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Nov 16, 2012 | 11:04 GMT

5 mins read

Bulgaria and Russia Proceed With the South Stream Pipeline

Bulgarian Prime Minister Boyko Borisov (R) and Gazprom CEO Alexei Miller after signing an agreement for the South Stream pipeline in Sofia on Nov. 15
NIKOLAY DOYCHINOV/AFP/Getty Images
Summary

The last hurdle for the construction of the South Stream natural gas pipeline fell Nov. 15 as Russia and Bulgaria signed a final investment decision. Immediately thereafter, the two sides signed an agreement for a 10-year natural gas delivery contract with a 20 percent discount over current prices between the Russian state natural gas provider and its Bulgarian counterpart, Bulgargaz. Bulgaria was the last, and most critical, transit state to sign on to South Stream. The project will allow Russia to export natural gas directly to Europe, making it a more attractive natural gas supplier to the Europeans.

A series of political incidents had made Bulgaria doubt Russia's reliability as a partner for the project, prompting Sofia to delay finalizing the pipeline, which will enter Bulgaria after passing under the Black Sea. But Russia ultimately proved accommodating in its negotiations with Bulgaria.

Russia's resolve to push ahead with — and Bulgaria's central role in — the South Stream project are underscored by the substantial discount on natural gas prices Moscow offered Sofia. The discount is among the steepest (in terms of percentage) that Russia has granted any European nation. Russia's willingness to compromise comes from the desire to attain its long-term strategic goal of securing a steady revenue stream from directly delivering natural gas to Europe. Before, Russian natural gas reached Europe via states on the Russian periphery, states Moscow has clashed with over natural gas before, causing disruptions in its natural gas deliveries to Europe.

Bulgaria, which is almost entirely dependent on Russia for its energy needs, is the most strategic link in the South Stream project because it is the only European country geographically and politically suitable for the undersea section of the pipe to return to land. While Romania is practical geographically, it would not work due to its ongoing political crisis, disputes with Russia over Moldova and general preference for aligning itself with EU interests. 

Planned South Stream Route

Planned South Stream Route

Before Nov. 15, Russia had signed final investment decision agreements with all the countries but Bulgaria on the planned South Stream route. The delay in Bulgaria's signature occurred because of a political and diplomatic flare-up between the two countries over the Belene Nuclear Power Plant. In March, Sofia decided to cancel the expansion of one of its two nuclear power plants after Bulgaria had already contracted with Russia's Atomstroyexport to oversee the expansion. The Russian nuclear company sought $1.3 billion for Bulgaria's breach through arbitration proceedings.

Heated discussions over the Belene disagreement prompted a series of strong statements by Bulgarian Prime Minister Boyko Borisov against Russian President Vladimir Putin, prompting concerns that an agreement over South Stream would be delayed. Russia had hoped to complete all final investment decisions with the transit states and to break ground on the pipeline before the end of the year. After Borisov's threat to undermine the project, the noise surrounding Atomstroyexport claim against Bulgaria rapidly disappeared and Moscow seems to have buried the issue, at least until Sofia could be brought on board South Stream.

Moscow's willingness to offer Bulgaria a 10-year contract with a 20 percent discount, one of the largest ever given by Gazprom to any of its European customers, reflects the importance of Bulgaria to the South Stream project and the importance of the South Stream pipeline to Russia. EU energy liberalization legislation going into effect in 2013 that would significantly delay and raise the costs of the projects for Russia explains Moscow's urgency to finalize South Stream.

South Stream is of crucial importance for Russia's long-term strategy for the European energy market. With Europe likely to have alternative sources of natural gas in the medium term, Russia hopes to secure its current market share in Europe by locking its customers into long-term contracts. Russia's ability to do so was hampered by the 2006 and 2009 energy disputes that pitted Russia against Ukraine and subsequently left a significant portion of Europe without gas during the winter. This tarnished Russia's image as a reliable provider of natural gas, prompting a series of liberalization and diversification efforts across Europe.

To secure its market before these efforts deprived Russia of a significant portion of its annual revenue, Moscow pursued two strategic pipeline projects that would bypass the traditional Ukrainian and Belarusian routes: Nord Stream and South Stream. These projects would directly deliver natural gas from Russian territory to Moscow's EU customers, bolstering heavyweight European customers' ability to rely on Russia for their energy needs and in the process diminishing their motivation to seek alternative supplies of natural gas.

It is much less likely that Russia and Bulgaria would clash in the type of political disputes that triggered the energy crises of 2006 and 2009. Their geographic and political relationship is much different from the relationship of Russia and Ukraine, where Russia's geopolitical interests and leverage are much greater. Bulgarian membership in the European Union also will prevent Sofia from jeopardizing its fellow EU members' natural gas supplies, since doing so would trigger a backlash against Bulgaria from Brussels.

With the second leg of the Nord Stream pipeline having come online last month and a groundbreaking ceremony for South Stream now expected before year's end, Russia is well on its way to completing the infrastructure necessary to diversify its access to its main customer market, Europe. Russia's flexibility in price and contract renegotiation with European consumers has so far proven effective in locking in Gazprom's market share in that market. While switching to routes entirely within the European Union has cost Russia some geopolitical leverage with the transit states on its periphery, the guarantee of a long-term revenue stream by being directly linked to the Europe outweighs this.

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