EKIP– Expert Club for Economics and Politics A Different Opinion
Many commentators described the rejection of the Belene project at the end of last month as a major victory over the “Russian bear.” Praise was also showered on Bulgarian Prime Minister Boyko Borisov and Energy Minister Delyan Dobrev. Finally, our diplomacy has shown that it can win victories. But is it really so?
Along the Russian Stream
We present to you the second article in the series by Martin Vladimirov, dedicated to the energy geopolitics in the Black Sea. The first part ("Nabucco is dead, long live Nabucco!") can be found here.
The great Chinese reformer, Deng Xiaoping, had a favorite saying: “It doesn’t matter whether a cat is black or white, but whether it catches mice.” Although he used these words to defend China’s opening up to the world economy and the beginning of gradual liberalization, the saying could apply to any great power determined to pursue its goals at any cost. This applies with full force to Russia’s energy policy and its aggressive nature in the Black Sea basin.
Many commentators described the rejection of the Belene project at the end of last month as a major victory over the “Russian bear”. Praise was also showered on Bulgarian Prime Minister Boyko Borisov and Energy Minister Delyan Dobrev. Finally, our diplomacy has shown that it can win. But is it really so? Do we believe that we have managed to corner Russia?
On the one hand, it cannot be denied that shutting down Belene was an economically sensible decision. When the triple coalition launched the project in the period 2006-2009, it seemed profitable. The calculations for the future electricity consumption were made on the basis of the economic boom in Bulgaria (our economy was growing by an average of 6-7% annually), which made a second nuclear power plant a cheap and logical solution to a possible energy deficit. With the onset of the crisis, however, it suddenly became clear that high growth rates are not expected in the next decade, and energy consumption, according to the European Commission's forecasts, will remain more or less at current levels. Thus, the construction of a nuclear power plant with a capacity of 2,000 megawatts would create an oversaturation with electricity in Bulgaria. The possibilities of selling electricity abroad also seem doubtful, given that Romania's Cerna Voda nuclear power plant plans to build two new units in the next decade, and Turkey has already signed a $20 billion contract with Russia's Atomstroyexport to build a 4,000-megawatt plant near Mersin on the Turkish Mediterranean.
It is true that the Russian nuclear monopoly Rosatom will lose strategic influence in Bulgaria after the rejection of Belene, but compared to the number of orders the company is fulfilling worldwide, Bulgaria is just a drop in the ocean. The company controls 16% of the global market for the construction of nuclear power plants and is actively working on projects in China, India, Iran, Slovakia, Jordan and other countries. In addition, Bulgaria eventually agreed to buy at least one of the two reactors intended for Belene, the idea being that they will become units 7 and 8 of the Kozloduy NPP. At the Belene site, which was often called the “gyola”, it is planned to build a gas-fired power plant, of course, built by Gazprom and powered by Russian gas. Given the fact that both Rosatom and Gazprom are state-owned companies with active interference in Russia’s foreign policy, it seems that Russia’s national interest was protected after all.
Bulgaria – player or pawn?
Despite Bulgaria’s energy strategy to diversify its natural gas sources, the country is slowly but steadily pursuing its partnership with Gazprom on the South Stream project. The pipeline, which will carry about 63 billion cubic meters, could bring Bulgaria up to $400 million annually in transit fees. At the same time, however, it will solidify its dependence on Russian supplies of natural gas, which already accounts for 94% of its annual gas consumption. It will solidify it because what the completion of South Stream will practically achieve is the elimination of European competition in the Southern Corridor direction. Neither Nabucco nor any of the other alternative projects will make economic sense if Gazprom floods the European market with almost 50% more gas than it currently exports.
Some will say that Bulgaria still has an independent policy that is yielding results. The Russians are lowering the price of gas by 11% from July 1 (previously it was increased by 12% from April 1), and Bulgaria managed to “get out” of a Russian infrastructure and energy package, including the Burgas-Alexandroupolis and Belene oil pipelines. Both “successes” actually depend a little on us. Gazprom has reduced the price of blue fuel to all its major buyers, including the French GDF Suez and the German Wintershall. The reason for this is not wizard diplomacy, but simply the pressure exerted on Gazprom by the rapid change in the Western European gas market. As for Burgas-Alexandroupolis, the oil pipeline was intended to bypass the Bosphorus, one of the busiest straits in the world, delivering an additional 35 million tons of Russian crude oil annually to world markets. The project would have made Bulgaria one of the largest oil distribution centers in Europe with exceptional geostrategic importance.
Instead, Bulgaria quickly backed out after GERB came to power, citing environmental concerns. Russia did not protest much, not because Bulgaria’s position was strong, but because the Russian oil giant, Rosneft, had a ready-made alternative. Energy cooperation between Turkey and Russia made it possible to quickly find a new route that would bypass the dangerous straits. The solution was the Samsun-Ceyhan Trans-Anatolian Oil Pipeline, which will have a capacity of 1.5 million barrels of oil per day. The project is expected to cost about $2 billion, and will be financed in part by Russia’s Transneft (Rosneft’s export arm), Italy’s ENI, and Turkey’s Çalık Energi. The pipeline is expected to be operational by the end of this year, and will be fed with both Russian and Kazakh oil.
Actually, it's about Ukraine.
The commissioning of the first stage of Nord Stream (27.5 billion m³) last year and the rapid progress of South Stream put Ukraine in an extremely difficult situation. Until now, the country has been the main transit country for Russian gas. 80% of natural gas supplies to Europe pass through Ukraine. But the price wars between Gazprom and the Ukrainian Naftogaz in 2006 and 2009 showed both the European Union and Russia that Ukraine cannot be a reliable transit partner. Russia, which is seriously threatened by new developments in the gas market, is using all methods to reduce Ukrainian influence on energy policy. Russia is doing this in three ways. First, the construction of Nord Stream and South Stream will eliminate the need for Ukraine as a transit country. A simple calculation shows us how this will happen. In 2011, Ukraine transited just over 110 billion m³. When the two alternative routes reach full capacity (55 and 63 billion m³, respectively), they will be able to cover all of Ukraine's exports.
Second, Russia has a serious interest in buying up Ukraine’s gas transmission system, thereby preventing, on the one hand, the theft of natural gas, and on the other, strengthening its control over the Ukrainian energy industry. At a time when Ukraine is facing very serious economic problems and is mired in gas debts to Russia, its position is extremely unfavorable. For now, the Ukrainian government refuses to sell its gas pipeline network, but with the progress of South Stream, Ukraine’s time to react is running out. Third, the Russian bear wants to regain its geopolitical influence in its backyard. In 2010, Russia increased its pulling power after the new president, Viktor Yanukovych, concluded a gas deal with Russia, according to which the price of natural gas supplies would drop by 30% in exchange for an extension of the contract for the operation of the Russian naval base in Sevastopol until 2035. Thus, Russia ensured two peaceful winters without serious disruptions to supplies to the EU, as well as strengthening its military positions in the Black Sea.
Russia is also rushing to launch South Stream to avoid mandatory application of new European antitrust regulations that are due to come into force in March next year. The so-called “third energy package” aims to separate ownership of the gas transmission system from that of production and supply to the network. In this sense, Gazprom cannot own a majority stake in the Transmission System Operator (TSO) responsible for the construction and maintenance of South Stream, since the company also owns the gas source. The Russian energy giant applied last year to be exempted from European regulation on the basis that the project is of pan-European importance (a status that both Nabucco and Nord Stream were granted earlier). The EU flatly refused, infuriating Russian Prime Minister Vladimir Putin, who at the time said that Europe was so dependent on Russia that even if it decided to heat itself with wood, it would still have to import it from Siberia.
Despite this obstacle, it seems that South Stream is moving forward at full speed, and Bulgaria’s decision to make the project a national priority shows that Russia is slowly but surely winning over its partners in the Balkans. There has been talk that construction of the Bulgarian section could begin as early as the end of this year. Serbia is also ready for this in their part of the corridor. This week, the Hungarian company MOL announced that it is likely to withdraw from Nabucco, and the Hungarian prime minister acknowledged the importance of South Stream in securing gas supplies for Central Europe. But at what price? Are we really ready to become even more dependent on a country that is desperately trying to keep its customers? Why remain its hostages when the gas revolution is already knocking on our door? Let’s give it a chance and invite it in.
In my opinion, another pipe from Russia will in any case improve the situation on the gas market in the EU... As you say, with the increased quantities and the alternative of new gas technologies, seeing as prices have fallen, and this resource has become more accessible here. The dependence also goes both ways... just as the EU is dependent on Russia for energy supplies, Russia also needs the money it receives for gas. However, the practical reason for the fall of the USSR was the low oil prices that occurred after the recessions in the early 80s. Nowadays, Russians do not need to import wheat to feed themselves, but the "middle class" in large cities undoubtedly needs uninterrupted trade with the world, which at this stage is achieved by exporting natural resources.
I absolutely agree with you. One thing that many Eurocrats in Brussels do not understand is that Russia needs Europe as much as Europe needs Russia. Energy exports form about 40% of the Russian budget, and therefore Russia cannot afford to lose its customers in the EU. For now, Gazprom has managed to avoid separating gas pricing from oil pricing, because otherwise, the price of Russian gas would collapse due to the oversaturation of the European market. Russia has also managed to maintain its strategic partnerships with companies in Italy, Germany, Austria, etc., with long-term contracts valid until the mid-2020s. However, it is not known how much longer Russia can resist market trends. And the question is whether it should? Russian energy is in desperate need of investment and reconstruction if it wants production to remain at current levels.