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May 15, 2009 | 18:25 GMT

7 mins read

Russia, Italy: A Productive Agreement on South Stream?

ARTYOM KOROTAYEV/Epsilon/Getty Images
Summary
Russia and Italy have signed an agreement to get the proposed South Stream natural gas project up and running. Despite the agreement, numerous logistical and political problems will likely keep the project from becoming a reality in the foreseeable future.
Russian natural gas behemoth Gazprom and Italy's energy giant ENI have signed an agreement in Sochi May 15 on the development of the South Stream natural gas pipeline. In addition to officials from both energy companies as well as energy representatives from Serbia, Bulgaria and Greece, Russian Prime Minister Vladimir Putin and his Italian counterpart, Silvio Berlusconi, also attended the meeting, highlighting the importance of the energy project and the level of attention it has gained. South Stream, originally proposed by Italy and Russia in 2007, is one of the main prospective projects that would link Russian natural gas to Italy and Austria through an additional and more direct pipeline system by 2015. Rather than pass through Ukraine, as most existing Russian pipelines flowing to the Central and Southeastern European regions now do, South Stream (originating in the Black Sea port of Novorossiysk) would instead be built underwater to traverse the Black Sea and continue on through Bulgaria to ultimately terminate in Italy and Austria. Click image to enlarge To put South Stream in context, one must further examine the geopolitics of the Russian energy system. Under the Soviet period, vast natural gas pipelines were developed from Russia's various deposit fields, crossing the entire Russian heartland and reaching far into Eastern and Central Europe. All of the pipelines reaching Europe proper either went through Ukraine or Belarus, which at the time were republics of the Soviet Union and firmly under the Kremlin's control — in essence, they were just an extension of Russia. These pipelines entrenched Europe's energy needs firmly with Russian supplies while giving Moscow a great deal of political clout over the Continent. But the fact that the Soviet Union is no longer intact and that Ukraine and Belarus are independent and autonomous countries has created complications within the energy relationship between Russia and Europe. Ukraine and Belarus now charge transit fees for Russia to send its natural gas westward, and just as the price of energy supplies fluctuates, so do negotiations and terms of the deals between the various players. Moscow would like to keep the pressure on its former Soviet states in order to limit (if not eliminate) their influence over energy matters and keep them in subservient roles. So now, Moscow's energy strategy is to bypass these two countries, especially Ukraine (Russia and Belarus have a much closer and less tumultuous relationship) by linking its natural gas resources more directly to Western Europe. This is fueled mainly by political motivations, as Russia no longer wishes to be affected by the decisions of the fractured and dysfunctional government in Kiev, such as those that prompted the natural gas cutoffs in January. Instead, Russia would prefer to tap Italian and Austrian energy markets (as well as those of the transit Balkan countries) more directly, without going through Ukraine. Similarly, another proposed pipeline known as Nord Stream would flow through the Baltic Sea straight to Germany without facing the complications of Poland, a vehemently anti-Russian state. But despite Russia's grand plans for expanding its pipeline infrastructure and hooking Europe even more into its large energy network, there are three reasons why the South Stream project most likely will not happen anytime soon (if at all). First, there are the logistical issues. The design of South Stream calls for the pipeline to carry an estimated 63 billion cubic meters (bcm) of natural gas across a long (more than 550 miles) and deep portion of the Black Sea. This requires complex water and construction technology that Russia simply doesn't have. Even if Moscow did have the necessary know-how, there is also the pesky issue of financing the project. On average, undersea lines cost more than quadruple their land-borne counterparts, and Russia simply doesn't have the resources for such an endeavor. So Russia expects the Europeans to pay for South Stream, all the while insisting on claiming 51-plus percent ownership of all sections of the pipeline so it can stay firmly in control. Because of their own economic problems, it is very unlikely that the Europeans will pony up the cash unless Russia leads the way with the checkbook, and there are no signs of that happening just yet. Second, there are the political roadblocks. The Europeans have made no secret of their plans to diversify their energy resources away from their dependence on Russia, which currently accounts for 25 percent of all their energy supplies, and this desire has only intensified — at least rhetorically — since the natural gas imbroglio in January. So even though nominal agreements have been made between Russia, ENI and the relatively Russian-friendly governments in Bulgaria and Serbia, other European countries, like Austria and Hungary, have yet to sign on to the South Stream project, and likely won't any time soon. And the agreements that have been made are not worth much until the necessary investment is secured and construction begins. Third, South Stream is not at the top of Russia's list of priorities in terms of energy projects. Moscow is much more interested in developing its Yamal fields (the site of Russia's largest natural gas reserves) and expanding the pipelines that lead from this northern Arctic region across Russia and on to various export terminals. The cost of South Stream, estimated at about $25 billion to $30 billion, requires an enormous commitment for a relatively small amount of transport compared to Russia's main trunk lines (lines running through Ukraine carry some 100 bcm of natural gas). Especially as Russia faces its own financial crisis — and Gazprom has particularly taken a big blow in recent months — the likelihood of South Stream getting off the ground fades further. What's more, Yamal must be developed first, as Gazprom knows full well that there is no future to the South Stream pipeline if Russia doesn't have the natural gas supplies to fill it. Despite these obstacles, it is still politically important for Moscow to block Europe's diversification efforts and further integrate their energy network with Russia's. South Stream has a high level of symbolic importance, since it allows the Kremlin to feel out the European countries it can engage with (like Italy and Germany) and those that could prove hostile (like Poland and Ukraine) and manage its relationship with these countries accordingly. This has only gained in significance as the Europeans pursue a different project, the proposed Nabucco pipeline, which deliberately circumvents Russian territory to bring Caspian supplies through Turkey to Europe. Meanwhile, Moscow will do what it can to try to get the many moving pieces in line while negotiations are made and events play out. Still, the logistical and political challenges cannot be ignored. There are too many problems that will likely keep the South Stream pipeline from materializing in the foreseeable future. So while Russia will continue to hype up South Stream and even sign agreements from time to time, it will look for other levers to use in its constantly shifting relationship with Europe and the West.

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