With Bulgaria suspending the South Stream energy project, allegedly because of U.S. pressure, will Russia find other ways to tackle this new challenge?


The future of the South Stream project is in limbo. Photo: Reuters

Bulgaria, until now resisting attempts by the EU to block the construction of Russia’s South Stream gas pipeline, has stopped the project in his country until the conflict with Brussels is resolved. Freezing the project, which is designed to supply gas to Europe while bypassing Ukraine, obviously threatens both Gazprom and Russia. Putting the project on hold would preserve the status quo, in which the main export destinations for gas are dependent on relations between Moscow and Kiev.

However, the U.S. might be interested in complicating the fate of the South Stream not only for political reasons, but also for economic reasons, according to Kommersant's sources. Ukraine is discussing transferring its pipelines under the control of U.S. and European companies, and the South Stream project would reduce the value of these assets to nil.

Bulgarian Prime Minister Plamen Oresharski yesterday unexpectedly ordered the suspension of the construction of the South Stream pipeline in his country because of demands from the European Commission.

“After further consultations with Brussels, we will determine the course of further work,” he said after talks with three U.S. senators.

Republicans John McCain and Ron Johnson, along with Democrat Christopher Murphy, yesterday held a closed-door meeting with Oresharski, with the focus of the discussions being the situation in Ukraine. At the end of the meeting, Senator Murphy said he hoped to see a single European position regarding the situation in Ukraine, and Bulgaria has ceased to resist attempts to block the South Stream project.

It is through this country that a future gas pipeline from Russia to Europe, via the Black Sea, should enter the territory of the EU. It was assumed that the South Stream pipeline would be launched in late 2015, and would supply Europe with up to 61 billion cubic meters of natural gas annually. This would bypass Ukraine, thus making its gas transportation system superfluous.

The EU, for a long time already, has been actively resisting this project, and starting in autumn of 2013, it officially began trying to stop it. However, countries participating in the South Stream project, including those from the EU, still would not heed Brussels, defending the project and ignoring the demands for a construction freeze. Moreover, during summits of EU leaders, Bulgaria had consistently opposed a third wave of sanctions being implemented against Russia.

Nevertheless, the Americans were now able to change the position of Sofia. At the same time, McCain yesterday called for Russia’s share of participation in South Stream to be reduced, and in particular, to ensure that in this project no companies would be involved that were under U.S. sanctions.

Two weeks ago, a tender for the construction of the Bulgarian section of the South Stream was won by the Stroytransgaz Consortium, consisting of Stroytransgaz CJSC and the Bulgarian company Gasproekt Jug. The Russian company, controlled by Gennady Timchenko, came under U.S. sanctions (but not under EU sanctions). It is due to this tender that the European Commission came up with a new reason to demand that Bulgaria suspend the South Stream project.

Brussels launched a remedial action procedure, which could mean a reduction of European subsidies for Bulgaria, and if the case ended up in an EU court, would also result in the leveling of fines for each day of violation.

However, despite this and the extremely harsh statements by the European Commission President Jose Manuel Barroso, Sofia still reacted very calmly – Energy Minister Dragomir Stoynov repeated several times that the government was prepared to discuss the South Stream project with the European Commission, but was not going to stop it.

The decision of Oresharski, in addition to the external pressure, could also have an effect on internal political instability, says , Matthias Dornfeldt, an expert on energy policy at the Free University of Berlin. In late May, the parliamentary coalition, led by Oresharski, barely fought off the fourth no-confidence vote in the government – with the main target of criticism of his opponents being energy issues. In addition, Bulgaria will be holding early parliamentary elections this autumn.

Dornfeldt adds that, acting under international law, U.S. officials cannot officially put pressure on Sofia, except through Brussels. However, he believes that the objectives of the recent visit of President Barack Obama to Poland, as well as the tour of U.S. senators to Bulgaria, Romania and Poland, “were most likely designed to seek support for the new Ukrainian president Petro Poroshenko, and correspondingly, an attempt to alienate governments in Eastern European countries from Russia.”

Dornfeldt stresses that the countries of southeastern Europe are extremely interested in ensuring stable supplies of gas from Russia, and therefore hardly wish to support the steps being taken by the EU, which may go against those goals.

According to Kommersant, the U.S. attempts to prevent the implementation of the South Stream may be connected with the idea of ​​selling the Ukrainian gas transmission system (GTS) to a consortium of American and European investors, a prospect which is now being actively discussed.

Last week, Ukrainian Prime Minister Arseniy Yatsenyuk announced the restructuring of Naftogaz of Ukraine, as a result of which the company would be divested of its natural gas pipelines and gas storage facilities. These assets, according to Mr. Yatsenyuk, would then be supposedly “used jointly with the U.S. and the EU.”

According to Kommersant's sources, the Ukrainian government is already in talks with Shell, ExxonMobil and Chevron on their possible involvement in the fate of the GTS. The main question is transit guarantees from Gazprom, because without them the value and importance of the Ukrainian GTS will be minimal.

Gazprom is not hiding the fact that with the South Stream it will be possible to avoid gas transit through Ukraine. To make the idea of ​​participation of the U.S. and the EU in the Ukrainian GTS viable, it is necessary to ensure that, for the transit of gas, Gazprom has no alternatives to the Ukrainian direction.

According to the deputy head of the National Energy Security Fund Alexei Grivach, Bulgaria can still change its position and support the project, despite the U.S. pressure, but in such a case, Sofia would require further concessions from Russia, as has happened many times before in the past four years. In addition, the expert adds, in case of interruption of transit of gas through Ukraine, Bulgaria would be the first to suffer.

At the same time, Grivach believes that refusing the use of Ukraine as a transit country for Gazprom is a matter of principle, and Russia will keep seeking alternative gas supply routes to Europe, even if the South Stream is not built. One option that was mentioned by President Vladimir Putin is a gas pipeline through Turkey.

This is an abridged version of the original article that was first published in Russian in Kommersant daily. Yuri Barsukov, Oleg Gavrish, Elena Dudina contributed to the story.