Hungary and Russia sign off on cheaper South Stream

Gazprom chief Alexei Miller and Janos Eros, president of the Hungarian Development Bank, yesterday March 11 signed a deal to create a joint venture to build Hungary’s section of the South Stream gas pipeline by 2015. According to the Russians, the estimated cost of the project has fallen over half to 10bn euros, and the pipelines projected capacity has increased.

South Stream is a joint project of Gazprom with Italy’s Eni to pipe Russian gas to Italy and Austria through countries including Hungary, Serbia and Greece.

The Russians reported improved parameters for the pipeline. Russian Prime Minister Vladimir Putin, attending the signing ceremony, stated that due to lower materials and services prices, the cost of building the South Stream pipeline is expected to fall to about 10bn euros compared to the previous estimates of 25bn euros, according to Interfax.

Gazprom CEO Alexei Miller also announced that total transportation capacities of the pipeline could be higher than previously estimated, with the Hungarian section alone could pump up to 10 bcmpa.

Hungary’s Prime Minister Ferenc Gyurcsany was also present. Gyurcsany said the deal would help his country improve its energy security. Hungary currently receives all its gas through Ukraine, and was directly affected by January’s cutoff of supplies in connection with the Russia-Ukraine gas dispute.

“Hungary is not interested in there being one gas pipeline or one oil pipeline,” he said. “Hungary is interested in having as many pipelines as possible.”

Gyurcsany also said the South Stream project should not be considered a rival to the US-sponsored Nabucco pipeline, intended to pipe gas from Azerbaijan and the Caspian basin to Europe. He argued Budapest would benefit from transit fees from both pipelines.

The deal also includes Gazprom and Hungary’s oil and gas giant MOL building a large underground gas storage facility in Hungary for 1bn cubic meters of gas. Gyurcsany said existing such facilities helped Hungary cope with the gas shortages resulting from January’s dispute between Russia and Ukraine, according to Itar Tass.

The South Stream pipeline will bypass Ukraine and directly link Russia and Central and Western Europe. The pipeline will run beneath the Black Sea to the Bulgarian coast and then split into two branches – one heading South to Italy and one going North to Austria with a total combined capacity of 31-47 bcmpa.

Gazprom has already signed intergovernmental agreements with Bulgaria, Greece, Serbia and Hungary and negotiations with Slovenia and Austria are on schedule.

According to UralSib’s Victor Mishnyakov , “questions remain. We welcome Gazprom’s intention to diversify gas routes and increase its presence in the key European market. We regard this news as positive from a strategic perspective but neutral at the moment, as many questions remains unanswered.”

“In particular,” says Mishnyakov, “the Southern regions of Russia do not have sufficient gas deposits to supply the South Stream and the high-sulfur Central Asian gas would need to be treated before being transported. We also doubt that the current macroeconomic environment makes the project economically viable and do not believe that it will be built by 2015, as originally planned.”

Alfa’s Ron Smith is also downbeat about South Stream prospect: “We are still less-than-certain that South Stream will ever be completed. It is not clear that there will be enough European demand for Russian gas to justify the additional route, especially if Russia’s relations with Ukraine eventually quiet down.”

However, Russia’s PM Vladimir Putin had a quick response to doubters yesterday, according to Moscow Times. “If we aren’t able to build South Stream, which I doubt,” said Putin, “we’ll liquefy our gas and sell it to you for more.”