South Stream holds promise of energy

The pipeline deal between Russia, Italy, Bulgaria, Serbia and Greece envisages completion of the project by 2015.
During the often blazing heat that suffocates Serbia during the summer, it can be easy to forget how close, last winter the whole country came to freezing, when a dispute broke out between Russia and Ukraine, shutting off gas supplies to great swathes of South Eastern Europe. With Serbia's main source of gas coming from Russia via Hungary, the need for diversification of the country's supply suddenly seemed more urgent, lest the former Soviet republics fall out with one another again as temperatures plummet.

Step in, the South Stream pipeline project, which though it will once more originate in Russia, will traverse the Black Sea, pass through Bulgaria and then Serbia and on to Italy from there. Hopes are growing fast that it will guarantee the country's energy security and also lend Belgrade crucial influence in the Western Balkan region when it comes to controlling gas supplies.
The 900-km offshore section of South Stream is planned to start from the Beregovaya compressor station at Dzhubga on Russia's Black Sea coast and then run to the Bulgarian port of Varna, from where it will continue into land-locked Europe. It is due for completion in 2015.

On May 15th, the gas companies of the countries involved in the project, Russia, Italy, Bulgaria, Serbia and Greece, signed an agreement concerning the construction of the pipeline.
The Serbian branch of the pipeline is due to be 450 km in length and will have a capacity of 4.4 bn cm a year. Most observers agree that the project offers huge opportunities for Serbia, whose prime transit location is much remarked upon, but rarely exploited to the full. However, many are also very aware that behind the optimism exist a number of potential pitfalls too.

Milan Budimir, spokesperson for Serbia's energy ministry, told: "We are very supportive of the project which will ensure that we will have enough gas for our needs in thefirst instance. The pipeline [transit] revenue will also be very welcome and we will no longer have to pay [transit] fees to Hungary, which are the highest in Europe."
He went on: "The diversification of gas supply offered by South Stream is a positive development for Serbia and we feel we can only benefit by being in the middle of the pipeline."

In theory, there will be many other benefits as well, though Serbia will also have to upgrade its own gas storage and other facilities to make sure this will happen.
Dusan Bajatovic, general manager of the state gas monopoly, Srbijagas, told a recent gathering in Novi Sad that: "South Stream does have much potential but we must also be aware that there is a lack of development as far as gas is concerned in our economy. It will be important to improve the financial conditions in our business and I would like to emphasise that having such large quantities of gas [as a result of the pipeline] will be a privilege."

Others agree that Serbia and other countries lining the pipeline route will have to do more to make their gas provision more efficient. The South Stream project will not in itself provide a panacea for the problems encountered by the Western Balkans when the taps were turned off last winter, they insist.
Borut Grgic, a Brussels-based energy expert for South Eastern Europe at the Institute for Strategic Studies think tank, told that: "The region's energy problems go well beyond supplies. There are also infrastructure issues to consider, as well as interconnectivity, and price liberalisation, which has to do with opening up the market and making things more transparent."

There is also some debate as to whether Serbia's position on the map can make it the gas transit hub that it so craves to become. On June 19th, Srbijagas and the Republika Srpska's gas company Gaspromet signed an agreement for the former to acquire a 40 % stake in the latter, which was perceived by both sides as way of integrating Republika Srpska's supply into the opportunities presented by South Stream.
And although the move prompted fears in the rest of Bosnia that the Serbian gas monopoly would eventually seize control of the rest of the divided country's industry, it did seem to signal some intent on Serbia's behalf that it would be using the leverage gained by the South Stream pipeline to the maximum.

Milos Vuckovic, energy specialist and partner at the Karanovic & Nikolic law firm, told that: "If you are talking about Serbia being able to distribute gas in the countries of the former Yugoslavia, as a result of its position in the South Stream project, then yes, it can become a hub."
But other market watchers are less certain that Serbia will be allowed to become an influential player with what will essentially be its much bigger partner's much sought-after product.
Grgic said: "Serbia will not be in a position to buy Russian gas with the purpose of reselling it. If South Stream is to be built, and that's a big if, the gas will be sold by Russia directly to the end buyer. Serbia, like every other country along the route will be a transit country at best and hopefully, a reliable one."

There have been a number of doubts expressed as to South Stream's feasibility, mainly because it has a serious and, some argue, formidable competitor in the form of the Nabucco pipeline project, which will transport gas from Turkey to Austria, via Bulgaria, Romania and Hungary. Nabucco is also backed by the European Union and the USA and is seen as a real challenge to the grip that Russia has had over the supply of gas to so much of Europe.
The irony is that although South Stream is perceived as an alternative to the crises engendered when Russia comes into diplomatic conflict with one of its neighbouring gas transit countries, it is exactly the same country which is behind the diversification that the new project apparently offers.

The suspicion therefore arises that Russia's South Stream child is a ruse to thrust its influence ever more forcefully in the Western Balkans' direction. In January this year, this was highlighted when Serbia sold a 51 % stake in its oil monopoly, NIS, to Russian giant Gazprom for EUR 400 mm, which was seen by some as a knock-down price, although it came with a commitment to invest an additional EUR 500 mm. Following along fast from that sale, came Serbia's ultimate signature on the South Stream contract.
Vuckovic said: "This could all be a huge political game and it is not entirely clear why Serbia is playing it. There has been a lot of debate about the low price paid for NIS but in the situation at the time, it was much needed money for Serbia."
He continued: "Russia is definitely going to have a greater influence on this region [because of the South Stream project] and this is strongly related to its support for Serbia over the Kosovo issue."

Yet Grgic prefers to play down images of the big bear throwing its weight around in south-eastern Europe.
He said: "This 'Russian influence' is perhaps an exaggerated concept.If you introduce your energy sector reforms correctly, then Russian gas can become part of the energy mix for the region, not the dominant agent. Time will tell, but logic suggests that if you don't want to be vulnerable, it is best to integrate into the EU energy market as soon as possible and diversify."