Natural Gas Europe: The “South Stream” Train Stops in the Balkans

 

The European Commission infringement proceedings against Bulgaria, in breach of EU law over the choice of constructor of the South Stream gas pipeline, shows the determination of the EU institutions in the implementation of anti-trust policy and the liberalisation of the energy market. However, even if Sofia—and also Belgrade—will move the start of construction, one should not expect that they will withdraw fully from this project. Also the commission has neither the will, nor the instruments, to completely stop South Stream, but it may still seek to change the terms of the investment, so that it is beneficial for the whole EU.

Bulgaria is the first country against which the European Commission has launched infringement proceedings, over the construction of a section of the South Stream gas pipeline. The 541 km connection, joining the Bulgarian Black Sea coast and the Serbian city of Zaječar, is a key part of the investment, and one of the most financially challenging. A terminal in Varna, three compressor stations with a total capacity of 300 MW, and a 59 km branch to a distribution hub in Provadia, which will supply Greece, Macedonia and Turkey, will also be built, in addition to the pipeline. The EC alleges that Sofia broke EU public procurement law in choosing its section’s constructor without transparent procedures. After a six-month process, the tender, worth around €3.7 billion, was won by a consortium composed of Russian oil and gas company Stroytransgaz and a five Bulgarian firms, affiliated under the name Bulgarian Gazproekt Jug AD. The owner of the main shareholder in Stroytransgaz (63%), Volga Group investments, is Gennady Timchenko, who is on the U.S. sanctions list of oligarchs close to the Kremlin. The left-wing Plamen Oresharski cabinet has already announced its readiness to move the start of construction, scheduled for the end of June. This was due to pressure from both the EU and the U.S. (Oresharski made his decision after conversations with three American senators and the U.S. ambassador, who had earlier threatened to impose sanctions on firms cooperating with Stroytransgaz), and the junior coalition partner’s threat that it would leave the government. Shortly thereafter, the possibility to suspend Serbia’s part of the investment was mentioned also by some members of the government in Belgrade.

South Stream: A Long List of Legal Problems

The procedure against Bulgaria is associated with EU public procurement law, but the list of legal doubts regarding South Stream, the northern branch of which could deliver the gas from the Russian port of DŜubga through the Black Sea to the countries of Central and Southern Europe from 2018, is longer. The EC has already pointed out that the project is inconsistent with anti-trust policy and EU energy market liberalisation rules (in terms of, amongst other things, violations of the principle of separation of transmission system operators and TPA rules). Therefore, in December 2013, the EC challenged the intergovernmental agreements signed by Moscow with the countries through which South Stream will pass; these contracts gave both parties a monopoly on the construction and use of the pipelines, and the exclusive right to determine tariffs. Due to the differences on this background the EC and Russia are in a legal dispute in the World Trade Organisation (on Russia’s initiative, which indicates the superiority of international law over EU law). Proceedings against Bulgaria prove the intractable position of the EC, which thus widened the scope of its activities with completely new tools.

South Stream and the Crisis in Ukraine

After the crisis in Crimea, geopolitical doubts resounded, in addition to legal uncertainties. The annexation of the peninsula and engagement in separatist activities in eastern Ukraine have undermined the credibility of Russia as a predictable member of the international community, and helped to stiffen the 2EC position. The EU Energy Commissioner spoke of the need to suspend investments in connection with the loss of confidence in Moscow, meanwhile the European Parliament adopted an amendment declaring that South Stream was unbeneficial to EU interests. The possibility to abandon the project was publicly considered by Italian company Eni, which besides Gazprom is the main shareholder in South Stream. At the same time, the EC has stepped up preparation of a new comprehensive strategy for energy security (this will be discussed at the European Council summit, 26–27 June). Russia’s activity aimed, on the one hand, to undermine confidence in Ukraine as a reliable transit country (by threatening to introduce pre-payment terms on Kyiv, which, given of its inability to pay, would result in interruptions in the supply of gas to Europe), and on the other, to accelerate negotiations with EU Member States without participation of the EU institutions. By such means, Gazprom signed a memorandum with the OMV company in April, on the construction of the Austrian section of the pipeline in 2015.

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Source: Natural Gas Europe, 2014

 

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