Russia Alleges Romanian Interest in South Stream Membership as Romania Inks LNG Deal

Following a visit by Gazprom’s deputy CEO Alexander Medvedev to Romania’s capital Bucharest on Wednesday (17 February), the Russian side has announced that Romania has expressed willingness to join the Russian-led South Stream natural gas pipeline, it was revealed in a Gazprom press release. During his visit Medvedev held meetings with the country’s minister of economy Adriean Videanu, as well as with the general director of Romanian state-owned gas company Romgaz, Marcel Piteiu, and the CEO of Romanian gas pipeline operator Transgaz, Florin Muntean. According to the Gazprom statement, Romania provided the data required to prepare a feasibility study for a possible pipeline route across Romania. The two sides have also discussed the prospect of increasing bilateral co-operation in the energy sector, which may include the development of joint gas storage facilities between Gazprom and Romgaz. Commenting on the results of the meeting Videanu confirmed in front of Agence France Presse (AFP) that Transgaz has been invited to join South Stream, but the Romanian side is yet to officially confirm its interest in the project.

In separate developments, Deputy Economy Minister Tudor Serban revealed in front of Reuters yesterday that Romania is due next month to complete a deal with Georgia and Azerbaijan for the construction of two new LNG terminals, one on Georgia’s Black Sea coast and another at Romania’s Black Sea port of Constanta. According to Videanu, the project, which is to be named AGRI, will have the capacity to export between 3 bcm and 8 bcm/y of gas from Azerbaijan, via Georgia and into Romania. The project is to be carried out by Romgaz, along with Azerbaijan’s state oil and gas company SOCAR and a partner from Georgia. The estimated cost for the construction of the export and import terminals is expected to be between 4 billion and 6 billion euro (US$5.4 to 8.1 billion). In Videanu’s words, the consortium will seek additional members that can provide financial backing for the project.

Open Questions

The idea that Romania may join South Stream is not new; Russia has been courting the country for more than a year now and Romanian leaders, particularly President Traian Basescu, had previously hinted at such a possibility (see Europe-Bulgaria-Romania-Hungary: 18 January 2009: South Stream vs. Nabucco – the Battle for the "Southern Corridor"). If the information is confirmed Romania will become yet another South-Eastern European country to have opted to join the 63-bcm/y Russian-led project over the past several months. Most recently, Slovenia signed a memorandum with Russia over its participation in the project and, reportedly, Croatia is also in the process of negotiating its participation in South Stream. However, the potential participation of Romania raises a few more questions over South Stream’s future for two main reasons. First, Romania is among the most vocal proponents of South Stream’s rival project, the 31-bcm/y Nabucco. Romanian entry into South Stream will certainly send out a negative signal about Nabucco’s credibility, given that one of its core supporters has joined the rival camp. Such a move on behalf of Romania will also need to be placed in the context of the country’s intention to participate in the LNG venture with Azerbaijan and Georgia. Azeri gas is expected to make up the bulk of Nabucco’s supply if the project is to move ahead and the prospect of sending substantial volumes via LNG to Romania is certainly not a statement of confidence in Nabucco.

The second important issue stemming from potential Romanian entry into South Stream is the future role of one of the current members of the project, Bulgaria. South Stream is, as things stand, designed to land in Bulgaria after traversing the Black Sea bed. Given its strategic geographic location, Romania could serve as a replacement for Bulgaria, which has been at odds with Gazprom over a number of issues relating to the project. Neither Russia nor Romania have revealed any information on whether Romania may join as a landing point, or whether Gazprom is considering building an extension of the pipeline from Bulgarian territory into Romania. This lack of clarity continues to keep pressure on the Bulgarian side and, in all likelihood, may be a deliberate move by Russia to keep pressure on its partner in order to obtain further concessions from the Bulgarians (see Bulgaria-Russia: 17 February 2010: Bulgaria Pushes for Higher Transit Fees for Russian Gas).

Outlook and Implications

Reality or PR?

Considering the geostrategic interests of all stakeholders, it may be in the best interests of both Romania and Russia to maintain an aura of calculated uncertainty over the issue of Romania’s South Stream entry. Romania could certainly derive a number of benefits from its participation. Above all, it allows the country to hedge its bets in its attempts to diversify supply sources. By Eastern European standards Romania has large gas reserves and imports only 50% of the gas it needs from Russia though a single route via Ukraine. The country has been keen to see the realisation of Nabucco, which is aiming to bring gas from the Caucuses and the Middle East to Europe via Turkey, but the project remains shrouded in uncertainty as it has not been able to secure a commitment from gas suppliers. By agreeing to participate in South Stream Romania keeps its options open and ensures that it will not be left out if South Stream were to move ahead and Nabucco fall through. Additionally, by toying with the idea of joining South Stream Romania may also be sending a message to the other parties in the Nabucco project that it is running the risk of failure unless some progress in securing supplies is achieved. This message is particularly pertinent with regard to Turkey, whose state-controlled gas company BOTAS is one of the members of the Nabucco consortium (see table), and Azerbaijan. The two states have been involved in a protracted dispute over gas prices and transit tariffs, which has thus far prevented progress on Nabucco.

Romania’s joint LNG project with Azerbaijan and Georgia should probably also be seen as a move designed to pressure Turkey into making concessions in its dispute with Azerbaijan for Nabucco’s sake, rather than as a viable commercial initiative. Of course it is too early to discard the feasibility of the two LNG export terminals, although there are some very compelling factors that work against the venture. Turkey has made it clear that LNG tankers are not a desired type of vessel in the Bosporus Straits, which immediately limits the market for the two terminals to the relatively small, and fairly risk from a political point of view, Black Sea Basin. Second, given the preliminary cost estimates, the LNG project does not seem to be particularly cost efficient either. Assuming that the two projects are realised at the mid-point of the ranges for capacity and cost of construction, it becomes clear that the AGRI project could supply only 18% of the gas Nabucco would be capable of at approximately 65% of the fixed capital expenditure (capex), which is highly unimpressive.

Lastly, Russia’s current stance needs to be viewed in light of political rather than purely economic considerations. Russia certainly has a lot to benefit from including Romania in South Stream, but it also stands to lose quite a bit if this is done at the expense of Bulgaria. Diverting the route will delay the realisation of the project, but Gazprom certainly has some flexibility given that a feasibility study is yet to be carried out. However, landing in Romania will make the offshore stretch of South Stream (which is bound to cross the exclusive economic zone (EEZ) of Turkey) longer, and consequently even more expensive than the 25 billion euro projected at the present stage. Russia has also pledged to build a southern stretch of South Stream through Bulgaria and into Greece, and dropping Bulgaria, or reducing its status to merely a transit state, after the pipeline lands in Romania, will certainly kill enthusiasm for the project in Bulgaria. There is of course the possibility that South Stream could be split into two branches offshore, with the northern landing in Romania and moving into Serbia, and the southern landing in Bulgaria, or circumventing Bulgaria altogether and heading into Greece via Turkey. However, such a plan will be more expensive and will inadvertently sour Russia’s relationship with Bulgaria. That is not to say Russia will not be willing to make these sacrifices, but any real assessment of both the political and economic costs of the switch will be premature before a feasibility study for South Stream has even been carried out.