Since South Stream’s termination in early December 2014, governments in Central and Southeast Europe (CSEE) have championed a litany of pan-regional pipeline proposals to carry gas from Russia’s planned delivery point in Ipsala, Turkey via the Balkans to Baumgarten, Austria, while meeting local consumption along the way. The underlying assumptions for these dedicated pipelines are twofold; first, that at least two of the four strings (31.5 billion cubic meters) of Turkish Stream will be completed on time and second, that Gazprom CEO Alexei Miller will make good on his still-dubious promise to end Ukrainian transit by 2019. Turkish Stream is underpinned by tangible political and economic momentum while Miller’s overzealous assertion is more reflective of Moscow’s geopolitical agenda than a realistic projection of the CSEE infrastructure landscape in 2019.
Nonetheless, countries in the region appear to be considering Miller’s words at face value. Governments are scrambling to make collective political pacts over projects that will secure Turkish Stream offtake to and through their markets. In any event, regional energy experts continue to doubt that Gazprom can meet its contractual obligations in 2019 without Ukraine, largely based on the notion that these very projects will not gain financial traction.
In February, the European Commission released its communication on the Energy Union Package, highlighting the importance of regional initiatives, and improving “cooperation, solidarity and trust” in CSEE to raise the liquidity and resilience of the region’s energy system. Behind the flurry of post-South Stream meetings initiated by Maros Sefcovic, the EC’s Vice President in charge of the Energy Union, the commission hopes to reinvigorate CSEE government participation in long-dormant projects identified by Ten-Year National Development Plans (TYNDPs) and Gas Regional Investment Plans (GRIPs). The latest TYNDP report found political and regulatory uncertainty the greatest obstacles to development among surveyed project promoters. This is partly thanks to Gazprom-dependent governments that have strategically committed more resources and political capital to Moscow’s promises than to holistic EU energy security.
But just as South Stream was Russia’s foil to the original Nabucco pipeline running from the Turkish-Bulgarian border to Austria—and a wedge dividing the energy security priorities of Brussels and CSEE until its demise—these large-scale projects represent South Stream 2.0 in the sense that they cater to Russian gas delivery and overshadow the EU’s energy union roadmap.
Eastring and Tesla, the two most prominent projects now moving forward with intergovernmental memoranda of understanding (MoUs), are shallow below the surface. On a map, the two pan-European lines appear palpable, but questionable merits and dim financial and economic prospects undermine their credentials. Tesla is most reminiscent of South Stream and is likely to fail for the same reasons; private and public financing options are limited, and Russia will unlikely pay for a line only to subsequently be forced to compete for its capacity. Likewise, Eastring needs to prove to the commission that it will contribute to source diversification rather than route diversification for Gazprom. The CSEE region’s political leadership should have learned a lesson last December, yet the promise of cheap, plentiful gas can be blinding.
Indeed, these projects are, for the most part, politically motivated alliances rooted in national self-interest: ensuring supply from Russia at a discounted price, maintaining relevance as a transit state, and securing large-scale construction contracts for local firms, as opposed to meeting the commission’s objectives of helping to diversify supply sources reaching Europe.
Eastring is the pet project of Slovakian transmission systems operator Eustream, which would connect the Trans-Balkan pipeline through Romania and Hungary (or possibly Ukraine) to Slovakia’s Druzhba pipeline artery, and the rationale is not a mystery. Druzhba is the biggest route for Russian gas into Europe, and Eustream stands to lose significant transit revenue and relevance if and when this line is abandoned. A 51 percent state-owned company, the operator has signaled its intent to sign MoUs with partner countries. It recently hired former Czech Prime Minister Mirek Topolanek as its International Development and Public Affairs Director for additional clout in its campaign. Tesla, Hungary’s regional, Moscow-backed initiative, links Greece to Baumgarten via Macedonia, Serbia, and Hungary, tracing the remaining central-southeast European geography still ostensibly allied with Russia. The foreign ministries of all four countries met in early April in a likely harbinger of MoUs to follow. However, as with Eastring, the MoU is no more than a statement of political will. To have any credibility, both projects will need to demonstrate private-sector interest culminating in commercial contracts, which themselves are complex undertakings requiring a cumbersome licensing and permitting process. To date there is no indication of any such financial commitments.
While these proposals are unlikely to qualify for EU funding and will therefore need to raise capital independently, they will also face considerable regulatory scrutiny from the commission. Tesla will probably not win approval in Brussels unless it demonstrates commercial commitments from non-Russian suppliers or applies for an exemption. Even if other suppliers book capacity to satisfy this condition, it is difficult to imagine Gazprom financing the pipeline while agreeing to terms of third-party access (TPA). Eastring promotes itself as an openly competitive line in compliance with TPA, but its latest incarnation entirely bypasses Ukraine (via Hungary) at a time when the consensus thinking on regional energy security places a premium on Ukraine’s integration with EU transmission systems. Furthermore, the European Gas Market Model (EGMM) of the Regional Centre for Energy Policy Research (REKK) concludes that while the pipeline does have a positive regional price effect, large segments of it remain unused under normal market conditions. In other words, it is not a cost-effective option.
Any infrastructure project that facilitates the rerouting of Gazprom’s contracts through Turkish Stream and away from Ukraine can be interpreted as acquiescence to Russia’s agenda, and the EU does not appear ready to concede this just yet. As Sefcovic stated May 5 at an energy security conference organized by the European Court of Auditors, “I remain convinced that Ukraine will and should continue to play an important role in ensuring Europe’s energy security as a transit country.” In fact, the EU increasingly has the regulatory power to shape the internal infrastructure that Gazprom will rely upon to achieve its objective as it proved with South Stream.
Meanwhile, for the first time since Gazprom’s MoU with Eni for the construction of South Stream in June 2007, there is room for a common EU-regional approach to energy security centered on a piecemeal, project-by-project approach to the North-South corridor from the Aegean to the Baltic Sea. While less glamorous than the bigger projects, this process adheres to continually refined cost-benefit analysis (CBA) and cross-border cost allocation (CBCA) methodology. These provide for comprehensive project and project cluster appraisal prior to selection and support, identifying the most cost-effective approaches and compensation for adversely affected member states.
To encourage this vision and further align interests toward sensible infrastructure development, the commission formed a high-level working group for the region, the Central East South Europe Gas Connectivity High-Level Group, which met in February for the first time and will meet again in June. Headed by Sefcovic, it consists of representatives from Austria, Bulgaria, Croatia, Greece, Hungary, Italy Romania, Slovenia, and Slovakia.
The Energy Union Package also explicitly urged “significant reinforcement of the powers and independence of ACER [Agency for the Cooperation of Energy Regulators]” to oversee the development of the internal market, and promote selected cross-border infrastructure projects that have been struggling to reach final investment decision (FID). In this manner, the commission is pushing EU regulators to more effectively govern and make decisions, particularly when problems surface among three or four member countries that must act jointly. Thus, ACER will assume more responsibility within the expanding energy union architecture, offering guidance and oversight for practical CSEE integration measures in the context of the EU internal market.
As is the case with South Stream, Russia can successfully divide Europe with promises as long as markets are segmented. It is hard to blame vulnerable countries that have suffered recent gas disruptions for doing what they must to secure affordable natural gas for their citizens. Yet Russia behaves opportunistically, hoping to slow the integration process among these countries and maintain its unrivaled, dominant market position. In the wake of South Stream, countries should have more incentive to expedite projects of common interest (PCIs) that offer widespread benefits but have been sidelined in pre-FID stages. Yet countries anxious to lock in reliable Russian gas for transmission and consumption continue to cling to big proposals as energy security solutions, despite their significant implementation challenges. Without them, Russia will be extremely limited in its ability to redirect large volumes through Turkey into the EU. In the end, commercial realities and regulatory obligations should win out over the narrow political ambitions of national governments, paving the way for rapid PCI-led integration throughout the region.
Nolan Theisen is an energy analyst at the Regional Centre for Energy Policy Research (REKK) in Budapest, Hungary. He was a delegate at the Atlantic Council’s 2014 Energy and Economic Summit in Istanbul.