In recent years Russia has faced some serious problems with gas transit. Many believe that Russia’s Nord Stream and South Stream projects will be a way out of the situation. In an interview with RIA Novosti Alexei Khaitun, Doctor of Economics and head of the Institute of Europe’s Center of Energy Policy predicts that these projects are not profitable for Russia and Moscow only needs them to maintain the dependence of its neighbors on Russia’s gas and pipelines.
Mikhail Gusev: How important is the South Stream agreement, which was signed with European energy companies last week? What role will it play for Russia?
Alexei Khaitun: On the one hand, it is a highly lucrative project for Russia. On the other hand, it has triggered a host of political problems. Why do I say it’s lucrative? Its costs are estimated at about $25 billion. The pipeline’s average throughput capacity is about 25 billion cubic meters per year. European gas prices have grown lately, reaching about $500 per 1,000 cubic meters from the recent $300. Spot market prices are around $400. From here, we can roughly estimate annual revenues at $12 billion, less the costs of production and transportation. This suggests Russia will return its investments in 2.5 years. This is very fast. But of course, this will happen only if the pipeline is eventually built.
Now let’s discuss some problems that could hamper the project. The pipeline will have to be laid deep under the sea, at 1,500 meters below the surface. I don’t believe it will be entirely safe there. The Black Sea with its standing waters allows hydrogen disulfide to accumulate at its bottom, which is downright dangerous. Turkey has not yet approved the project. I mean, there is an agreement in place, but there is no approval from Turkey, which backs the European Nabucco project. Then there is the issue of filling the pipeline. The entire amount of natural gas produced in Russia is already distributed between the existing pipelines. To redistribute it to South Stream would be inefficient, although politically rewarding to some extent. If South Stream outruns Nabucco, then Central Asian republics won’t get direct access to European markets. They currently supply their gas via Russia.
Mikhail Gusev: How viable is Nabucco? Doesn’t the South Stream agreement make the project inefficient or redundant?
Alexei Khaitun: Turkmenistan, Azerbaijan and Kazaskhan seek economic independence, and Nabucco would give these countries an opportunity to sell their gas without intermediaries.
Mikhail Gusev: But, given this rivalry between the two pipeline projects, what should Russia do? And how justified, politically, would its decision be?
Alexei Khaitun: Nothing. And it wouldn’t be justified, politics-wise. The pipelines across Ukraine, which were built in the Soviet era, used foreign technology and the shortest possible route. It is still the most efficient way of gas transportation. But now, there is a problem in terms of Russia’s trade with Ukraine, which refused to pay a higher price for Russian gas. Russia stopped supplying gas for Ukraine’s domestic needs, and thereafter Ukraine disrupted the supplies to Europe. Later, former Ukrainian Prime Minister Yulia Tymoshenko signed an agreement that eventually brought her to court, although Vladimir Putin insists that the agreement had been drawn up correctly. Russia’s Gazprom then offered to buy the gas distribution network from Ukraine. If it agreed, it would be able to buy gas at cheaper prices and Russia would take over the pipeline maintenance. However, Ukraine will never agree to sell its pipelines, which it considers its most important national asset.
Mikhail Gusev: Does this mean it is impossible to reach an agreement with Ukraine?
Alexei Khaitun: It is possible. But not on Russia’s conditions.
Mikhail Gusev: Yet, every time New Year’s Eve approaches, everyone begins to anticipate another gas conflict. This leaves Russia with only one solution – to build South Stream “to spite them all.” This decision would be economically efficient and politically unjustified. Turkey has not given its approval, and problems arise with other countries, too.
Alexei Khaitun: There seems to be a substitution of notions here. Gazprom’s interests are not quite the same as Russia’s. I think Russia is much more interested in friendly relations with Ukraine, and such relations should be built carefully on the basis of equality. Sending tanks would be a poor solution here. In addition, I don’t think Russia would profit from that economically. Look, say we ship 50 billion cubic meters of gas through Nord Stream and another 100 billion cubic meters to the south, bypassing Ukraine. This would cause Ukraine a 50% shortfall in terms of its gas transit income. But Russia won’t gain anything either because laying pipelines are expensive projects. Gazprom will not be the one to pay for the consequences – those who sign the agreements will.
Mikhail Gusev: Can we describe all the above as the government’s energy policy?
Alexei Khaitun: This certainly is the government’s policy because such large long-term agreements cannot be signed without government approval. They involve large-scale interests. But the practical implementation of these agreements is up to Gazprom.
Mikhail Gusev: But what happens with these projects? Will they become unviable or damaging to Russia?
Alexei Khaitun: These projects jeopardize Russia’s political future. Moreover, there is another major problem in terms of producing enough gas for them. The gas fields tapped in the Soviet era have not shown any increase in productivity. The government has not invested anything in Gazprom since the 1990s. Over that period, Gazprom has been giving its earnings for government needs to finance social programs and so on. But any deposit becomes depleted with time. Four years ago, Urengoi’s reserves were over 60% developed. More gas was extracted in the subsequent four years. Although some new deposits have been discovered, they are not being developed because greenfield projects require huge investments and the government does not have enough money for that. This means Russia should cut production and build its own networks. But Russia is currently focused on global plans – to cover all of Europe with its gas supplies, thus bringing Ukraine to its knees, and dictating its terms to Europe.
Mikhail Gusev: It sounds like these projects have other aims than imposing limits on Ukraine. What are they?
Alexei Khaitun: The aim is to put limits on Ukraine and on other East European countries, and thwart Ukraine politically as well. Viktor Yanukovych, who is labeled a pro-Russian president, and who indeed enjoyed the Russian government’s support, is now arguing with Russia about Nord Stream and other gas issues. As I said, Ukraine views its pipelines as its national asset and expects that asset to yield dividends. True, most gas fields are in Siberia, but Ukrainians once took part in their development.
Mikhail Gusev: That was in a different era.
Alexei Khaitun: It certainly was, but Ukraine sees it differently. We helped build those gas pipelines in Siberia, and they are now selling us gas at their prices. I think when two opponents wish to reach an agreement, the strongest must compromise.
Mikhail Gusev: What about Nord Stream? What does this project mean to Russia?
Alexei Khaitun: This project means Russia will be able to annually supply 50-60 billion cubic meters of gas directly to Germany. But there is a small problem here. In the past, Gazprom was a trusted European supplier, which never broke a single contract before its conflict with Ukraine. The Russian exporter has lost that trust. European laws have always limited the amount of energy purchased from one country to 25%, but it was never observed properly. It is now. Moreover, they plan to lower that limit even more.
Mikhail Gusev: Do you mean that Nord Stream is more efficient?
Alexei Khaitun: It isn’t compared with the Ukrainian route because delivering gas by land is much cheaper. Although Germany believes it now has a dependable backup in the event of another Russian-Ukrainian gas conflict, Nord Stream can hardly be expected to replace the pipelines running across Ukraine.
Mikhail Gusev: What gas policy will Russia pursue in the future?
Alexei Khaitun: Russia’s energy sector is presently kept down. It will most likely have to focus on meeting the domestic demand. Our primary task is to pursue an energy saving policy. An economy like Russia’s cannot rely on the export of one commodity only, even an important one like natural gas. Under the economic model used by Russia now, both Nord Stream and South Stream are inefficient projects. Whatever economic effect they might have is offset by political losses, and Russia’s gas resources aren’t infinite.
