Russian production shortfalls, commercial priorities, or political considerations). Moscow manipulates such concerns. By negotiating with Slovenia for transit, for example, Gazprom is strengthening its negotiating hand with regard to Hungary and even Austria. The Russians have played off Austria and Hungary against each other with regard to the location and capacity of gas storage (“hubs”).

With Gazprom’s offer to Romania, it is now Serbia’s and even Bulgaria’s turn to be concerned. If Romania takes the bait, Gazprom would be in a position to discuss South Stream’s route into Central Europe via Romania, instead of Serbia. At the moment, Moscow is pressuring Belgrade to sell the Serbian Oil Industry (NIS) far below its real value to Gazprom Neft, as part of the overall South Stream deal with Serbia. The Serbs are resisting on the issue of NIS but would relent if Gazprom could credibly threaten to circumvent Serbia via Romania.

Furthermore, if the Romanian government plays along with Moscow, Gazprom would be in a position to divide the gas volumes across the seabed into two pipelines, one to Romania and one to Bulgaria, instead of the single pipeline to Bulgaria; or even to bypass Bulgaria altogether, according to Russian press leaks (Kommersant, RossBusinessConsulting, October 20). Apparently, Moscow is seeking to soften up Serbia and Bulgaria on energy negotiations and potentially on other issues by making this overture to Romania.

Russia’s South Stream temptation seems to work on most of these countries because the Western-backed Nabucco project does not. It is a measure of the European Union’s abdication from leadership in this regard that a small country like Hungary has taken over a leading role in promoting Nabucco (see EDM, July 21, September 29). Hungary’s Socialist government has nevertheless hedged its bets by signing up for South Stream; but the privately owned MOL company is a loyal member of the Nabucco consortium, as is the Romanian government through Transgaz.

For its part, the United States backs Nabucco to the hilt rhetorically but vetoes Iranian gas (the project’s designated supply source) and cannot offer a practicable alternative after having neglected the United States’ own Caspian agenda. Russia envisages using Turkmen gas at least in part for future delivery through South Stream as “Russian” gas.

Romania can comfortably turn down the South Stream bait because it does not need additional gas volumes in the short or medium term. The country consumes some 18 billion cubic meters of gas annually, including approximately 12 billion from internal production and some 6 billion cubic meters per year imported from Russia. The proven reserves in Romania are expected to last another 30 years at existing rate of extraction. Given this balance, Romania enjoys the highest level of gas supply security in Central-Eastern Europe, where all the other countries depend heavily on Russian-delivered gas.

However, Romania pays what it describes as inordinately high prices for Russian gas, which is delivered by two intermediary companies. Bucharest would like to buy directly from Gazprom, eliminating the two intermediaries, and to reactivate the decade-old Margineni gas storage project in partnership with Gazprom.

Ever since Russia announced the South Stream project in the spring of 2007, the Romanian presidency and government have correctly analyzed the project’s drawback, including the exorbitant price of gas (due to the seabed pipeline of world-record length and depth) and almost certain supply shortfalls (due to Gazprom’s looming production shortfalls). Moscow, however, apparently hopes to induce some political groups in Romania into joining at least discussions on South Stream after the forthcoming Romanian elections. This would strengthen Russia’s hand vis-à-vis other countries in the region as well as Romania.

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