South Stream Should be Considered a Pan-European Project

We recently has the opportunity to receive the views of Dr. Pavel Zavalny, President of the Russian Gas Society and Deputy Chairman of the State Duma Committee on Energy.

1. Why do you think Russia’s natural gas offer is the best choice for Europe today and in the mid-term?

There are a lot of arguments in favor of a continued commitment to Russian gas. First of all, there is our reputation, earned during the decades of reliable supplies. Europe is the biggest export market for Russian gas. Our gas-transportation system is already in place. It is connected with the major gas-pipeline systems in Western, Central and Eastern Europe.

The vast majority of analysts agree that European demand for imported gas will continue to grow in the foreseeable future, totaling about 70% of aggregate demand, despite increasingly lower levels of gas consumption in the EU. Gas production within Europe is declining. By 2040 it may drop to about 40% of its current level.

How will Europe satisfy its need for gas? Political instability in Africa and in the Middle East rules out any hope of reliable supplies from those areas. This is equally applicable to pipeline gas from Algeria and Libya, as well as to LNG shipments from those countries or from Egypt or Nigeria.

LNG exports from the United States will hardly satisfy the growing European demand for imported gas. First of all, it is estimated that the US can export no more than 50-60 billion cubic meters (per year). Most of this volume will be delivered to the Asia-Pacific region and other markets.

Secondly, any reasonable estimate of the price of American gas that can be shipped to Europe in the next few years comes to about $450 per 1,000 cubic meters, making it clearly no cheaper than Russian gas.

Let us not forget that LNG market, unlike pipeline gas, is very volatile. LNG will always find its way to the premium markets. That is the case now. Despite the fact that the quantity of LNG available throughout the world remains stable since 2013, the geography of its sources has significantly changed. Imports of LNG to the EU have fallen 50% over the two last years.

Gas from Russia is far more reliable. Its quantities and prices are predictable, because it is based on the traditional model of oil pricing tied to the spot market. However, it certainly requires more specific guarantees and a long-term commitment, in terms of quantities and prices, from the consumer, i.e., the European Union.

2. What is the Eastern European consumers’ stand on Russia’s gas? Is there any difference between the countries that may have access to alternative pipelines and those who totally depend on Ukraine as a transit country?

A number of countries in Eastern Europe - primarily Bulgaria, Slovakia, Hungary, and the Czech Republic - are historically quite dependent on Russian gas that passes through Ukraine. They will have to take the risk associated with transit through the transit country that is now torn by conflict and instability. The construction of the South Stream pipeline can eliminate such threats in the future and improve energy security in the Eastern Europe.

But the countries of Western and Central Europe are practically immune to this risk, because they get reliable natural gas supply from such pipelines as Yamal-Europe and Nord Stream. In fact, Nord Stream is not currently operating at 100% capacity. For political reason Brussels’ decision on Gazprom’s access to OPAL pipeline is being delayed again and again. Furthermore, Western and Central Europe have a well-developed system of LNG infrastructure.

3. Chancellor Angela Merkel claimed that foreign policy should take priority over economic cooperation. Brussels and Sofia seem to share Merkel’s opinion, as their position towards the South Stream pipeline is ambiguous. In your opinion, what will happen to the pipeline if tougher sanctions are implemented?  

The situation with the South Stream project proves that political considerations are more important than economic forecasts and common sense. Strategically, South Stream should be considered a pan-European project. It will facilitate the integration of the regional gas markets and the development of the gas-transportation system. South Stream will help funnel a significant amount of direct investment into the economies of the EU member states. The local communities hit by the global financial crisis will get thousands of jobs across Europe. Its operation will generate revenue for companies, as well as lucrative tax income for governments.

Meanwhile the Eurocrats are hindering the urgent work for political reasons. We face growing destabilization in Ukraine and Prime Minister Yatsenyuk’s direct threats to block Russian gas export to Europe. In such situation the European policy of red tape is absolutely inexplicable.

South Stream is a vital project for Europe. Who would benefit from its failure? The answer is: those who desire a general escalation of tensions and the introduction of retaliatory sanctions – in other words, a third party.  The US, to be precise.  Europe will only suffer.

4. Why does the Ministry of Energy of the Russian Federation believe that the Ukraine’s law enabling the sale of the country's gas transportation system to a group of international investors violates the WTO rules and regulations?

Decisions made by the government of Ukraine and the Verkhovna Rada on the Ukrainian gas-transportation system do not allow Russia, a full-fledged WTO member, to participate in the management of that system. According to this piece of legislation, only companies from the US and the EU have the right to invest in it. The law is politically selective, and for this reason the Russian government considers it a violation of the WTO regulations.

I would like to point out that Russia, conscious of its responsibility for Europe's energy security and placing a high priority on strictly adhering to its contracts, has repeatedly made the offer to Ukraine and Europe to create a two- or three-party consortium that would not only manage the gas-transportation system, but also maintain it in good technical condition. Unfortunately, our business offers were not supported.