For Russia, South Stream is above all an instrument for enhancing the reliability of gas supplies to Europe, which is the key consumer of Russian natural gas. In terms of profitability, Gazprom’s investment in the project will be partly compensated by the revenues of Russian steel and pipe-building companies, which will provide their products for the pipeline.
Russia has started building the South Stream gas pipeline across the Black Sea to Europe, bypassing Ukraine. Opinions on this project vary. Some experts question its economic expediency now that Russian gas consumption in Europe is decreasing, but contend that its political advantages are unquestionable. Other experts disagree.
Yaroslav Lisovolik, Head of Research and Member of the Management Board, Deutsche Bank Russia, tells the Valdai Discussion Club about the pipeline’s advantages for Russia.
What is South Stream to Russia from the political and economic viewpoints? How much will it cost? And how much gas can it pump to Europe annually?
We estimate that Gazprom will need another $10 billion to develop the gas transportation system in Russia for delivering gas to South Stream. The pipeline is to be completed in 2015 and should reach its design capacity of 63 billion cubic meters by 2018.
For Russia, South Stream is above all an instrument for enhancing the reliability of gas supplies to Europe, which is the key consumer of Russian natural gas. In terms of profitability, Gazprom’s investment in the project will be partly compensated by the revenues of Russian steel and pipe-building companies, which will provide their products for the pipeline. Also, an economic revival in Europe accompanied by an increased demand for Russian gas could improve the project’s balance of profit and loss.
South Stream offers Russia direct access to the end user in Europe bypassing neighboring transit countries. However, South Stream is not connected directly to the largest customer, such as Germany in the case of Nord Stream. Bulgaria is the first customer on the other side of the Black Sea, and no one can guarantee that gas will be subsequently supplied to other European countries, for example Italy, without any transit problems. Hence, the value of South Stream in terms of avoiding transit risks is smaller compared to Nord Stream. This project has been estimated at EUR 16 billion, with Gazprom to provide approximately half of the sum.
Can Ukraine remain a transit country for Russian gas? What steps could it take to secure this position? How could it influence the South Stream project? Will the EU support Ukraine or Gazprom?
Ukraine will most likely lose its status as a transit country when all lines of the Nord Stream pipeline, whose design capacity is 55 billion cubic meters, and South Stream, with the capacity of 63 billion cubic meters, are launched and Gazprom implements its plans to increase gas transit via Belarus, whose pipeline system it owns. Ukraine can only retain its transit status if it accepts the same conditions as Belarus.
As for the EU, it does not view South Stream as a new source of gas supply but only as a new route that will bypass Ukraine. So the European Union is unlikely to make a choice between Gazprom and Ukraine. However, it would be wrong to assume that South Stream would enjoy preferential treatment in Europe.
What will ordinary Russians gain from South Stream and Nord Stream? Will gas prices go down in Russia? In short, who will stand to benefit from these two pipelines?
Gas prices keep growing in Russia. But even though they have doubled over the past few years, Gazprom is still operating at a loss on the Russian market. To a degree, the high cost of new gas export routes has a negative effect on Gazprom’s ability to generate profit on the Russian market. Therefore, it can be said that Russian consumers are indirectly paying for these projects.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.