SINGAPORE/LONDON (Reuters) – Russia’s $40 billion South Stream gas pipeline project has fallen victim to plunging energy prices, stalling European demand and the political standoff between the European Union and Moscow over the crisis in Ukraine.
Russia on Monday said it had scrapped the project to supply gas to Europe without crossing Ukraine, citing EU objections, and named Turkey as its preferred partner.
South Stream planned to supply 63 billion cubic metres (bcm) of natural gas a year, equivalent to more than 10 per cent of European demand, from Russia via the Black Sea into the EU towards the end of this decade, cementing Russia’s role as the region’s dominant supplier.
But it came under increasing fire this year. The crisis over Ukraine led to Brussels freezing its approval process, and the pipeline also hit trouble over weak European gas demand and energy prices, undermining its economics.
“I think the likelihood of South Stream being built is now is close to zero,” said Pierre Noel, senior fellow for economic and energy security for International Institute for Strategic Studies (IISS).
South Stream would need to be marketed at an equivalent of $9.50-$11.50 per million British thermal unit (mmBtu), including a 30 per cent export duty, estimates have shown. The average European spot gas prices have ranged between $6-$9 per mmBtu this year.
“Decreasing oil-indexed prices for gas and lower sales are likely to drive Gazprom to the red this year,” said Mikhail Korchemkin of East European Gas Analysis, forcing the firm to reduce its investment programme.
Russian state-controlled Gazprom sells most of its gas under oil-linked contracts. With oil prices tumbling 40 per cent since June and European gas demand down 10 per cent since 2010, Gazprom’s gas revenues have plunged.
“Cancellation of the project can reduce Gazprom’s negative cash flow in 2014-2017”, Korchemkin added.
Gazprom meets almost a third of Europe’s demand, which in turn makes up 80 per cent of its revenues.
“It (scrapping South Stream) reflects internal Russian pressure on where it is going to invest limited resources at a point in time when sanctions are hitting,” said Carlos Pascual, a fellow at Columbia University’s Center on Global Energy Policy, referring to Western sanctions over Ukraine.
“It’s harder, more expensive to access capital and the fastest growing gas markets in the world are in Asia, and Russia has virtually no export capacity to the Asian market,” he added.
The announcement on scrapping South Stream came during a visit by Russian President Vladimir Putin and Gazprom chief executive, Alexei Miller, to Turkey, during which Putin proposed building it to Turkey instead, offering its gas at a discount.
“I don’t think Putin is bluffing. I think he’s really adapting to a fundamentally new geopolitical situation in Europe,” the IISS’ Noel said.