December 4, 2014

While the timing of President Vladimir Putin's abandonment of the South Stream gas pipeline this week was surprising, its demise was inevitable from the start.

South Stream was primarily a "political" project–one that would have been difficult to finance. Its purpose was twofold: to reduce Russia's dependence on Ukrainian pipelines to deliver gas to Europe, and to stifle development of the European Commission’s Southern Gas Corridor, which brings supplies to Europe from Azerbaijan through Georgia and Turkey. The final investment decision last December to go forward with the Shah Deniz gas project as well as the decision to move forward with the TransAnatolian Pipeline (TANAP)  and the TransAdriatic Pipeline (TAP) virtually insured that the Southern Gas Corridor would happen in spite of the threat of South Stream.

South Stream from its inception also had severe legal and political problems in Brussels. The project would not have increased competition in Europe. Instead, it would have increased dependence on Russian gas at a time when Europeans were extremely sensitive to that dependence after Russian gas through Ukraine was shut off during the winter of 2009. There also was concern that diverting transit away from Ukraine would have seriously hurt the tenuous Ukrainian economy.

Russian Gas, the EU's Laws

In discouraging South Stream, the European Union did not have to rely solely on political wrangling with Russia. It was able as well to rely on its own competition laws and its program (the "Third Energy Package") to promote a more open energy market in Europe. The South Stream concept did not increase diversification, did not provide for third-party access to the proposed pipeline system, nor provide adequate separation between production, transit, and distribution of gas. The EU has been able to say to Russia, 'comply with our laws and sell as much as you can in our market.'

The events of the past year sealed South Stream's fate. After Russia's occupation of Crimea and the conflict in eastern Ukraine, it became politically impossible for the EU to ever approve South Stream.

South Stream's fate was further sealed by the sharp reduction in oil prices and pressure on the Russian economy. The handwriting was on the wall when Russia entered into its recent gas agreement with Ukraine.

Russia and Gazprom realized that South Stream was impossible, and that they would have to pipe gas to their European customers through Ukraine for the foreseeable future. That required reasonable cooperation with Ukraine. This leads to the question of who has the leverage regarding gas -- Russia or Europe. Europe, particularly Central and Eastern Europe, will have to continue to buy Russian gas, but Russia with its increasing economic woes will have to continue to sell as much as possible to Europe and live within the EU regulatory structure.

A Turkish Path?

That said, Russia will not roll over and play dead. President Putin cleverly made his announcement while talking with Turkish President Tayyip Erdogan about new energy cooperation. Turkey has always dreamed of being a transit hub and it is not out of the realm of possibility that new Russian gas coming to Turkey could be diverted to Southeast Europe. Having learned to never say never with respect to Bluestream, it is also conceivable that an expanded Bluestream pipeline across the Black Sea to Turkey could ultimately give Russia's Gazprom third-party access to Turkey's TANAP pipeline, which will carry gas to Europe. At the same time, Turkish companies have too much at stake in both TANAP and Shah Deniz for Turkey to let any new deals with Russia interfere with the Southern Gas Corridor. Turkish Energy Minister Taner Yildiz said as much after the Putin-Erdogan meetings.

Russia will continue to compete strongly in the European market; it will and should continue to be a major supplier to Europe. But Russia must play by the rules, and the EU should continue to rigorously enforce them. The shelving of South Stream is a step in the right direction.

Ambassador Richard Morningstar is the founding director of the Atlantic Council’s Global Energy Center.  He previously served as US ambassador to the European Union, special envoy for Eurasian energy, and ambassador to Azerbaijan.



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