Battle rages between Bulgaria and Brussels over future of energy supplies

| May 7, 2014

0805-ukraine_full_600The rapidly unfolding crisis in Ukraine has put the spotlight firmly on  another burning issue that has dogged EU/Russia relations for years –  energy security. As Ukraine struggles to contain the unrest convulsing its eastern region, a perhaps even more significant struggle hinges on what happens  beneath the ground where billions of euro worth of Russian natural gas flows  each year through pipelines to enter Europe. 

Russian energy giant Gazprom currently accounts for more than 30% per of the EU’s gas needs, more than half of which is piped through Ukraine.  The EU’s so-called ‘Third Energy Package’ is intended to prevent a  monopolistic supply chain but has resulted in Russia filing a complaint  against Brussels with the World Trade Organisation (WTO)  The complaint relates to the South Stream gas pipeline, designed to  provide an alternative to the troublesome Ukraine route and intended to  transport some 63 billion cubic metres of gas per year through the Black  Sea, Bulgaria, Serbia, Hungary and Slovenia into Italy.

The 2,380-km pipeline, funded by Gazprom as well as Italy’s Eni,  France’s EDF and Germany’s BASF, was first suggested in 2007 and is  expected to cost €17 billion.  At the heart of the Russian complaint are EU provisions which prevent a  single company from both owning and operating a gas pipeline.  EU lawmakers agreed the rules, known as ‘ownership unbundling’,  as part of its energy package on rules governing the bloc’s gas and  electricity market. The new framework, which was agreed in 2009,  is aimed at stimulating competition in the EU’s gas market and lower  prices.

For its part, Russia claims that state-owned Gazprom, which often  owns both the pipelines and the gas inside them in many eastern EU  countries, is the only company with the right to export gas.  The row has now taken a dramatic new twist with Bulgaria’s Parliament  backing Gazprom by seeking to amend its energy law and exempt the  offshore pipeline from EU rules.  Bulgaria is a key battleground because delivery of pipes for the pipeline  should begin this month with construction work due to start in both  Bulgaria and Serbia next month.

The undersea pipes will be start being  laid in the autumn.  The European Commission, though, has reacted by warning Bulgaria  that the pipeline remains subject to EU law, adding that Sofia could face  “legal steps”.  The “third energy package” would limit the volume of gas that Gazprom  could export to the EU although it is argued this would weigh on the  project’s profitability.  Both Russia and Bulgaria are now stressing the importance of winning  exemptions from EU competition rules.

While Hungary has not rallied to defend South Stream as vocally  as Bulgaria’s government, Budapest has aligned its energy policy  with Moscow more closely this year by granting it a multibillion-dollar  nuclear reactor deal. Serbia, which is applying for EU membership, also  supports the pipeline.  The latest move came last month when Bulgaria’s Parliament legislated  for the Bulgarian section of South Stream to be redefined as a “gas grid  interconnection” rather than a pipeline, a move it hopes will allow the  project to address EU competition legislation.

The idea is that the new legal definition of South Stream as a connector  – that is an extension of an existing network – will mean Gazprom will  not have to open the crucial Bulgarian part of the pipeline to third parties  under the EU’s draft energy legislation.

Sophia argues that EU rules should not apply to a small section of South Stream in Bulgarian territorial waters that would still, according to Bulgarian law, be pipeline.

The proposed regulation change to Bulgaria´s energy law, a copy of which has been seen by EU Reporter, states: “The purpose of the amendment is to fill in the legal gap that has not been regulated so far.”

A source at Bulgaria´s Permanent Representation to the EU said the new legal provisions “have simply clarified an area of ambiguity” relating to the offshore section of South Stream. He added: “It does not interfere with the Third Energy Package, which covers onshore pipelines within EU territorial borders.”

Bulgarian energy minister Dragomir Stoynev recently met the outgoing EU energy commissioner Günther Oettinger to discuss the South Stream issue and, afterwards, the German official said EU rules also applied to infrastructure in Bulgaria’s territorial waters.

Nicole Bockstaller, Ottinger’s spokeswoman, said: “We are concerned about the compatibility of the amendments made to the Bulgarian energy law with EU legislation. That is why Mr Oettinger wrote to Mr Stoynev to ask for clarifications. We received a reply from minister. On the one hand, the answer did not reassure us that the amendments would not be finally adopted. On the other hand, the minister said that he wants to make sure that EU law is respected. However, should the amendments enter into force as adopted by Parliament, we would have strong concerns as regards compliance with EU law. In this case we would need to take the necessary legal steps.”

The EU’s perceived inflexibility over the third energy package is an obstacle for Gazprom as the first gas supplies are due to be delivered next year.

Russia has a key strategic interest in wanting to diversify its exports away from Ukraine. With 63bn cubic metres of planned capacity, South Stream would be able to replace almost entirely the volume of gas that currently transits Ukraine –planned at 70bcm this year.

So, what happens next?

Andras Jenei, an independent expert on natural gas in Hungary, believes that, for Bulgaria, South Stream “would clearly” be a project which will be productive economically (transit fees) and politically.

“South Stream would mean a direct access the Western market and it is worth a little catfight with the EU.”

“The Commission can only stop this project by political means or with a brand new regulation which would directly target Gazprom.”

From the Hungarian perspective he says South Stream is a “win-win” project as the alternative Nabucco project is considered “dead”.

“The EU must understand that Hungary and the region cannot heat up the homes in winter with deep concerns and some friendly slaps on our back. We need quick and effective steps to secure our energy import supplies in reality, not on paper and South Stream will diversify the route of our gas imports.”

Jenei says the Ukraine crisis means it is not a question of if there will be any kind of interruption in gas and oil supplies “but rather when will this happen.”

“Tomorrow, a week, a month or in the start of the winter? This is the simple message: the situation is difficult, if not catastrophic and we need to act quickly. South Stream gives at least some kind of solution.”

His comments are partly echoed by Bulgaria´s foreign minister Kristian Vigenin, who said: “South Stream is a very important project for Bulgaria. The whole of our Parliament is in favour of it and other EU member states should not be held hostage because of the Ukrain crisis.We will do whatever possible to conclude the pipeline. Our arguments are, in fact, shared by most of the former East European bloc from the Danube southwards.This is largely because these countries cannot afford expensive and elaborate gas pipeline plans that do not include Russia.”

One Bulgarian Socialist MEP agreed:  “This is a view that has, so far, failed to have been understood by Northern and Western European policy makers in Brussels that either have their own indigenous resources or are more advanced in industrial and technological terms.”

The European Parliament has called for South Stream to be halted but Bulgarian MEP Slavcho Binev, deputy leader of the EFD group in Parliament, said: “The major objective of the project is meeting Europe’s additional demand for natural gas.”

Igor Elkin, Executive Director, South Stream, Bulgaria, stressed the economic benefits the $3 billion project had already brought to his country, including the creation of some 5,000 new jobs.

He said: “The project is being implemented on the basis of more than 40 years’ experience of Gazprom and South Stream is a long term solution for the gas supply in Central and Eastern Europe.”

Further comment comes from Professor Jonathan Stern, of the Oxford Institute for Energy Studies and a member of the EU-Russia Gas Advisory Council, who said: “What Bulgaria and Russia are most concerned about is that the EU can sabotage South Stream. But people need to be realistic that European dependence on Russian gas is not going to decline over the next decade.”

Ironically, Stern said the Ukraine crisis was likely to make pipelines bypassing Ukraine, such as South Stream, even more important for European energy supplies, adding, “We may be in a situation where we will be accusing Russia of not delivering and preventing them from delivering through these pipelines. It’s a black farce.”

The 450-km Serbian leg of the pipeline is worth almost €2 billion and at least 2,000 jobs. Serbia consumes about 2.5 billion cubic metres of gas, mostly imported from Russia through Hungary. The Western Balkan nations as a whole consume about 6 bcm per year, a figure expected to rise in coming years.

Zorana Mihajlovic, Serbia’s minister of energy, development and environmental protection said: “South Stream is of great economic and geo-strategic importance for Serbia.We expect to benefit a lot from gas transit tax that could potentially bring in €100m annually.”

His comments are endorsed by Zeljko Sertic, President of Serbia’s Chamber of Commerce and Industry, who says the project is one of the largest investments in South East Europe in the last 20 years and held a “profound importance” for the region’s supply of gas.

He said: “South Stream has enormous economic, strategic and energy-related importance for the entire region.”

Gazprom CEO Alexey Miller, who said: “Only South Stream can provide realistic guarantees to Europe in terms of energy security.”

The former communist states of the east, which joined the EU in 2004, remain heavily reliant on Soviet-era infrastructure for energy supplies and many blame the failure to address this on Western Europe, where countries are less beholden to Gazprom.

“In the field of energy, I have never seen a real effort from the West to help us,” said one top diplomat from an ex-communist EU member state.

Another expert, Drew Leifheit, from Natural Gas Europe, said: “The Ukraine crisis has brought European energy security back into the spotlight and poses the real danger that political obsession/over-reaction with reducing or excluding the Russian presence in the gas market will lead to a diminished overall role for gas in Europe’s future energy mix.”

A recent survey by strategy consultancy WorldThinks showed there is huge support for South Stream with 68% of Bulgarians backing it and only 5% against.The potential beneficial effects of South Stream were apparent to survey respondents, not just in terms and increased supply security, but overall economic benefits such as job creation, taxes and transmission fees.

Leifheit added: “While much focus has been put on the South Stream, it is important to note that Bulgaria’s strategy is not exclusively tied to Russia. Bulgaria is actively taking steps aimed to make the country a hub interlinking its energy security interests with a variety of different sources of gas and energy players.”

He concluded: “South Stream will have a role in delivering a steady, secure stream of gas to Bulgarian consumers as will other developing or proposed project.”

Though the European Commission may argue that South Stream at present does not comply with EU legislation, Russia remains optimistic it can push ahead with the project.

With Ukraine’s civil unrest casting an ever longer shadow over Europe, the consensus is that the current rift between the EU and Bulgaria must be quickly resolved to avoid a delay in what  most see as a much-needed energy project. After all, no-one in the region wants another winter shut-off of gas from Ukraine.

What is likely is that, after the European elections on 25 May, South Stream is likely to be one of the ‘must-do’ issues for the new EU administration.

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