The Scrapped Pipeline Project (II)

An Unexpected Blow

In the final days of December, Wintershall and the other EU shareholders withdrew from the project, selling their shares to Russia. This ultimate cancellation of the South Stream pipeline project is a heavy blow to Berlin and Brussels. Hardly anyone in the EU expected that Moscow could choose to scrap the pipeline project, for several reasons: Gazprom strategy was aimed at minimizing risks and maximizing profits by having influence over the entire chain, from production to delivery. This corresponded to Germany's efforts to acquire access to the gas reservoir and trade all the way down to the end consumers. Because Gazprom had already made significant progress, Berlin had not given any serious thought to the possibility that the corporation would abandon the project. Russia had already invested billions in the South Stream supply lines, running from Siberia to a compressor station at the Black Sea. In addition, Moscow has already concluded comprehensive gas deals with China, but Moscow seeks to avoid becoming too dependent on Beijing, because the Peoples Republic is expected to become an overwhelming power. Ultimately, German experts have repeatedly pointed to experiences of the Cold War: At the time, even the collapse of the socialist countries - including the Soviet Union - had not jeopardized the gas supply to the West.

Not Taken Seriously

This is why Germany and the EU were treating the South Stream project with such self-confidence. The EU Commission had denied Gazprom, as gas producer, the permission to participate in the construction of the pipeline and the EU Parliament decided twice explicitly against construction (on April 17 and September 18). In early June, Bulgaria was forced to officially halt preparations for South Stream construction and was no longer allowed to issue permits for the pipeline within its territorial waters. Already in May, Russian President Vladimir Putin had publicly announced that, if the EU continues to obstruct the construction, he could eventually halt South Stream and switch to an alternative pipeline via Turkey.[1] In August, a Russian journal published details of plans resembling the scenario now being implemented. According to the article, it is not Moscow's preferable route, but Moscow cannot wait indefinitely.[2] These warnings, evidently had not been taken seriously in Berlin and Brussels. They were convinced that Moscow could not but continue to cooperate, which is why pressure was almost arbitrarily applied. Thus, December 15, Chancellor Angela Merkel still sought to convince Russia to rescind its decision. She declared that the EU was "never fundamentally" opposed to South Stream, and would like for Moscow to change its mind. "Economic relations, regardless of differing appraisals, should always be structured very reliably."[3] Her approach came too late.

No Relief

In Germany and the EU, the damages from the project's cancelation are gradually making themselves felt. Businesses directly involved in the South Stream construction will face immediate losses. The German steel manufacturer, Salzgitter, for example, is anticipating losses in the double-digit millions. It was announced at the end of December that, for the time being, production, within the framework of the "Europipe" joint venture, undertaken together with the Dillinger Steelworks on the planned gas pipeline, must be discontinued. Hundreds of employees are threatened with short-time. Salzgitter was just returning to the net profit area, emerging from a serious crisis with heavy losses. The company's stabilization is now in jeopardy.[4]

Not into the Major Leagues

The cancelation of the project was a particularly hard blow to the BASF subsidiary Wintershall, based in Kassel. In mid-December, Wintershall had announced that it considers Russia, with its enormous natural gas deposits, to be a "core region" for company business.[5] Wintershall produces mainly natural gas, but also oil, in three joint ventures in Russia. It holds 35 percent of the shares in the Siberian Yuzhno-Russkoye gas field, 50 percent in the Siberian Achimgaz project, as well as 50 percent in Wolgodeminoil near Volgograd. Wintershall has also 15.5 percent of the shares in North Stream ("Ostsee Pipeline"). Plans to expand its business with Russia were on the verge of realization. A deal with Gazprom was scheduled to be signed at the end of December, allowing Gazprom to take over Wintershall's German-based gas trade and storage businesses, in exchange for the German company's obtaining shares in major Siberian gas fields. However, now with the cancelation of the South Stream project, Gazprom's strategy to take over the entire supply line, down to the end consumer, is doomed. Therefore, Gazprom has canceled its deal with Wintershall. Because of the strategic importance of Russian gas fields, this has dealt Wintershall a heavy blow. The press has observed that, Wintershall's "plans to join the major leagues of the world's gas producers have collapsed."[6]

Dependent on Ankara

Experts have begun confirming that scrapping the South Stream project will have serious repercussions on numerous EU countries. Bulgaria is particularly hard hit, because it would have become the gas hub. This would not only have assured the country billions in investments, but also, provided strategic advantages. Italy is also hard hit. It's Eni corporation was a major shareholder in the South Stream project. The influence Rome had hoped to gain through the pipeline has now evaporated. But above all, southern Europe's gas supply will be dependent on Turkey, via whose territory the substitute pipes for South Stream ("Turkish Stream") will be laid. This is more than inconvenient for the EU, because its relations with Ankara, who must also be included in future gas supply negotiations, have seriously degraded over the past few years. In fact, Brussels had planned to pipe gas from the Caspian Basin - and eventually Iraq and Iran - via Turkey, bypassing Russia, as its alternative to Russian gas. If Turkey now becomes more dependent on Russia in energy policy, this could possibly "successfully torpedo the EU's main 'energy policy' objective of establishing a southern gas corridor independent of Russia," according to a "Russia Analysis" published by the University of Bremen.[7]

Concessions

According to "Russia Analysis," only one possibility remains: Turkey could - "in exchange for concessions from the EU and the USA" - "refuse Turkish Stream in its current form planned by Russia, or limit its capacity to its own consumption, while relying only on Azerbaijani and eventually Turkmen gas for gas exports to Europe. Then Putin would have set his stakes too high."[8] Of course, Berlin and Brussels would have to revise, at least somewhat, their aggressive attitudes toward Turkey and its President Tayyip Erdogan.

Other reports and background information on the Germany-European pipeline plans can be found here: Southern Corridor, Energy Realignment toward Russia, The Scrapped Pipeline Project and EU's Contradictions.

[1] Roland Götz: Putins Pipeline-Poker. Turkish Stream anstatt South Stream? Russland-Analysen Nr. 288, 19.12.2014.
[2] South Stream "Plan B" opts for route through Greece and Turkey. www.euractiv.com 19.08.2014.
[3] South-Stream-Pipeline: Merkel mahnt neue Gespräche mit Russland an. www.euractiv.de 15.12.2014.
[4] Pipeline-Aus kostet Salzgitter Millionen. www.handelsblatt.com 30.12.2014.
[5] Wintershall sieht Kerngeschäft in Russland. www.handelsblatt.com 15.12.2014.
[6] BASF und Gazprom stoppen Milliarden-Deal. www.sueddeutsche.de 18.12.2014.
[7], [8] Roland Götz: Putins Pipeline-Poker. Turkish Stream anstatt South Stream? Russland-Analysen Nr. 288, 19.12.2014.