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Interfax.com  |  Interviews  |  Poptchev: South Stream ‘will benefit’ from third-party access rules



Interviews


May 19, 2014

Poptchev: South Stream ‘will benefit’ from third-party access rules


Peter Poptchev is a Bulgarian diplomat and recently served as adviser to the country’s minister of economy and energy. He was part of the Bulgarian negotiating team for both the South Stream and Nabucco intergovernmental agreements (IGAs). In this interview, he tells Interfax that Gazprom’s South Stream project will benefit from the EU’s Third Energy Package (TEP).

By Annemarie Botzki.

Interfax: How will EU energy policy influence the gas sector in the next few years? 

Peter Poptchev: In terms of gas, European energy policy has so far mostly succeeded in the established markets of Western Europe. It is still struggling to extend the principles and rules of the internal energy market (IEM) to member states in central and southeast Europe, as well as countries that are part of the Energy Community. 

Not much institutional attention has been paid to the fact that the weakest economies in the EU are paying the highest gas prices. 

The growing dependence of Europe on external sources of gas, be they Russian or non-Russian, has not been tackled in a strategic way. 

Interfax: After the elections, how do you see a new European Parliament and Commission affecting energy policy? What priorities do you expect them to set in the energy sector?

PP: The new parliament and commission will have energy security high on their agendas. The Ukraine crisis has revealed a recurring tendency to use energy for geopolitical and strategic purposes.

Also, Europe’s energy transformation will not be a smooth and straightforward process because of the unpredictable nature of eurosceptic and nationalist parties in the parliament, and the incomplete status of the IEM. Some of the elements of the European energy union will be adopted.

Development of gas interconnections and underground storage facilities in central and southeast Europe will be accelerated.  

An emphasis on developing the Southern Corridor will take the form of closer and more strategically motivated relations with producer and transit countries in regions neighbouring Europe and further away. 

Transatlantic strategic energy cooperation will receive a new boost. Russia will continue to be treated as Europe’s major energy supplier, albeit with more caution and subject to intra-EU coordination.

Interfax: As the EU seeks to diversify its energy supply routes, is there a new case for Nabucco? 

PP: Nabucco took a long time to mature. Nabucco West was structured so that it would serve two strategic purposes: to stimulate the development of new cross-border gas infrastructure in central and southeast Europe and supply these markets with Caspian gas; and to bring sufficient additional gas to increase the trading power of Baumgarten, Europe’s major physical hub and trading platform. 

The case for Nabucco was obviously weakened after OMV signed a memorandum of understanding with Gazprom on a new South Stream pipeline to Baumgarten. 

This pipeline will have a capacity of 23 billion cubic metres per year by 2018 – which was exactly the intended capacity of Nabucco West in its 42-inch diameter version. 

In other words, Baumgarten could be deemed satisfied. But there might be pressure to go back to the other promised goal: namely, Nabucco West’s strategic outlook of freedom of choice and diversification for European gas consumers.

Interfax: Do you expect South Stream to have to comply with third-party access under the TEP?

PP: South Stream should comply with the TEP. This is the best that could happen to Gazprom – and to any new Russian gas companies – because of the large share of the single market Russian companies will have in the foreseeable future. 

In fact, any development of South Stream outside an agreed political, technical and legal framework to be negotiated between the commission and Russia would render the project uneconomic. 

With the deterioration of relations between Ukraine and Russia this has become even more obvious than before. South Stream could become as strategically important to the EU as Nord Stream and the Southern Corridor. 

Strategic partners – such as Russia and the EU – do not ’impose‘ economic projects on each other; they negotiate until both sides’ respective interests are fully covered. South Stream is not there yet. 

Interfax: How could the signing of Ukraine’s EU association agreement (AA) affect Russian-EU relations?

 

PP: Russia’s instinctive reaction has been to prevent Ukraine orienting itself towards the EU. On the other hand, the EU has shown it can reliably offer Kiev all the necessary political, economic and financial support to enable Ukraine to freely choose its affiliations. 

It will take years, perhaps decades, for Ukraine to reform and to qualify for EU membership. Russia cannot prevent a close cooperation between the EU and Ukraine within the framework of an AA. 

Interfax: So you don’t expect European integration for Ukraine to move forward?

PP: Not easily, and not soon. Ukraine has to undergo profound reforms – societal, economic and institutional – before it can qualify for a fully fledged AA and then move onto becoming a potential EU member. 

Europe will impose strong conditionality; the same approach will be applied to all the EU’s prospective ‘eastern’ partners and other potential applicants. 

Interfax: What potential is there for gas in the Crimean region?

PP: Until about five years ago, Conoco-Phillips had a licence to explore a shallow offshore field. Then, suddenly, the Ukrainian government of [former Prime Minister Yulia] Tymoshenko took the licence away and gave it to Gazprom. No exploration and production developments have been reported since.

There are shale deposits and possibilities for drilling near the Crimean peninsula on the mainland. However, all companies’ undertakings have been interrupted because Ukraine’s new minister for natural resources and the environment is opposed to shale gas. This is expected to change soon.

Interfax: Developing Ukrainian shale would compete with Russian gas – could that affect relations between the two countries?

PP: Ukraine is a relatively large user of gas, consuming more than 50 bcm/y. Presently, Ukraine produces around 20 bcm/y. There are sound opportunities to increase domestic production from its shale gas deposits, which are among the richest in Europe.

This will make the Ukrainian economy more competitive and much more independent from Russia. However, in the short term, the crisis will slow down business. It also relates to the conditions under which South Stream will be implemented. 

Interfax: Central European states have lobbied for United States LNG imports. Could this help diversification? Is it realistic? 

PP: Logistically, it is perfectly feasible and, under certain commercial conditions, economically viable. Greece and Lithuania are planning FSRUs. Poland, Croatia and Ukraine are constructing onshore terminals. Italy, Turkey, Greece and Spain already have LNG terminals. Reloading LNG shipments is a growing business in Europe. 

So, if US or Qatari LNG imports become competitive – meaning a price of around $10/MMBtu – LNG could help diversify central and southeast Europe’s supply, beginning in the next one to three years. 

The EU is developing a re-industrialisation strategy. In many respects, this will be more feasible if gas becomes more affordable to industrial consumers. LNG will be part of the solution, especially after Japan ceases to import so much gas and returns to its broad reliance on nuclear power.

Interfax: Can Bulgaria’s import dependence be reduced?

PP: Bulgaria’s high dependence on Russian gas can hardly be reduced in the short term. Bulgaria does not have alternative suppliers. The first volumes of Caspian gas are contracted for 2018-19. 

Plans to build four interconnections – linking the Bulgarian gas transmission system to Greece, Romania, Serbia and Turkey – have been delayed for a number of years by successive governments. 

So, if supplies through Ukraine were cut off, Bulgaria’s only option would be to get gas from Greece – but no proper reverse flow is possible there unless certain technical improvements are made. 

Production of the country’s own gas is feasible in the next three years or sooner, both on- and offshore.  



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