Russia’s state-owned gas major Gazprom and its partners are beginning construction of the $16bn South Stream pipeline that will run under the Black Sea to Europe and rival the Nabucco project.

The symbolic first welding of the pipeline took place in the city of Anapa in Southern Russia on Friday. Among those present at the ceremony were Russian President Vladimir Putin, Bulgaria’s Regional Development and Public Works Minister Liliyana Pavlova as well as representatives of Italy's ENI, France's EDF and Germany's BASF.

Last month Gazprom and its partners signed off on the final investment to launch the project. The parties confirmed registration of South Stream Transport BV with headquarters in Amsterdam.

The construction of the pipeline includes two large-scale steps – laying a gas pipeline on the bed of the Black Sea and the development of an onshore pipeline network in Europe. 

The offshore section of the pipeline from Russia to Southern Europe will stretch 900 km. There are optional routes for South Stream along the Black Sea seabed: the north-western route, towards Slovenia and Austria via Bulgaria, Serbia and Hungary, and the south-western route; towards Greece and Italy.

The cost of the South Stream, including the pipeline’s overland sections, is estimated at $16 billion, but the total cost could double to $32bn taking into account the onshore sections, according to estimates. The supply of natural gas to Europe is expected to start in the first quarter of 2016. By 2018 the project is expected to deliver up to 63 billion cubic meter of natural gas to European consumers. 

Meanwhile, Turkish Energy Minister Taner Yildiz said on Friday that Ankara will not take part in the South Stream project, saying it is more interested in South Nabucco and the Transanatolian (TANAP) projects. He added however that Turkey was interested in greater imports of Russian natural gas due to the rising level of internal consumption.

Is there enough gas for the pipeline?

Meanwhile, experts doubt if the large-scale gas project is viable as demand in Europe declines and LNG supplies from the Middle East compete with Russian natural gas supplies. In October the second stretch of the Nord Stream gas pipeline linking Russia and Germany was launched, doubling Nord Stream’s capacity to 55 billion cubic meters (bcm) per year.  But during the first 11 months of Nord Stream’s operation only 9 billion bcm of Russian gas, or about 30-40% of capacity, has been delivered to European customers. 

However, it’s not only economic profitability the pushed Russia forward with the South Stream project. With the new pipeline the country would secure an outlet in Europe, according to Aleksandr Polygalov, analyst at Institute on Natural Monopolies.

“If there is no South Stream, the Nabucco project will take its place and Caspian Sea gas will get to Europe, bypassing Russia,” Polygalov told Deutsche Welle.

The Nabucco pipeline project is designed to deliver Caspian Sea gas to the European Union to rival South Stream. According to the original plan, the 3,900 km pipeline was to cross Azerbaijan, Georgia, Turkey, Bulgaria, Hungary and Romania to end in Austria and was designed to supply up to 31bn cubic meters per year. But several months ago the project was put in doubt as it became clear there were no guarantees there would be enough gas. German energy company RWE and Hungary's utility MOL announced they are considering giving up the project.

Recently the Nabucco consortium submitted plans for a smaller Nabucco West pipeline which would deliver gas from Azerbaijan’s Shah Deniz 2 field. The global boom of shale gas development is also a concern. President Putin has urged Gazprom to revise its export policy, as the “shale revolution” and the development of LNG will seriously eat into the country’s export revenues. But Gazprom repeatedly stressed that shale gas development and decreasing demand don’t pose any threat to its business.

The development of the South Stream and Nord Stream pipelines comes amid tightening EU energy policies aimed at decreasing dependency on Russian gas. Currently Gazprom faces an EU antitrust probe over alleged unfair competition and price fixing in the natural gas markets of Central and Eastern Europe. If found guilty of violating EU competition rules Gazprom could be fined as much as 10% of annual revenue, or $1.1-1.4 billion.

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