'North Stream', 'South Stream' but not 'Ukraine stream'

Russia and Italy have signed a memorandum of understanding to build a gas pipeline between their countries - the so-called ''South Stream'', which, if constructed, will significantly increase Russia’s options to play consumer countries, transit countries, and various national energy champions in Europe against each other. 'South Stream' includes a hugely expensive 900 km link under the Black sea to Bulgaria.

The 'South Stream' would reduce Ukraine's leverage on Russian exports of gas to Europe, a major portion of which are currently piped through Ukraine.

An article in today's 'Gazeta po Kiyevski' entitled 'Gas pincers' suggests that the memorandum of understanding may be a ploy by the Kremlin to gain more control over Ukraine's gas transit system and to obtain a higher price for their gas to be negotiated this autumn.

I've paraphrased portions below:

On 23rd June the Italian gas monopolist ENI and Russian "Gazprom" signed a memorandum on the building of major gas pipeline under the Black sea. Naturally there was not a word about participation of Ukraine in this project. Moscow is trying to scare us with the familiar thesis: if you do not want to give up your gas transport system, then we will bypass your country. However, in the opinion of experts, the Kremlin's threats are more words than real actions, and are intended to thoroughly frighten Ukrainians so that they become more compliant.

"This is an important and very promising project, which will contribute to an improvement in the energy situation in Europe as a whole," according to Vladimir Vladimirovich Putin.

Despite the fact that it is intended a substantial part of the pipeline will pass through their territory, the Bulgarian's didn't know too much about it, apparently because of the rush to publicly flaunt this grand new project. Only on the next day, 24th June, did Putin promise to discuss the idea of "'South Stream' with the Bulgarian President.

This is the second gas pipe Russia intends to construct in order to bypass Ukraine. The first - "North Stream", is to be laid along the bottom of Baltic sea to Germany. The Kremlin is systematically removing from our country the status of main gas transit route into Europe as revenge for our unwillingness to share our own gas transit system with them. Belorussia, which is second in significance to us as as a gas transit power, has practically handed over its entire oil pipeline system to "Gazprom".

Frankly, the Kremlin's projects by no means coincide with their statements about common economic interests and the "Ukrainian partner being a reliable transit country". Reading between the lines, Russian officials constantly hint that any joint projects with Ukraine are possible only in exchange for participation in a common gas transit system.

The article then refers to the National Security and Defence Council meeting which took place on 15th June, about which I posted recently.

It was expected that the President Viktor Yushchenko would give the government a 'roasting' for their carefree attitude to the diversification of sources of fuel, for the monopolistic status of "RosUkrEnergo", for hindering the utilization of the "Odessa-Brody" oil pipeline, and for the totally incomprehensible attitude of 'MinTopEnergo', headed by Mr. Yuriy Boyko in negotiations with "Gazprom" on the future price of gas. It is completely incomprehensible how they are negotiating and on what conditions. However, as usual, the NSDC session took place very quietly and peacefully. No decisions and no disciplinary measures were adopted. Only Boyko was scolded a litte, just for the sake of appearances.

There is some good news. In spite of the Kremlin's 'big talking', the ''South Stream'' gas pipeline will hardly be successfully built in the near future - there are many serious technical and financial problems. The same may be true of the Baltic "North Stream", which could be blocked by Poland and Estonia into revenge for the Kremlin's "energy blackjack".

At the moment this is all intended to frighten Ukraine in advance of the autumn negotiations. Everyone knows Gazprom intends to raise gas prices significantly in 2008, and it's possible that the "'South Stream'" will be used by the Kremlin to increase pressure. If they succeed will depend on the response our politicians.

The article is followed by a brief comment by Mikhail Gonchar, director of analytical programs of the NOMOS centre:

- The discussions [on 'South Stream'] are about feasibility. The project will be expensive and complicated. Firstly there's the complicated task of laying the pipelines under the Black sea, then building powerful compressor stations on the Russian shore, necessary to drive gas more than 900 km.

Secondly, at the moment there is no agreement on the participation in the project of Bulgaria. It took more than 13 years to sort out the building of the Burgas-Aleksandrupolis oil pipeline with Bulgaria.

Furthermore, by using a similar pseudo-project, Moscow wants to pressurise Turkey into accelerating construction of a second 'Blue Stream gas pipe" [which also passes under the Black sea].

LEvko thinks 'North Stream' makes some sense because it directly connects supplier Russia with consumer Germany. ''South Stream'' assumes Bulgaria will be a more reliable transit country that Ukraine, but can this assumption be made?