Gazprom, Eni Agree to Expedite South Stream amid Signs of Friction

The Russian gas giant Gazprom and Italy’s oil and gas company Eni announced yesterday that they are planning to step up efforts in the development of their joint project, the South Stream natural gas pipeline. Following a meeting in the Russian capital Moscow between Eni’s CEO, Paolo Scaroni, and Gazprom’s chairman, Alexei Miller, Eni issued a statement confirming both side’s full commitment to the project. The statement also expressed the intention of Eni and Gazprom to complete the feasibility study for the offshore section of South Stream. The pipeline is designed to provide an alternative route for Russian gas supplies to Europe by circumventing Ukraine. In its final phase South Stream is designed to carry 63 bcm/y of gas from Russia under the Black Sea to the Bulgarian port of Varna. According to the existing plans the project will split in two branches in Bulgaria, one heading to northern Italy via Serbia, Hungary, and Slovenia and another going through Greece and the Adriatic Sea into southern Italy. Preliminary estimates provided by Gazprom indicate that South Stream’s cost may be in the vicinity of 25 billion euro (US$34 billion).

Following yesterday’s meeting Eni and Gazprom also confirmed their support for the inclusion of the French energy company EDF in the joint venture (JV) company, formed to carry out construction of the offshore section of South Stream. At present, Gazprom and Eni each have 50% stakes in the JV. It is believed, based on a memorandum of understanding (MoU) signed last year, that Eni and Gazprom will each cede 5% of their stakes, allowing EDF to obtain a 10% interest.

In the statement Eni also confirmed that the two companies have reached an agreement for the inclusion of Gazprom’s oil arm, Gazprom Neft, in Eni’s Elephant oilfield in Libya. Under the deal, which was initially negotiated back in 2006, Gazprom Neft will take half of Eni's stake in the field, or a total of 33%.

Rebuilding Shattered Ties

The joint declaration of commitment to South Stream comes only a few days after tension between Eni and Gazprom rose after criticism from the Russian company that Eni was obstructing progress on the project. Speaking in front of Russian media last week, Stanislav Tsyganov, the head of Gazprom's foreign projects department, was quoted by Interfax as saying that Eni has provided no "material evidence" of its work on the project. Tsyganov further added that the Italian company has not agreed upon a working programme, is not carrying out surveying work, and has not footed any of the expenses associated with the project’s development. In the aftermath of Tsyganov’s commentary Gazprom’s official spokesman, Sergei Kupriyanov, attempted to calm the situation by saying that Gazprom sees "no principle disagreements within the South Stream project".

Tsyganov’s criticism is not the first indication of a growing rift between the project partners. At the an energy forum hosted by IHS CERA in Houston, Texas, Scaroni outlined the idea of a partial merger between South Stream and the European Union (EU)-backed natural gas pipeline project Nabucco (see Europe: 11 March 2010: Eni Proposes South Stream, Nabucco Partial Merger). Nabucco, which is designed to bring gas from the Caucasus and the Middle East to Europe via Turkey, is seen as the main competitor to South Stream and as a direct attempt to break Europe’s dependence on gas imports from Russia. Scaroni’s suggestion was immediately rejected by Russia’s energy minister Sergei Shmatko, who declared that Russia is "not discussing such issues". The rejection was also followed by rumors that Russia’s leadership is reconsidering its stance on partnering with Eni and that progress on the project may be halted.

Outlook and Implications

The suggestion that the project, and the Gazprom-Eni partnership in general may be collapsing certainly appears unrealistic, particularly in the context of the joint declaration of support that the two companies issued yesterday and given Gazprom’s rhetoric on the whole. On the contrary, the picture painted by the Russian side appears very optimistic. Commenting on the project in front of Itar-Tass last week, Shmatko revealed that Russia is likely to sing an MoU with Austria, the last country that must join the project before it can move ahead and a key proponent of the rival Nabucco, by the end of April or early May.

In the last several months the project also secured support from three other states—Slovenia, Hungary, and Croatia—which all signed agreements with the Russian side. According to claims by Russian officials, Gazprom may also be edging closer to securing Romania’s participation in the project, the Russian company announcing that the Romanian side has "confirmed its interest in participating in the South Stream project" (see Romania: Russia: 19 February 2010: Russia Claims Romanian Interest in South Stream).

Lastly, and arguably most importantly, the involvement of EDF is a considerable breakthrough for South Stream. Eni and Gazprom will certainly be happy to split the massive bill for the offshore stretch of the pipeline with the new partner and, as a participant in the project, EDF is also likely to be among the main consumers of gas, thus strengthening the argument that South Stream’s increased capacity of 63 bcm is justified in the context of Europe’s natural gas glut. Lastly, the presence of a French company in the consortium goes some way to nurturing South Stream’s desired image as a pan-European, rather than a Russian, project, which has been a long-established goal of Russia.

All these factors point favourably towards South Stream’s prospects, not all of them, however, should be taken at face value. The willingness of a number of countries—such as Slovenia, Croatia, and perhaps Austria and Romania—to join South Stream and the MoUs they have signed with Russia have little value before a feasibility study and a final investment decision (FID) have taken place. All the agreements that Russia has concluded to date for the project have remained within the political, read non-binding, realm. Russia has started discussions on the technical and financial aspects of the project with only one country so far, namely Bulgaria, and the progress made there is far from impressive (see Bulgaria: Russia: 1 April 2010: Bulgaria Keen to Link Gas Spot Prices to New Supply Contract with Russia). Russia has attempted to pressure the Bulgarian side by suggesting that it could be replaced by Romania, but even if Gazprom attempts to replace Bulgaria with Romania as a landing point for South Stream, there is little guarantee that Romania will prove a more amenable counterpart.

Lastly, the entry of EDF is also unlikely to come without a price. According to reports back in the autumn of 2009, Gazprom initially intended to secure EDF’s 10% stake just by reducing Eni’s interest in the venture, much to the dismay of the Italian company. Arguably, the first notable signs of friction between Eni and Gazprom emerged over the issue of EDF’s entry. Eni may have its reasons to view EDF’s stake in the project with suspicion as it will erode Eni’s own position as Gazprom’s principle partner in South-Eastern and Southern Europe. It is still unclear how the EDF-Eni dynamic will evolve, but a potential rivalry between the two could force Gazprom to maintain a shaky balancing act and may very well render yesterday’s pledge of commitment meaningless.