PUTIN'S SOUTH STREAM WISHES UNLIKELY TO COME TRUE

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 002715 SIPDIS NOFORN DEPT FOR EUR/RUS, EEB/ESC/IEC GALLOGLY AND GREENSTEIN, S/EEE MORNINGSTAR DOE FOR HEGBURG, EKIMOFF DOC FOR JBROUGHER NSC FOR MMCFAUL E.O. 12958: DECL: 11/01/2019 TAGS: EPET ENRG ECON PREL RS SUBJECT: PUTIN'S SOUTH STREAM WISHES UNLIKELY TO COME TRUE Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d) -------------- Summary -------------- ¶1. (C) PM Putin stated during a meeting with Italian PM Berlusconi that the proposed South Stream gas pipeline could be completed before the proposed Nord Stream gas pipeline. His statement followed agreement by Turkey to allow South Stream feasibility studies in its Black Sea waters, and agreements between Gazprom and Serbia's Sribjagas on gas storage and construction of the Serbian leg of South Stream. Gazprom and Italy's ENI, its 50-50 South Stream partner, also reportedly decided to accelerate the project. However, despite this apparent progress, we still believe that South Stream faces significant obstacles. Under current conditions, we expect gas from Nord Stream a few years after the current proposed 2011 target date, and from South Stream several years after the current proposed 2015 target date -- if ever. End summary. -------------- South Stream Takes a Few Steps Forward... -------------- ¶2. (U) PM Putin once again surprised analysts and journalists on October 22 when he stated during a meeting with visiting Italian PM Silvio Berlusconi that the proposed South Stream gas pipeline could be completed before the proposed Nord Stream gas pipeline. Putin's statement followed developments indicating some movement on South Stream. Earlier in the week, Turkey gave approval for Gazprom and Italy's ENI, Gazprom's 50-50 partner on South Stream, to conduct South Stream feasibility studies in Turkish Black Sea waters. Also, during President Medvedev's trip to Serbia that same week, Gazprom and Srbijagas agreed to set up a joint venture to manage construction of the pipeline on Serbian territory and to build gas storage facilities in Serbia. In conjunction with the Putin-Berlusconi meeting, Gazprom and ENI reportedly agreed to accelerate the project. -------------- -------------- ...But Very Unlikely to Be Built Before Nord Stream -------------- -------------- ¶3. (SBU) Putin's statement was a surprise because Nord Stream is an already established company that has conducted reams of feasibility, technical, and environmental impact studies, and has spent hundreds of millions of dollars on infrastructure and pipe. South Stream, on the other hand, remains a project on paper. Gazprom itself plans to complete the first phase of Nord Stream by 2011 (a delay from the original target date of 2010),and to complete only the first leg of South Stream by 2014. Most analysts believe both estimates are optimistic, with the South Stream timeline particularly unrealistic. ¶4. (C) Deutsche Bank oil and gas analyst Pavel Kushir (protect) told us on October 23 that a situation in which South Stream would be completed before Nord Stream is "highly unlikely" given the different stages in which each project currently finds itself. He (along with other watchers) noted that Putin's statement could only come true if Nord Stream is seriously delayed or if South Stream is built "incredibly quickly." Credit Suisse oil and gas analyst Andrey Ovhinnikov (protect) was more blunt, suggesting to us on October 23 that Putin's statements do not make sense. He compared them to Putin's earlier reference in China to the "Asian oil basket" -- "No one knows what that is," Ovchinnikov said, "but it sounds good at the time he says it." Both Ovchinnikov and Kushnir also indicated that Putin's statement could be related to a growing expectation that Sweden may not provide needed Nord Stream permits anytime soon. ¶5. (C/NF) Referring to his PM's apparent agreement with Putin, Italian Embassy Energy Officer Lorenzo Fanara explained to us on October 23 that "of course those are just political statements." Fanara believed there was a link MOSCOW 00002715 002 OF 002 between Turkish agreement on South Stream feasibility studies, and an earlier agreement by Rosneft, Russia's state-owned oil company, on the Samsun Ceyhan oil pipeline to Turkey, in which ENI also has an interest. Fanara also downplayed a reported statement by ENI CEO Pablo Scaroni that ENI may make a final investment decision on South Stream in ¶2010. He said such a decision could only come after feasibility studies that are planned to be concluded only at the end of 2010. As to why ENI is participating in a project that many see as uneconomic, Fanara said that ENI's calculation is "different from Gazprom's." He noted that ENI's construction subsidiary is slated to build the pipeline and that the project guarantees gas for ENI to distribute within Italy. ¶6. (C/NF) Fanara also commented on whether South Stream is needed at all, given Nord Stream's likely construction and the gas glut that is forecast to continue in the medium-term. He said that gas for South Stream would "clearly" be diverted from Ukraine. Although this may be uneconomic, he said, the GOR "is obsessed" with bypassing Ukraine. -------------- COMMENT -------------- ¶7. (C) Russian political leaders' statements about the economy or energy projects often overlook how they may sound to educated observers. Putin's comment on South Stream is likely just a flip "political statement," as Fanara put it. Unless Nord Stream is delayed by many years, it would be extremely unlikely for South Stream to be completed first. Gazprom estimates the total costs of the South Stream pipeline at approximately 24 billion euros. This estimate is difficult to confirm because few real studies have been concluded regarding the scope and path of the pipeline. Regardless of the exact final cost, raising such vast sums of money would prove very tricky in the current credit environment. Financing should be even more difficult for a project of questionable economic merit, and at a time of great uncertainty about future gas demand and pricing in Europe. Furthermore, the pipeline has to compete with other priorities for Gazprom's limited cash. Logistical, environmental, technical, legal, and political obstacles only add to the uncertainty over the future of South Stream. We continue to believe that we will not see gas flowing into Europe from the South Stream project until at least several years after the current target date of 2015, if then. Beyrle