Ukraine And The South Stream Bogeyman

BRUSSELS, Belgium -- The thing that keeps Ukrainian officials awake at night in Kiev is Russia’s South Stream gas pipeline - the fear that the project will finally be constructed and remove gas volumes crossing the former Soviet republic on the way to Europe and thus lucrative transit fees.

“South Stream is more of an alternative to the Russian gas pipeline transiting Ukraine,” Pavel Sorokin, an oil & gas analyst at Moscow’s Alfa Bank, told New Europe on 20 July.

“It was one of the bargaining points with Ukraine and one of the factors which should have made Ukraine more cooperative in the gas questions because, of course, if South Stream was built it would take most of the volumes away from Ukraine which would have significantly worsened the economic situation in the country, as that would take the transit fees for gas away from Ukraine and that could have a disastrous effect for Ukraine's economy.”

South Stream, a pricey joint-project of Russia's Gazprom and Italy's ENI, is strongly backed by Russia, which has a strong interest in the ambitious project since it would enable larger gas sales to Europe, reinforce its position on the European market, limit access for its competitors namely the EU-backed Nabucco and thus strengthen Russia economically and politically, European analysts say.

It will also strengthen its influence on the countries in Southeast Europe.

Russia has signed cooperation agreements with Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia, and Austria. Romania and FYROM are also to be included.

On 19 July, Ukraine independently launched in a symbolic ceremony the modernization of the country's Gas Transportation System (GTS).

The EU predicts that European financial institutions will take positive decisions on allocation of credit means to Ukraine for modernisation of the GTS will be made in late 2011, the EU Delegation in Ukraine said in a statement.

Nevertheless, Ukrainian officials also hope in Russian participation.

South Stream spokesman Sebastian Sass told New Europe on 22 July that their investors - including majors ENI, French EDF and German Wintershall as well as smaller companies from the Balkans - are committed to the Gazprom-led South Stream project.

But in terms of security of supply, the advantage of South Stream is that it is providing diversification of routes, Sass said.

“If you extend existing routes, if you increase the capacity of existing routes, then you will not achieve any diversification... We believe that the advantage of South Stream vis-a-vis upgrading the Ukrainian network is that we provide an additional route option.”

Sorokin added that upgrading Ukraine’s transit pipelines and Russia’s South Stream project are linked.

“I think in a way these two projects are interconnected at least politically and of course Ukraine did oppose South Stream significantly. So Ukraine is indeed engaging or once again considering refurbishment of its gas transit system with the help of Gazprom so that may indicate some agreement being reached between the two sides. We have to wait and see who takes part in the refurbishment, in what form and proportion,” Sorokin said.

Russia has also being pushing for a merger of Ukraine’s state-owned oil and gas firm Naftogaz with Gazprom.

Ukrainian President Viktor Yanukovych has said Kiev is not planning such a merger.

He added that Naftogaz was interested in cooperation with Gazprom in such joint projects as modernisation of Ukraine's GTS.

Russia has said it is open to discuss modernising Ukraine’s pipelines but added that it will not abandon South Stream.

“Gazprom is definitely interested in securing a major shareholding in the Ukrainian transit and distribution entities but it is hard to say where exactly the talks stand now,” Sorokin said.

For now, Ukrainians will keep tossing and turning during these warm summer nights, worrying that South Stream will be built and, as one source privately said, “We will lose everything.”

Source: New Europe