Making Sense of South Stream and the Southern Corridor

Making Sense of South Stream and the Southern Corridor

A flurry of recent headlines has caused confusion surrounding the pipeline drama of the so-called Southern Corridor. Bottom line: there are no “done deals” as to which pipelines will be constructed linking Caspian/Russian sources of natural gas with European consumers.

Here is what has been reported:

  • Russia and Turkey agreed to the South Stream pipeline passing through Turkey’s territorial waters. All you reporters out there take note: much of the English language reporting on this is wrong, in that South Stream would not pass through Turkey’s territorial waters (which extend only 12 nautical miles from the coastline) but rather through its Exclusive Economic Zone (EEZ).
  • Prime Minister Putin urged construction of the South Stream to begin earlier than planned, with construction possibly starting as early as late this year
  • Turkey and Azerbaijan have agreed in a Memorandum of Understanding signed on Christmas to construct a Trans Anatolian Gas Pipeline (TANAP), which among other things would get 10 billion cubic meters of Azeri gas to the Turkey-Bulgaria border

As things stand, then, we have two intergovernmental agreements and an order by Vladimir Putin to will the South Stream into existence earlier than planned. Much of the reporting makes it sound as if the results of these developments are A) South Stream will in fact be realized, and B) Nabucco, the rival EU-backed Southern Corridor project, is (still) dead in the water, as has been reported repeatedly over the past few months. Not so fast…

Here is my read:

First, the South Stream is no more likely to be built than it was two weeks ago. That does not mean it will not be built, because pride and prestige are involved—the boss, Putin, would certainly like to thwart Nabucco and gain negotiating leverage vis-à-vis Ukraine—but the economic realities are no different than they were in 2011: South Stream is very expensive, Gazprom is in a weak financial position now, and there are many uncertainties in the global gas market currently. Gazprom and other South Stream investors know that there is little appetite for megapipeline projects such as Nabucco right now, in part because of the unknown longer term ripple effects of America’s shale gas revolution.

Second, there is nothing surprising about Turkey granting permission to South Stream passing through its EEZ, since the existing Blue Stream pipeline already moves gas from Russia under the Black Sea to Turkey. Blue Stream has been the basis for strategic energy cooperation between Turkey and Russia since it was inaugurated in 2005, and therefore contrary to some interpretations (notably Steve LeVine’s), Turkey has not only “played only for the Western team” in pipeline politics. More likely than not, what we are witnessing is the endgame of negotiations between Gazprom/Russia and Ukraine over price and transit conditions.

Third, the MoU between Turkey and Azerbaijan means that it is increasingly likely that the 10 bcm of Shah Deniz gas will find its way to consumers in Europe, but it does not mean anything more than this. Whatever the piece of pipe is named that gets that gas from the Caspian to the western side of Turkey is of minor importance; there is precious little appetite for the grand, greenfield pipelines when upgrades to existing infrastructure would suffice. We will know much more later this spring, when a decision by the Shah Deniz consortium is made public. All observers seem to be betting on Nabucco’s prospects being close to zero, mainly due to uncertain supplies for what is a very ambitious project. If accurate, what we are probably witnessing is a shift from prestige projects that form arteries of infrastructure over long distances (e.g. Nord Stream, South Stream, Nabucco) to capillary projects of linking existing infrastructure with smaller, less ambitious, and less expensive pipes.

Thanks to Josh Raisher for research assistance.