May 4, 2014

Austria and Bulgaria Defy EU over Russia's South Stream

The following report details how Austria and Bulgaria, with the implicit support of Germany, have defied the EU’s attempt to thwart Russia’s South Stream natural gas pipeline. Henning Gloystein of Reuters explains how “Side deals with Moscow thwart drive to wean Europe off Russian gas” (May 4)

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While officials in Brussels were calling for Europe to reduce its dependency on Russian natural gas and negotiate with Moscow as a bloc, Austria was quietly bypassing the European Commission to cut its own bilateral deal on building a pipeline.

The deal on the South Stream pipeline, which will be built under the Black Sea to Bulgaria and on to central Europe, shows the European Union's difficulty in creating a unified energy policy on Moscow during the Ukraine crisis.

While EU officials are calling for Europe to wean itself off Russian gas, private and state-owned firms, with the support of politicians, are pushing ahead with projects to buy ever more.

Austrian energy firm OMV agreed last week with Russia's state-controlled Gazprom to bring the South Stream pipeline to Austria's Baumgarten gas hub, outmanoeuvring Italy which had wanted it to end there.

The deal is also likely to please some in neighbouring Germany, as the gas will now be delivered closer to customers.

It shows that when it comes to natural gas diplomacy, European countries still have their own competing interests which are difficult to unite under an EU flag.

The timing of the deal, which coincided with Europe announcing new sanctions on a list of Russians designed to push the Kremlin to reduce its support for separatists in Ukraine, could hardly have been more at odds with official EU policy.

The Commission had put the approval process for South Stream on hold after Russia annexed Ukraine's Crimea region in March, hoping the delay would push Moscow to stop what the West says is its intervention in Ukraine.

Brussels says South Stream does not comply with its regulations on ownership and pipeline access. But Austria and Russia have circumvented this by announcing that their deal is based on a bilateral agreement between the countries rather than an EU accord.

South Stream's main purpose, like the German-Russian Nord Stream pipeline under the Baltic Sea, is to circumvent Ukraine. This would ensure that disputes between Moscow and Kiev do not interfere with the flow of Russian gas to Europe, much of which crosses Ukraine in existing pipelines.

"If we agree to South Stream, Europe will sell the rope with which Russia will hang Ukraine, and it will also agree to increase its energy dependency on Russia," said Frank Umbach, at the European Centre for Energy and Resource Security (EUCERS), a research team at King's College London.


Austria was motivated to push for the South Stream deal after it lost out to Italy in a competition last year over a separate pipeline bringing gas to Europe from Azerbaijan.

OMV's Nabucco pipeline project was dropped in favour of the rival Trans-Adriatic Pipeline (TAP) to Italy. That derailed years of Austrian lobbying, which the EU had initially backed, for Nabucco to bring the Azeri gas to central Europe.

"Current international developments show once again that in the long-term we don't only have to diversify our energy sources, but also our routes," said Austrian economy and energy minister Reinhold Mitterlehner. "Should the South Stream pipeline end in Baumgarten, we will get closer to this target."

Gazprom sources said they had been approached during the last four weeks by Austria, and a deal was put together as fast as possible.

Gazprom and OMV aim to get the remaining permits by the end of next year and start delivering gas by 2017.

"For Russia, this project is a clear signal to Ukraine that it intends to avoid any future disputes or supply disruptions," said Friedbert Pflüger, director of EUCERS. "The reference to a 2010 bilateral agreement for regulatory approval demonstrates Moscow's intention to circumvent the EU's regulations that would make the realisation of the project more difficult."


The Gazprom-OMV agreement continues Russia's strategy of making bilateral deals that undermine the Commission, the EU's executive arm, which wants to build up a European front on energy supplies.

Bulgaria, which imports almost all its gas from Russia, also backed South Stream last month in defiance of Commission calls that member states should not enter bilateral deals with Gazprom without its approval.

"South Stream is a project of strategic importance. Now they (the European Parliament) want to stop South Stream. How are we to develop? This crisis at the moment shows that we do not have security of natural gas supplies for Bulgaria," energy minister Dragomir Stoynev said.

Quietly supporting smaller EU member states such as Austria and Bulgaria is Germany, where the government has said it sees Moscow as a reliable gas supplier and industry has made big investments in securing Russian gas.

Germany is by far Gazprom's biggest customer in the EU, paying around $15 billion a year for Russian gas.

After years of lobbying by former German chancellor Gerhard Schroeder, the Nord Stream pipeline began operations in 2011.

Schroeder chairs Nord Stream's board and has been an outspoken critic of moves to isolate Russia diplomatically. He drew strong criticism in the German press last week for bear-hugging President Vladimir Putin during a visit to Russia.

South Stream's proposed 2,500 km (1,500 mile) route would stretch from Russia under the Black Sea through Bulgaria and Serbia to Hungary and now Austria.

Germany's BASF, the world's biggest chemicals company, is a partner in South Stream through its gas supply subsidiary Wintershall.

The head of BASF's advisory board is Eggert Voscherau, brother of Henning Voscherau, who is chairman of South Stream Transport's board of directors and a prominent former politician of Schroeder's Social Democratic Party.

A government adviser in Berlin, speaking on condition of anonymity said Berlin was happy that the new pipeline was now going to Austria rather than Italy: "Bringing South Stream's gas to Austria is far better for Germany's industry and gas security than pumping it far to the South to Italy."

Source: Johnson's Russia List, May 4, 2014
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Update: The FT has further detail on the new pipeline politics:

This week, Gazprom signed a preliminary deal with the energy company OMV to build a spur of South Stream into Austria. It also announced deals with Switzerland’s Allseas Group and Italy’s Saipem to build South Stream’s submarine pipelines in the Black Sea. Many of the project’s pipes are being manufactured by the German company Europipe.
“[Russian President Vladimir] Putin is using South Stream to undermine the EU and its cohesive energy policy from within,” said Ilian Vassilev, an energy consultant and Bulgaria’s former ambassador to Russia. EU countries with interests in the project – Italy, Germany, Bulgaria, Hungary and Austria – are all reticent about imposing broad economic sanctions on Russia.

The deals with OMV, Saipem and Allseas come amid a crucial dispute in Bulgaria that cuts to the heart of whether the EU can use competition law to undermine Gazprom. Bulgaria is a key battleground because construction work is due to start there in June and its socialist government has some of the EU’s strongest ties to Russia.
The arguments centre on EU policies called the “third energy package”. These measures are intended to prevent a monopolistic supply chain and would limit the volume of gas that Gazprom could export to the EU, even to a point where the company could only supply half of the pipeline’s gas. Analysts argue this would weigh on the project’s profitability. Russian officials have stressed the importance of winning exemptions from the competition rules but Brussels is signalling that it is unlikely to grant Gazprom any leeway.

Bulgaria’s parliament has opened a new front to support Gazprom by seeking to amend its energy law and exempt the offshore pipeline from EU rules. The commission has reacted sternly to what it sees as a test of its resolve, warning Bulgaria that submarine pipelines are still subject to EU law and adding that Sofia could face “legal steps”.
The EU’s inflexibility over the third energy package is an obstacle for Gazprom as it needs to arrange financing for South Stream. The first gas supplies are due to be delivered next year. In a sign of its concern, Russia has launched a dispute over the EU’s third energy package at the World Trade Organisation.

“What they are most concerned about is that the EU can sabotage South Stream,” said Jonathan Stern of the Oxford Institute for Energy Studies, who is a member of the EU-Russia Gas Advisory Council. 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,
Earlier this year, Gazprom had been on the point of winning an important exemption to the competition rules to supply extra gas to Germany. Russian officials had hoped that this was a sign that the commission could also be flexible on South Stream. But commission officials now say that decisions on exemptions from the third energy package are on ice for political reasons.

Still, Mr Vassilev said that Russia was likely to pay for South Stream from its own treasury if commercial lenders were deterred by the EU’s stance. He said that Mr Putin would seek to defend the pipeline as “a huge lever”.
“They would use state money to be seen to be in a position to ignore European Commission concerns,” he said.

Europe’s rifts are growing. Italian oil companies Eni and Saipem have important stakes in its construction, although a spur into Italy itself is in doubt. While Hungary has not rallied to defend South Stream as vocally as Bulgaria’s government, Budapest has aligned its energy policy with Moscow more closely this year by granting it a multibillion-dollar nuclear reactor deal. Serbia, which is applying for EU membership, also supports the pipeline.
Ironically, Professor Stern noted that the crisis was likely to make pipelines bypassing Ukraine, such as South Stream, even more important for European energy supplies: “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.”

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