South Stream is dead. Should Hungary mourn or laugh?

12 Dec

Neither. The South Stream would not have solved much of Hungary’s problems. But neither will the country be worse-off without it.

by Péter Simon Vargha and István Zsoldos.

 

To the surprise of many, Vladimir Putin announced recently that the South Stream would not be built. The pipeline’s aim was to deliver Russian natural gas to Austria through the Black Sea, through Bulgaria, Serbia and Hungary. The announcement raises several important questions for Central and Eastern Europe and Hungary, in particular; in this post we try answer some of them.

The cancelation should not come as a surprise

Putin blamed the stubbornness of the EU, as it did not support building the South Stream pipeline according to his taste (not giving access to other parties to the pipeline). Still, it seems the real blow for the project was the oil price decline: Russia is highly dependent on oil revenues, and as the price of oil plummeted by 40%, its finances are in ruins. (In fact we wrote a post on this before Putin’s announcement, where we also raised doubts regarding South Stream.)

The South Stream would have been a “luxury good” for Russia: it would not have opened new markets, or brought new gas, so the economic reality of the project has long been questionable. Moreover, the Russians could have ended up worse-off if other suppliers were allowed to use the pipeline (this would have been good for consumer countries of course). We also wrote about this previously.

The only real reason for South Stream was to bypass Ukraine. In theory, Gazprom would have had the ability not to supply gas to Ukraine but still sell to CEE. However, only theoretically, since it has been becoming more-and-more obvious that the Ukrainian pipelines can be reversed, so Russian gas entering the EU somewhere else could be sold to Ukraine, leaving the only reason for South Stream to be built ineffective.

Still, Putin’s sudden announcement was a shock: the project could have been killed more slowly and less spectacularly instead. We would have to look into Putin’s head to know why he chose this way. One possibility is that he really believes what he says: he is punishing Europe now. And he even tried to threaten the EU: “if you do not want to meet our conditions, we can sell the gas to someone else”. However…

Russia cannot just sell the gas to someone else

According to the announcement, the South Stream will only change course: instead of Bulgaria, it is headed to Turkey, where it will end in a gas trade hub. We think this is not going to happen, it’s a bluff and it only wants to mitigate the loss of face.

As the Russian state budget is in desperate need of money, it is not going to spend on such expensive projects that do not open new markets. Turkey is already supplied by the Blue Stream pipeline, which is not even running on full capacity, why another one?

Blue Stream

 New Blue Stream? The squares show the most important Gazprom pipelines’ capacity towards Europe (billion cubic meter per year) Source: Reuters, Wikipedia

There will be a pipeline built between Russia and China; however, Europe need not be afraid of that. First, it will take 5-10 years to build it (if it will ever be ready). Second, this pipeline would connect East-Siberia with China, which is not even connected to the West-Siberian gas fields from where Europe is supplied.

Not long ago, they announced plans to connect West-Siberia with China; however, this is again a science fiction story. The distances are so enormous and the infrastructure costs would be so high that the Russians would have to sell the gas for a price close zero for the Chinese to buy it. They are still better-off by selling the gas to Europe.

Hungary’s supply is not in danger

So will this endanger Hungary’s supply? Not at all. This was no pipeline-explosion, just the cancelation of a new pipeline, which anyway (according to Russian plans) would not have brought alternative sources of gas (and therefore wouldn’t have led to decrease in the gas price). The only benefit would have occurred in the event of a short-term Ukrainian gas shortage; however, Hungary is anyway well-supplied by storages. See our previous post on Hungarian gas security (in Hungarian only).

hun_gas

2013 data, for more details visit our previous post (in Hungarian)

As Russia is heavily dependent on European gas revenues, it will continue supplying gas.

Russia and Ukraine recently agreed on supplying gas to Ukraine; however, as their conflict lingers on, disruptions can occur later on. However, the best defense against this is not building another Russian pipeline, but connecting to the Western-European gas market (as we argued previously). This gas market has access to more alternative sources, and possesses spare liquefied natural gas (LNG) import capacity.

So will instead American LNG monopolize Europe?

No. Most of the LNG suppliers are profit-oriented corporations, so they will sell their product for the highest price/best conditions available. Politicians (even American!) tend to pretend that they are the driving force of events, even though in reality they possess far smaller impact on what is really happening. Politicians just cannot assign where LNG should go. The best things in LNG are that it is traded on a world market, impersonalized, and as there are so many options, consumers can always buy gas for a price, and producers can always sell their gas for a price. A globalizing LNG market is thus by definition not able to monopolize a country. In reality, it can be exactly the opposite: a globalized market’s innumerable options tend to decrease prices. This does not mean that we should build new LNG-infrastructure for that, as there is enough of that already in Europe.

What is going to happen with the planned new nuclear plant of Hungary, Paks 2?

We asked the same question a number of times before, last time a week ago. We would still leave it to the readers’ imagination – the answer depends (among other things) on the future oil price. However, we stick to our previous opinion: it is not worth building it, it is far too expensive.

What is going to happen with Russia?

Russia’s finances are getting worse and worse, first because of the oil price decrease, second because of capital flight and the effects of the embargo. Citizens will live worse and worse. The popularity of the Putin regime was bought by oil money. If this cannot go on, Putin will have to stick to the war-rhetoric to preserve his popularity. So the decrease in Russian revenues increases uncertainty, and this does not seem to bode well for Hungary and the region. However, it should be clear that the increase in uncertainty is not the result of the cancellation of the South Stream, the cancellation is a consequence of financial problems, and as we just argued, not even the most important consequence.

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