Russia's South Stream pipeline falls victim to Ukraine crisis, energy rout

Tue Dec 2, 2014 12:58am EST
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By Henning Gloystein and Dmitry Zhdannikov

SINGAPORE/LONDON (Reuters) - Russia's $40 billion South Stream gas pipeline project has fallen victim to plunging energy prices, stalling European demand and the political standoff between the European Union and Moscow over the crisis in Ukraine.

Russia on Monday said it had scrapped the project to supply gas to Europe without crossing Ukraine, citing EU objections, and named Turkey as its preferred partner.

South Stream planned to supply 63 billion cubic meters (bcm) of natural gas a year, equivalent to more than 10 percent of European demand, from Russia via the Black Sea into the EU toward the end of this decade, cementing Russia's role as the region's dominant supplier.

But it came under increasing fire this year. The crisis over Ukraine led to Brussels freezing its approval process, and the pipeline also hit trouble over weak European gas demand and energy prices, undermining its economics.

"I think the likelihood of South Stream being built is now is close to zero," said Pierre Noel, senior fellow for economic and energy security for International Institute for Strategic Studies (IISS).

South Stream would need to be marketed at an equivalent of $9.50-$11.50 per million British thermal unit (mmBtu), including a 30 percent export duty, estimates have shown. The average European spot gas prices have ranged between $6-$9 per mmBtu this year.

"Decreasing oil-indexed prices for gas and lower sales are likely to drive Gazprom to the red this year," said Mikhail Korchemkin of East European Gas Analysis, forcing the firm to reduce its investment program.

Russian state-controlled Gazprom sells most of its gas under oil-linked contracts. With oil prices tumbling 40 percent since June and European gas demand down 10 percent since 2010, Gazprom's gas revenues have plunged.   Continued...

Russia's President Vladimir Putin, accompanied by his Turkish counterpart Tayyip Erdogan (not pictured), attends a news conference in Ankara, December 1, 2014. REUTERS/Mikhail Klimentyev/RIA Novosti/Kremlin