Is South Stream making a silent return?

There is no official document that shows the South Stream gas pipeline project has been cancelled, it has been “frozen” and could be re-activated if such need would arise, Pavel Zavalny, chairman of the energy policy commission in the Russian Duma, said in an interview for the Bulgarian National Radio on Monday. The Ukrainian gas transit infrastructure is will be getting more and more unreliable in the future due to its deteriorating material condition and Russia is looking for other ways to reach European consumers, he added. Mr Zavalny also said the East and Southeast EU member states are not independent and asked a rhetorical question on why Bulgaria was not allowed to build a gas transit corridor on its territory.

Curiously, the words of Mr Zavalny confirm the actual status of Gazprom’s South Stream pipeline project. Bulgarian authorities have not announced receiving any official confirmation of South Stream’s cancellation from the Russian side since Mr Putin made his announcement during a visit to Ankara in early December 2014, an issue I touched upon in the summer. The blame was then thrown on Bulgaria, which was supposedly pressured by the European Commission.

In the meantime, Russia has placed on the table two more pipelines – Turkish Stream, aimed at replacing South Stream by avoiding Bulgaria, and Nord Stream 2, a direct link between Germany and Russia via the Baltic Sea. The courtship between Moscow and Ankara ended dramatically this November in the quagmire of the Syrian Civil War and subsequently Turkish Stream seemingly also came to an abrupt end. Now it appears that the absence of a formal notice of cancellation for South Stream may have served its purpose as Gazprom is back at the starting point.

In this light, a recent episode which played out on the domestic gas market in Bulgaria deserves more attention. Laid out in brief, the last few days of 2015 brought about a realignment on the market by ousting Overgaz, the largest private energy company in Bulgaria owned equally by Gazprom and the Bulgarian businessman Sasho Donchev, from its distribution position. This piece by the EurActiv portal provides a good summary of the details around these recent events. In the end, it seems that Gazprom has decided to abandon its subsidiary and is ready to move into closer cooperation with the Bulgarian state owned gas monopoly Bulgargaz, while Sofia takes a step back on the track of gas market liberisation.

Ilyan Vassilev, a former Bulgarian ambassador to Moscow, said for EurActiv that these market reshuffles represented a plan to re-activate South Stream via Bulgaria, as well as the oil pipeline Burgas-Alexandroupolis, which was to carry Russian oil by circumventing the Bosporus straits.  The latter was stopped in 2011 after a local referendum on environmental concerns.

At the end of November 2015, Bulgaria’s prime minister Boiko Borissov announced that his country would not support a letter of opposition to the Nord Stream 2 project which was ultimately sent by seven member states from Central and Eastern Europe to the European Commission. Since then Mr Borissov has been increasingly speaking in public about Bulgaria’s idea to become a “gas hub” by building up the relevant infrastructure which would allow flexible gas transit from “all suppliers”.

It is still possible to believe that Mr Borrissov sees one of these sources to be a revived South Stream after Turkey has become an adversary to Russia. There is very little transparency on the topic and that makes it difficult to estimate what the future will bring. However, all the recent events could possibly give some hints in support of Mr Vassilev’s version.

In any case, Gazprom does not possess the resources (with its own financing) to build both Nord Stream 2 and South Stream (or be it Turkish Stream). It seems that they may be looking to push through where the weakest link may be. Germany and Italy are two key European players that would like to see the projects realized, the Commission holds the key to their legality.

On the other hand, Bulgaria’s balancing act is becoming more and more obvious. In mid-December, the Turkish prime minister Ahmet Davutoglu was in Sofia partially to discuss the construction of a bilateral two-way gas interconnector link to be used for bringing the fuel from Azerbaijan via the Trans-Anatolian pipeline (TANAP), already under construction. At the same time, Bulgaria is loyal to the Commission’s recommendations and works on interconnectors with Greece, Romania, and Serbia, while also officially pledging to liberalise its energy market. Finally, as described above, it seems the idea for the revival of South Stream could have already been conceived both in Sofia and in Moscow.

The picture looks lovely some may say. However, one problem is how Bulgaria can be “friends” with Russia, Turkey, and the EU at the same time, when they all are in a sort of geopolitical competition. Secondly, Bulgarian institutions have a very poor record of transparency, often intentionally, when it comes to the energy sector and dealings with Gazprom, equally non-transparent, have so far only generated corruption and potential losses for the public. Thirdly, the Bulgarian energy sector is not in good shape. The state owned Bulgarian Energy Holding is deeply indebted and prospects for recovery without reforms are bleak. All this said, the future will show whether Sofia is not ultimately building a “house of cards”.

Image: South Stream pipes in the port of Varna, Bulgaria; Source: