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Experts back Bulgaria in dispute over South Stream Gas Pipeline

The rapidly unfolding crisis in Ukraine has put the spotlight firmly on another burning issue that has dogged EU/Russia relations for years - energy security.

By: EBR - Posted: Wednesday, May 7, 2014

A recent survey by strategy consultancy WorldThinks showed there is huge support for South Stream with 68% of Bulgarians backing it and only 5% against.The potential beneficial effects of South Stream were apparent to survey respondents, not just in terms and increased supply security, but overall economic benefits such as job creation, taxes and transmission fees.
A recent survey by strategy consultancy WorldThinks showed there is huge support for South Stream with 68% of Bulgarians backing it and only 5% against.The potential beneficial effects of South Stream were apparent to survey respondents, not just in terms and increased supply security, but overall economic benefits such as job creation, taxes and transmission fees.

by Martin Banks

As Ukraine struggles to contain the unrest convulsing its eastern region, a perhaps even more significant struggle hinges on what happens beneath the ground where billions worth of Russian natural gas flows each year through pipelines to enter Europe.

Russian energy giant Gazprom currently accounts for over 30 per cent of the EU's gas needs, more than half of which is piped through Ukraine.

The South Stream gas pipeline is designed to provide an alternative to the troublesome Ukraine route and intended to transport some 63 billion cubic metres of gas per year through the Black Sea, Bulgaria, Serbia, Hungary and Slovenia into Italy.

The 2,380-km pipeline, funded by Gazprom, was first suggested in 2007 and is expected to cost €17 billion.

The problem is that EU provisions prevent a single company from both owning and operating a gas pipeline. 

EU lawmakers agreed the rules, known as 'ownership unbundling', as part of its energy package on rules governing the bloc's gas and electricity market. 

Russia claims that state-owned Gazprom, which often owns both the pipelines and the gas inside them in many eastern EU countries, is the only company with the right to export gas.

The row has now taken a dramatic new twist with Bulgaria’s Parliament backing Gazprom by seeking to amend its energy law and exempt the offshore pipeline from EU rules.

Bulgaria is a key battleground because delivery of pipes for the pipeline should begin this month with construction work due to start in both Bulgaria and Serbia next month. The undersea pipes will be start being laid in the autumn.

The European Commission has warned Bulgaria that the pipeline remains subject to EU law, adding that Sofia could face “legal steps”. 

Nicole Bockstaller, Ottinger´s spokeswoman, said, "We are concerned about the compatibility of the amendments made to the Bulgarian energy law with EU legislation."

Both Russia and Bulgaria are now stressing the importance of winning exemptions from EU competition rules. 

Budapest  and Serbia, which is applying for EU membership, also supports the pipeline. 

The latest move came last month when Bulgaria’s Parliament legislated for the Bulgarian section of South Stream to be redefined as a “gas grid interconnection” rather than a pipeline, a move it hopes will allow the project to address EU competition legislation. 

The idea is that the new legal definition of South Stream as a connector - that is an extension of an existing network - will mean Gazprom will not have to open the crucial Bulgarian part of the pipeline to third parties under the EU´s draft energy legislation.

Sophia argues that EU rules should not apply to a small section of South Stream in Bulgarian territorial waters that would still, according to Bulgarian law, be pipeline.

The proposed regulation change to Bulgaria´s energy law, a copy of which has been seen by this website, states, "The purpose of the amendment is to fill in the legal gap that has not been regulated so far."

A source at Bulgaria´s Permanent Representation to the EU said the new legal provisions "have simply clarified an area of ambiguity" relating to the offshore section of South Stream. He added, "It does not interfere with the Third Energy Package, which covers onshore pipelines within EU territorial borders."

Bulgarian energy minister Dragomir Stoynev recently met the outgoing EU energy commissioner Günther Oettinger to discuss the South Stream issue and, afterwards Oettinger said EU rules also applied to infrastructure in Bulgaria’s territorial waters. 

The EU’s perceived inflexibility over the third energy package is an obstacle for Gazprom as the first gas supplies are due to be delivered next year. 

Russia has a key strategic interest in wanting to diversify its exports away from Ukraine. With 63bn cubic metres of planned capacity, South Stream would be able to replace almost entirely the volume of gas that currently transits Ukraine –planned at 70bcm this year.

So, what happens next?

Andras Jenei, an independent expert on natural gas in Hungary, believes that, for Bulgaria, South Stream "would clearly" be a project which will be productive economically (transit fees) and politically.

"South Stream would mean a direct access the Western market and it is worth a little catfight with the EU."

"The Commission can only stop this project by political means or with a brand new regulation which would directly target Gazprom."

From the Hungarian perspective he says South Stream is a "win-win" project as the alternative Nabucco project is considered "dead." 

"The EU must understand that Hungary and the region cannot heat up the homes in winter with deep concerns and some friendly slaps on our back. We need quick and effective steps to secure our energy import supplies in reality, not on paper and South Stream will diversify the route of our gas imports."

Jenei says the Ukraine crisis means it is not a question of if there will be any kind of interruption in gas and oil supplies "but rather when will this happen."

"Tomorrow, a week, a month or in the start of the winter? This is the simple message: the situation is difficult, if not catastrophic and we need to act quickly. South Stream gives at least some kind of solution."

His comments are partly echoed by Bulgaria´s foreign minister Kristian Vigenin, who said, “South Stream is a very important project for Bulgaria. The whole of our Parliament is in favour of it and other EU member states should not be held hostage because of the Ukraine crisis. We will do whatever possible to conclude the pipeline. "

Bulgarian MEP Slavcho Binev, deputy leader of the EFD group in Parliament, said, "The major objective of the project is meeting Europe’s additional demand for natural gas."

Igor Elkin, Executive Director, South Stream, Bulgaria, stressed the economic benefits the $3 billion project had already brought to his country, including the creation of some 5,000 new jobs. 

Professor Jonathan Stern, of the Oxford Institute for Energy Studies and a member of the EU-Russia Gas Advisory Council, who believes what Bulgaria and Russia are most concerned about is that the EU can sabotage South Stream. 

He said, "But people need to be realistic that European dependence on Russian gas is not going to decline over the next decade.Some aspects of the definition of  'sea gas pipeline' are unclear and don't reflect usual EU definitions. The key question is where, in EU parlance, the 'upstream pipeline' finishes and (onshore) 'transportation' begins. There is no requirement to provide third party access to upstream pipelines."

The Ukraine crisis, he thinks, was likely to make pipelines bypassing Ukraine, such as South Stream, even more important for European energy supplies, adding, “We may be in a situation where we will be accusing Russia of not delivering and preventing them from delivering through these pipelines. It’s a black farce.” 

The 450-km Serbian leg of the pipeline is worth almost €2 billion and at least 2,000 jobs. Serbia consumes about 2.5 billion cubic metres of gas, mostly imported from Russia through Hungary. 

Zorana Mihajlovic, Serbia´s minister of energy, development and environmental protection, commented, "South Stream is of great economic and geo-strategic importance for Serbia.We expect to benefit a lot from gas transit tax that could potentially bring in €100m annually."

Another expert, Drew Leifheit, from Natural Gas Europe, said, "The Ukraine crisis has brought European energy security back into the spotlight and poses the real danger that political obsession/over-reaction with reducing or excluding the Russian presence in the gas market will lead to a diminished overall role for gas in Europe’s future energy mix."

A recent survey by strategy consultancy WorldThinks showed there is huge support for South Stream with 68% of Bulgarians backing it and only 5% against.The potential beneficial effects of South Stream were apparent to survey respondents, not just in terms and increased supply security, but overall economic benefits such as job creation, taxes and transmission fees.

Leifheit adds, "While much focus has been put on the South Stream, it is important to note that Bulgaria’s strategy is not exclusively tied to Russia. Bulgaria is actively taking steps aimed to make the country a hub interlinking its energy security interests with a variety of different sources of gas and energy players."

He concludes, "South Stream will have a role in delivering a steady, secure stream of gas to Bulgarian consumers as will other developing or proposed project."

Russia remains optimistic it can push ahead with the project and, with Ukraine's civil unrest casting an ever longer shadow over Europe, the conthe current rift between the EU and Bulgaria must be quickly resolved to avoid a delay in what most see as a much-needed energy project. After all, no-one in the region wants another winter shut-off of gas from Ukraine.

What is likely is that that, after the European elections on 25 May, South Stream is likely to be one of the "must do" issues for the new EU administration.

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