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   With this in mind, we offer some solutions for cutting down both cost and time needed for the construction of the South Stream project.  Almost all factors may be questioned – the route (yellow line), entering the sea near Novorossiysk and crossing the Black Sea at the depth of over 2,000 meters, passing through Turkish EEZ; South Stream capacity at 63 billion cubic meters, a plan of installing four lines with subsequent sequential launch over four years’ period. The provided solutions are due to complex compelling reasons, including political expediency, rather than considerations on project’s optimization or cost efficiency.

   The proposed route (red line), outside of Ukrainian mainland but contacting the country’s GTS tangentially, solves several key problems:
Constitutional limitation of Ukraine on banning any form of foreign participation in UkrGTS is superseded by promoting foreign participation in creating new gas transportation facilities.
The route is being shortened by a total of about 500 kilometers, its sea part – by 150 kilometers.
The route’s depth is lesser than the North Stream route in the Baltic Sea.

   Requirements for the nameplate capacity of the entrance compressor station for the South Stream are being lowered as the offshore section becomes some 150 kilometers shorter; subject to agreement with Ukraine, Russia may (if needed so) place a booster compressor on the Perekop point.

   Instead of the four lines of 15.75 billion cubic meters, there may be only two lines of 27.5-30 billion cubic meters capacity, as in the North Stream project.
Instead of four years, South Stream can be completed for two years, and even faster than the North Stream.

   Linking the logistics to an extensive network on the Ukrainian coast of the Azov and Black Seas (pipe storage, concreting plants) rather than to a remote Turkish coastline or the end terminals would also boost the project’s support capacity. These conditions will not be worse than the Nord Stream terms. In 2010, Nord Stream AG has received the prestigious German Logistics Award from the German Logistics Association.

   The above parameters cut the price by more than double, 2-2.5 times, halves the construction time, and this is not fiction.

   Russia-based onshore infrastructure for our version of the project is already in place, or can be completed quickly enough. As in the base version, the route is supported at the Frolovo distribution point, which links the trunks from the north (Bovanenkovo side), and the east (Alexandrov Gai point). Alexandrov Gai point is the terminal for already designed trunk pipeline from Turkmenistan through Kazakhstan – the “problematic” (so far) Caspian Coastal Pipeline. From Frolovo the proposed route, instead of running to Izobilnoye and then to Novorossiysk, would go to Sokhranovka and then to Oktyabrskaya, using the recently constructed pipeline. From Oktyabrskaya, it is a short run to the Sea of ​​Azov – to Taganrog city. The section from Frolovo to Taganrog is 350 kilometers shorter than to Novorossiisk. Part of the route has already been built – from Sokhranovka to Oktyabrskaya. Advantages of the proposed route are keep on adding up – from Taganrog the pipeline would run via the exceptionally shallow Azov Sea (maximum depth 20 meters) rather than going to the Turkish EEZ with its 100 times larger depths.

   The need to cross several sand spits and a narrow Perekop neck justifies Ukraine’s participation, giving the country the opportunity to contribute to the South Stream consortium by granting a concession for underground passage across the Perekop. Concession Agreement would be signed by Ukraine in the form of an international treaty for 49 years with the countries whose companies participate in the South Stream. This will ensure political stability of the concession, preventing annulation of the treaty at any change of power in the country. The tariff for 20-30 kilometers long transit through the concession corridor (exact length will be determined during the survey work) can be given above the best expectations of the Ukrainian Cabinet of Ministers.
Next, the proposed route enters Karkinitsky Bay and runs through a shallow (again, 60 meters depths, not 2,000 meters) north-west shelf of the Black Sea, branching on to Romania and Bulgaria.

   Significant cost savings provided by this version of South Stream route (the Azov Sea – Perekop – Black Sea shelf) mean that South Stream consortium members could offer Ukraine 7 to 10 percent stake in the project, conditioned only on the country’s agreement to this route version and the concession of an underground corridor through Perekop, without any monetary contribution from the Ukraine. To boost Ukraine’s interest in the project, consortium could also offer a significant proportion (or a quota) for tubular goods supply for the project. For Ukraine, it is important that the logistics infrastructure will be based on its territory rather than in Turkey. In parallel this would save significant project funds (lower cost for delivery of the pipes to concreting plants and from these plants to the pipe-laying ships). If the project includes a gas booster station on the Perekop, Ukraine could provide the station equipment or even install it altogether.

   Apart from suggestions on Ukraine’s membership in the project, we note the expediency of attracting Turkmenistan as a project participant. This, while virtual, idea – if implemented – would be in line with interests of both Turkmenistan and Russia, and even the declared intentions of the EU and the European Commission on the diversification of gas supply to Europe using natural gas from Central Asia. Implied goals of Caspian Coastal Pipeline from Turkmenistan through Kazakhstan to Russia, to Alexandrov Gai, included the option of its linkage to the network feeding the South Stream. To reiterate, for Turkmenistan it is highly important both to increase gas exports to any destination and to access the European market, so as to weaken China’s position as an almost exclusive importer Turkmen gas: Turkmenistan will be able to ask the Chinese to set the prices more or less on parity with European levels. This goal is fully in line with Russia’s interests on entering the China’s market, where Russian gas still cannot compete with cheap Turkmen supplies ($350 vs. $190 per 1,000 cubic meters).

   We advise a full-scale participation of Turkmenistan in the South Stream project, not only as a resource provider. Such participation must be linked to an agreement on collaborative pricing policy of Turkmenistan and Russia within the project, so that instead of being competitors, Turkmenistan and Russia establish common pricing policy. Russia and Turkmenistan could well find a solution acceptable to both countries, the more so since this not a short-term issue and both sides are interested in a positive solution.

Roman Besedovsky, Fund Manager, Finam Neftegaz

   Ukraine’s chances of participating in the South Stream project are really minimal. The gas pipeline is intended to diversify Gazprom’s risks in natural gas transportation to the European markets which are of key importance to the Russian company, while laying the pipeline in Ukraine’s territory would defeat the whole purpose behind the original idea. Relations between Russia and Ukraine in the gas sphere, as, indeed, in so many other areas, continue to be strained, and there is no reason to believe that the situation might improve in the foreseeable future. Which also means that there are no guarantees that Ukraine might not try to use the new form of leverage, meaning the South Stream project, to exert pressure on Russia. Gazprom is highly unlikely to agree to that, unless Ukraine offers Russia some very attractive terms for its own involvement in the project. In this regard, it is noteworthy that, earlier this month, there has been some talk in Ukrainian mass media concerning Ukraine’s possible readiness to establish, together with Gazprom, two joint venture companies on a 50-50 basis using the existing Ukrainian gas transportation networks, with suggestions concerning ways to minimize legal risks to both sides. It bodes no good to the possible laying of part of the South Stream pipeline through Ukrainian territory that the “Moscow News” recently carried an article quoting a Gazprom source saying that the Russian state gas company had ultimately made a decision on the final route. With no mention of Ukraine, the pipe would come out, from under the Black Sea, to the Bulgarian coast and would pass through Serbia, Hungary and Slovenia all the way to northern Italy. Consequently, if we are to believe that source, the possibility of Bulgaria being replaced with Romania, or some other such option like Ukraine, seems to be excluded from the equation.

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