Crimea option for South Stream

Ukraińskie gazociągiOn the 18th of March 2014, the Russian president Vladimir Putin signed the act of annexation of the Autonomic Republic of Crimea and, therefore, incorporating it to the Russian Federation. The consequences of this will affect the energy policies of Ukraine and, quite possibly, the future of the Central and Eastern Europe’s gas sector.

There is a new order of things in Crimea. The Russian Ministry of Energy declared that it would soon provide the Crimean Peninsula with an unlimited supply of electricity. The Crimean separatist authorities are declaring that in the near future, the gas inventory will entirely provide for the car users’ demands for fuel and agreed for the Gazprom, which has already bought Chornomornaftogaz, a subsidiary of the Ukrainian Naftogaz, to take over the local energy companies. Chornomornaftogaz brought numerous benefits to the Ukrainian budget, and had the experience and the necessary machinery for working in the Black Sea. It also had the concession over this continental shelf, and the access to the deposits of hydrocarbons that were already being exploited by Ukraine. The extraction of gas by Chornomornaftogaz oscillates around 90 mln m3 a year; it adds up to less than 5 percent of the gas mining in Ukraine, which is about 20 bn m3 a year – the demand for gas around the Dnieper river is twice as much. Considering that this company has been taken away from Ukraine, it is reasonable to expect an increased interest of Kiev in the slates around Lvov, Ivano-Frankovsk, and Donetsk (potentially around 1,2 bn m3).

There is still no official opinion about this from companies such as Exxon Mobil, Shell and OMV, which were granted the exclusive right to search for hydrocarbons around Skifska gas field located on a continental shelf of the Black Sea. From unofficial sources, which BiznesAlert.pl managed to reach, fearing the escalating conflict in Crimea, the companies that have their outposts in Ukraine were prepared for the evacuation of their employees. It is hard to determine whether the annexation will stabilize or further destabilize our eastern neighbor. It is crucial, however, for the Ukrainian authorities to provide a welcoming atmosphere for the companies that want to search for hydrocarbons in Dnieper area, especially for those in the slates mentioned earlier. Unsettling is the opposition of the local governments nearby Lvov, in the areas that are being considered for future concessions. The hostility towards American Chevron may induce the company to leave Ukraine. This would be the greatest accomplishment of Vladimir Putin that could only be outshone if Russian companies replaced the Ukrainian ones during the projects that take place on the Black Sea, and in which western companies are involved.

Taking over Crimea would also give the grounds for the continuation of a plan made by the pro-Russian president Victor Yanukovych, which seemed impossible to accomplish after the opposition took over in Ukraine. Michael Korchemkin from the Center for East European Gas Analysis describes it. The South Stream is a project, which costs are constantly increasing. The pipe is supposed to connect the Russian deposits through the Black Sea, Bulgaria, Serbia, Hungary, and Croatia with Italy. It also considers branching out in Balkans. The goal of the Nord Stream and South Stream connection is to make Russia independent from the standard transit routes, which go through the Central and Eastern European countries. Nord Stream and South Stream will encircle the region, making it permanently dependent of Russia and its gas supply, which will flood its markets. In order to open the southern route, it is necessary to build gas pipes in Russia (12,5 bn euro, $17 bn), which is costly considering the conditions. Presently the estimated cost of this construction is 56 billion euro or $73 billion. The high costs include the particularly expensive section of South Stream, which goes through the deep part of the Black Sea. The costs of the South Stream pipe system have to also be added to the expenses that Gazprom paid while constructing Nord Stream. The company has to tighten its belt because its financial problems are noted even by Russian services, such as the Federal Customs Authorities.

The annexation of Crimea makes it possible to re-inspect the possibility of the South Stream gas pipe going through the shallow waters surrounding Crimea. The overthrown president, Victor Yanukowych, suggested on September of 2011 that by doing that, the costs of this project would decline 5 times of its estimated cost. When the Ukraine was still in control of Crimea, Russians speculated that Ukraine could blackmail them by threatening to cut the gas supply, which is exactly what Russia is doing now to the West. When Yanukowych proposed this route in 2011, Gazprom was not optimistic about it. However, after the annexation, Russia can return to this solution, especially because it is planning huge infrastructural investments in the peninsula, such as bridges connecting Crimea and Kerch.

In order to fully make Ukraine dependent on Russia, Moscow needs to take control in Kiev through a pro-Russian government. To completely make itself independent from transporting gas through Ukrainian territory, it only needed Crimea. While Europe is threatening with economic sanctions and the European Commission is trying to control Russian gas pipes with the third energy package, Moscow is bringing its strategic plans to life. Will Vladimir Putin give the green light to the Crimean section of South Stream?

Translation: Marlena Kister

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