RUSSIA: IS A LOGICAL MOVE

Gazprom's decision to scrap the South Stream pipeline project is one of the most discussed topics since the decision was taken in December, 2014. The Oxford Institute for Energy Studies has undertaken an in-depth study of Russia's stratagem and released "Does the Cancellation of South Stream Signal a Fundamental Reorientation of Russian Gas Export Policy". Natural Gas Europe had the pleasure to talk with one of the authors – Dr Simon Pirani, Senior Research Fellow at the Oxford Institute of Energy Studies.

NGE: Simon, in the recent publication OIES came to a conclusion that the cancellation of South Stream may be a signal of a sea-bed change in Russia's gas export policy...

SP: It appears to us that they started such a change. The way to look at that is that we had around same time the cancellation of the project and Gazprom's decisions to give up its negotiations with the European Commission about capacity in the OPAL pipeline (which is one of the pipelines that brings gas further into Europe from the North Stream pipeline) and not to continue with its transaction with BASF of Germany to take a 100% share to increase its share to 100% in Wingas– the trading company in Germany. All that seems to indicate that Gazprom has not in any way lost interest in selling gas in Europe but it has lost interest in trying to control the value chain all the way to the final consumer, party because of the disputes with the European regulatory authorities. Besides, we have a statement from Mr Miller who said "The principle of our strategy in relation to the European market is changing. The decision on stopping South Stream is the beginning of an end to our operation model of the market within which we oriented ourselves towards supplying to the end consumer".

NGE: Is this reorientation a forced move or a logical continuation of Russia's turn to the East that was announced in 2000?

SP: Well, reorientation is an economically logical move, so in this sense it is not a geopolitical question first and foremost. I think there has been an economic logic to produce gas in Eastern Siberia and transport it to China which has been evident to everybody for a very long time. You could turn your question round and say why did it take so many years to be put together. I think the answer is that Russia and China were getting comfortable with each other as commercial partners and it took a lot of time over that. Finally the contract was signed and possibly we can say that the geopolitical reason did encourage Russia to get on and sign the contract which was economically logical 10 years previously.

NGE: How do you foresee the future of Russia-Ukraine gas relations. Is the era of gas wars about to finish?

SP: No I don't think we can say that. Unfortunately, what we have now is the real war in the Eastern Ukraine. The Russian government is very insistent that it is not a party in that war and that point was made again the other day by one of the senior Russian politicians but also it is clear that Russia actually supports on of the sides of the conflict. I think we cannot separate the gas negotiations from that conflict. As you know, at the end of October arrangement between Russia, Ukraine and the European Commission was made covering the period up until the 31st of March. Now there should be some negotiations starting about what will happen from the 1st of April. What I hope is that the European Commission will be proactive because with this very bad relationship between Russia and Ukraine it is difficult to see how bilateral arrangement will be reached. The European Commission was able to help to bring about an agreement in October I hope they will do the same for the 1st of April.

NGE: How realistic are the new requirements of Gazprom given to the EU in order to get Russian gas? Should Europeans hurry up to build pipelines to the Greek-Turkish border?

SP: Mr Miller has said several times that the whole purpose of this Turkish pipeline is to reduce transit via Ukraine to zero. I think this is more of a bargaining position than an accurate statement because even if the Turkish pipeline is built, Gazprom in order to retain the fullest commercial advantage from its very powerful position may still need to use some transit through Ukraine. So I understand why they are setting that aim -Gazprom feels that it has been putting a position of having to take Ukrainian transit risk. Given the way the political situation has changed it has no longer wants to do so. I completely understand the piece of commercial logic. What we also have to say is because the political relations between Russia and Ukraine are now so extremely bad Gazprom probably feels that it wants to minimize as far as possible its exposure to that Ukrainian transit risk. On the other hand, what's I am sure Gazprom would acknowledge is there are long-term contracts on which they have to deliver gas. They have contractual obligations to the European customers to do so and they always met these obligations for years. I have no doubt that they want to continue to do so . Unless these contracts are renegotiated they have to deliver on them and that will almost certainly continue to involve some transit across Ukraine even if all pipelines are built to Turkey.

NGE: Do you think that Russia will be able to finance the Turkish Stream along with two massive China-oriented projects?

SP: It is going to be a challenge for Gazprom because of the bad economic and financial situation, devaluation of the ruble on one hand and as a result of the sanctions on the other hand, lending is now somewhere between difficult and impossible for all Russian companies. The financing of these projects is going to be very tough. Russian media recently reported that Gazprom is retendering one of the big construction projects for the Power of Siberia pipeline and that just indicates that they're watching every single copeck. There is no money to spare at all.

naturalgaseurope.com