Seeking Alpha
Independent research, commodities, macro
Profile| Send Message|
( followers)

About three and a half years ago I wrote a post discussing how Russia routinely uses “vapor pipelines”, “vapor contracts”, and other “vapor investments” in order to deter entry that would pose a competitive threat to Russian energy businesses, most notably Gazprom (OTCPK:OGZPY). Tuesday’s NYT runs an article about the South Stream pipeline which asks rhetorically “could the plan to build the world’s most expensive natural gas pipeline turn out to be an elaborate bluff?” That is, is South Stream a viable investment for transporting gas, or is it so much vapor?

On its face, South Stream makes little economic sense. For all of the scorn that Putin and Medvedev have heaped on Nabucco’s lack of gas supply, South Stream has the very same problem–only worse, because it is bigger. It is very expensive to build. It is getting more expensive and more unrealistic by the day as Gazprom has on multiple occasions boosted the the planned capacity on the line. It makes sense only as a means of sowing fear, uncertainty and doubt about the prospects of Nabucco, and to put pressure on Ukraine with regards to transit deals and gas prices on sales to that country.

I found two bits in the article entertaining. South Stream’s CEO scoffed at the idea that Russia is spending real money on the pipeline, and wouldn’t do that if it were merely a bluff:

Marcel Kramer, the Dutch-born chief executive of South Stream, denied during a recent interview that his pipeline was little more than Moscow’s attempt to squash Nabucco.

“To do such a major exercise as a sort of defensive move would be highly irrational,” Mr. Kramer said. “There is no doubt that this is very serious, and money is being spent — considerable amounts of preparatory money is being spent — by Gazprom itself.”

This conveniently overlooks the fact that with Russia generally, and Gazprom particularly, much of that “preparatory money” being spent is likely being vectored into the pockets of those doing the spending, or their buddies. With Gazprom, wasteful spending is more feature than bug.

Here’s the other amusing bit:

Frankly, neither of these pipelines make economic sense,” said Massimo Di Odoardo, a senior global gas analyst at Wood Mackenzie, an energy consulting firm. “It would be much cheaper for Russia and Europe to accept their interdependence and get to work making Ukraine an even more reliable gas corridor.

Yeah. That will happen. Back-to-back monopolies located in distinct and highly corrupt countries in which contracts are inconveniences rather than commitments are antithetical to “reliability.” These conditions are the ingredients in a classic recipe for conflict. South Stream and Nabucco would make no sense in sensible countries, a category that does not include Ukraine and Russia.

So don’t expect South Stream to die anytime soon. It creates FUD [fear, uncertainty and doubt], and FUD has its uses. It provides a vehicle that can be used to tunnel funds out of Gazprom. Those are more than enough reasons for Putin et al to keep it going.

A perhaps more interesting question is whether Nabucco will keep going. Waiting for it is like waiting for Godot. I’m not holding my breath–especially given that the Euros have other much bigger fish to fry. Like whether there’s going to be a Euro or a Euroland, for instance.

Disclosure: None

Source: Gazprom, South Stream and the Convenience of FUD