South Stream Shapes European Energy Security, Nabucco Falls Behind

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South Stream is an ambitious endeavor of Russia’s energy giant Gazprom to get direct access to the EU energy market.

by Igor Alexeev
Intellihub.com
April 9, 2013

It is portrayed and criticized by some politicians in Europe as a “dangerous” gateway to a broader economic relationship with Moscow. Remarkably enough, Bulgaria, Serbia, Croatia, Slovenia and Hungary have one-by-one opted for the project.

The Eastern Europe unanimously placed its bet on the South Stream. Plain fact is that the new Europeans chose to protect their national interests in spite of all temptations and threats from Brussels and Washington. Now it is not an overstatement to say: the South Stream business blueprint is complete and it is entering construction stage. By the end of 2018 the pipeline is planned to reach a transport capacity of 63 billion cubic meters per year – enough gigajoules to supply energy needs of 38 million households. What has encouraged the pro-South Stream choice of Eastern European political elites presuming their frosty relations with Russia? Why did they not resort to broadly advertised alternatives?

The not-so-obvious answers to these geopolitical riddles are conditioned by cold math and economic forecasting. Independent economic feasibility studies show that expensive and bulky South Stream is the only realistic way to guarantee safe and reliable natural gas supplies to Europe. It will play a pivotal role in the regional energy security up to 2030-es. Other sources like nuclear power or renewable sources are nothing more than perspective alternatives. Sovereign national leaders in Budapest and Belgrade understand very well: overoptimistic advertisements of wind energy on Euronews TV channel will not power heating networks in their countries. And the notorious Cyprus affair ruined the last remnants of their belief in “European solidarity”.

Let’s have a look at energy statistics. The primary production of renewable energy within the EU in 2010 was 166.6 million tonnes of oil equivalent – a 20.1 % share of total primary energy production from all sources. EU renewable energy targets 2020 are very ambitious in times of financial turmoil. But even if the European Commission completes this costly energy program, the total share of alternatives will reach only 30%. It means that today the end users in the Eastern Europe are in urgent need of stable fossil fuel source. Brussels understands it very well, but puts a brave face on a sorry business. Now the EU officials are presenting paper-and-pencil pipelines trying to lure Azerbaijanian businessmen into their controversial Nabucco West project. Although even the main US lobbyist for the Nabucco West, former US Ambassador to Baku Matthew Bryza admits: “the chances [of the South Stream] are excellent. When the leader of Russia puts his mind to a pipeline it happens.”

It is often claimed, that nuclear energy can be a solution. But Germany, the industrial powerhouse of Europe, has recently banned the use of nuclear power. Influential Green party in Berlin took advantage of overwhelming popular support after the Fukushima incident. Therefore, in the mid-term Germany’s energy demand will be satisfied by supplies via the completed Nord Stream and the emerging South Stream. A country-by-country survey of the South Stream milestones may shed some light on the key motives behind the strategic decision of the Eastern European countries to opt for this pipeline.

Bulgaria will develop both the South Stream and the atomic engineering. Sofia is planning to construct a new 1,000-megawatt (MW) reactor at the existing Kozloduy NPP with the help of the Russian company “Atomstroyexport”. In 2012 Bulgarian officials broke the deadlock in negotiations with Gazprom and signed a protocol of the final investment decision on the South Stream. The construction of gas receiving facilities will start in Bulgaria in 2013. “A 538-kilometer section of the gas pipeline will provide Bulgarian consumers with continuous and uninterrupted natural gas supplies over a long term,” said Alexey Miller, the CEO of Gazprom. As early as 2009, Sasho Dontchev, Executive Director of Bulgaria’s Overgas explained why his country stands with Russia: “We mostly have to discuss real opportunities. Nabucco would be very fine as it assures an alternative supplier and an alternative route, but the project hasn’t been sustained by the sufficient amount of gas. Therefore, the South Stream seems more preferable to me now.”

Serbia was the first South Stream member country to adopt the pipeline’s final investment decision. South Stream’s first facility – the Banatski Dvor underground gas storage – shaved gas consumption peaks in Serbia during the 2011/2012 cold winter season. Early 2013 Sebian government promised to grant the South Stream national significance status. Managing Director of state-owned Srbijagas Dusan Bajatovic confirmed that the construction of South Stream in Serbia will begin by the end of 2013. Now project implementation is going according to plan despite all sorts of speculation in a number of Serbian media outlets. In March, 2013 Mr. Bajatovic explained that some international “business groups” attempted to lobby against the South Stream, but failed. If we take into account US intrigues in Bulgaria against the Kozloduy NPP, this assumption doesn’t seem improbable.

Croatia gave a final nod to the South Stream in January 2013. Environmental impact assessment procedures required by national law are currently at their final stage. Gazprom and Croatia’s Plinacro inked an Action Plan to implement the South Stream project between 2013 and 2016. The document envisages that a joint project company for building a gas branch to Croatia will be set up at the beginning of the second half of 2013.

Hungary performed a feasibility study for the Hungarian section of the South Stream in 2011. It resulted in the approval of the final investment decision on building of a 229 kilometers long pipeline section. Moreover, Budapest granted the South Stream the status of a national significance project. Csaba Baji, CEO of the MVM Group, the largest Hungarian power company, favors the deal: “With the Hungarian Government’s support, we are committed to increasing energy security and diversifying the routes of natural gas supply to the European Union. The South Stream project is an important part of our long-term strategy.”

Slovenia teamed up with Gazprom for the South Stream on November 13, 2012. Slovenian stakeholders including energy company Plinovodi signed the final investment decision on construction of the gas pipeline section in this country. Priority is given to environmentally friendly construction schemes and economic efficiency. The Russian investors entrusted the majority of technical and operational work to the state-owned Slovenian natural gas company Geoplin for the purpose of carrying out the joint enterprise.

 

If we consider strategic agreements, economic feasibility studies and environmental assessments completed by the sovereign Eastern European energy companies, we can predict, that the South Stream project will be completed by 2018-2020, but with estimated cost overrun (approximately $ 39 billion – see fact sheet below). The rival consortium Nabucco West targets the same market as the South Stream. Although today these projects do not compete on equal terms. The South Stream boasts fixed construction schedule and a plethora of bilateral agreements with transit states, while the Nabucco West still undergoes negotiation process. Given the geopolitical importance of energy supplies to Europe, it is very probable that in the long term Nabucco West will eventually be completed, although the South Stream being a large-scale project may by that time capture lion’s share of the market.

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The South Stream Fact Sheet

• Gas pipeline will be 1455 km long in Southern and Central Europe;


• 8500 people will be employed in its construction, with 770 at the operational level;


• Eight compression stations are to be set up in the main transit countries;


• The South Stream planned transport capacity may reach 63 billion cubic meters;


• The overall cost of the project is approximately $ 39 billion.

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South Stream Shapes European Energy Security, Nabucco Falls Behind

European Financials Drop To 7-Month Lows

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European bank stocks are officially in bear market territory, now down over 22% from their highs with today’s drop closing the index at seven month lows. Financial stocks have played catch down to credit’s early warning weakness but still have more room to run. The correlation between financials and sovereigns has been notably broken down in the last few weeks – as it seems an external funding source has saved European sovereign debt (perhaps one that just wants to get away from its vicious cycle-like devaluation and diversify into anything non-JPY-denominated). On the day, Portugal blew wider at the open (+22bps) only to be magnificently bid back to unchanged by the invisible hand. Spain and Italy drifted slightly tighter on the day. Stocks were similarly low range today. Swiss 2Y closed at 3-month lows as EURUSD retraced back from its highs to close practically unchanged from Friday at 1.3000.

 

Bank stocks are -22% from their highs in Late January. Notice the stability in European sovereign risk (the blue line is a GDP-weighted average of nation spreads)… and its ignorance of the collapse in recent weeks…

it seems the ‘promise’ still holds… and the equity-credit arb has almost converged…

 

Portugal was sold and bid right back out of the gate; European stocks surged at the open but leaked lower all day…

 

Charts: Bloomberg

Zero Hedge

European Financials Drop To 7-Month Lows

When Will Deposit Haircuts Take Place In Other European Countries?

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When all is said and done, what happened in Cyprus over the past two weeks, is nothing but the culmination of re-marking the “assets” in the country’s financial system (which as noted previously, were a preponderance of worthless Greek bonds and countless other non-performing loans), long priced at assorted “myth” levels, to a long overdue reality.

As a result of delaying resolving the mismatch between non-performing assets and liabilities for years, the resolution was one which saw some €16 billion of the total asset base impaired, which in turn necessitated the impairment of billions of deposits: the primary liability funding the Cypriot financial system.

Furthermore, as a result of the “Freudian Slip” by the Eurogroup’s new head earlier this week, we know that Cyprus will be the template for all future bank resolutions, which seek to avoid a democratic popular vote of depositor self-impairment (a vote which is now known will never actually pass) and proceed to restructuring the banking sector a la carte, by liquidating bad banks and impairing liabilities to the point where the balance sheet is once again viable (however briefly).

The bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. Which means that the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? Thanks to Credit Suisse we now know the answer.

The chart below shows the liability breakdown for various Eurozone nations, of which the key line item is the Total Deposits, and which in Europe comprises the bulk of bank funding. It becomes obvious why Cyprus had no choice but to crush depositors: they make up a whopping 84% of all liabilities (the highest in Europe and matched only by Greece), so assuming all other liabilities are liquidated, there still would be impairments if the total bad assets (assuming all bank assets are loans which in Europe, unlike the US, is more or less the case) pushed above 16% which in Cyprus they did.

So applying some simple balance sheet equality math, one can quickly calculate how much of a “Bad-Debt Impairment” assorted European financial systems can withstand before they too have no choice but to follow in Cyprus’ footsteps and begin crushing depositors, who in bankruptcy court are known by a different, less friendly term: General Unsecured Claims.

The resulting chart is below:

Not surprisingly, in first place is Cyprus which underwent precisely the deposit haircut exercise that would have befallen Greece as well (at the same bad debt capacity), if only Greece had an easily expendable, for political reasons, deposit class – Russian Oligarchs. However, as more and more bad-debt accumulates within the system, the ability to provide a liquidity buffer, instead of resolving what is fundamentally a solvency issue, evaporates, and soon Greece, then Belgium, the Slovenia, then Spain, then Portugal, and so on, will have to address which, as Cyprus clearly demonstrated, is a solvency problem, not liquidity!

When will such days of reckoning happen? Ask the Cypriots: they had no idea they would wake up one day with virtually all of their deposits over €100,000 wiped out. Point being – nobody knows, or more specifically, fundamentally this is a political decision, usually one which is taken ahead of elections (i.e., those in Germany this September), and which has nothing to do with actual finances.

The reality however is that all of Europe’s banks have a soaring bad-asset overhang, and sooner or later it will have to be resolved.

It is now common knowledge that such resolution will not take place via additional liquidity injections, but through impairment of the various liability classes as per the reverse waterfall of seniority: first equity, then capital and reserves then junior debt, and finally, senior debt and deposits (with secured senior debt last).

The lesson here is: do your homework, and know your bank. If one’s deposits are in a bank that has, or is rumored to have, many bad loans, then pull your money and either put it in a safe bank, put it offshore, or just keep it under the mattress.

Because what happened in Cyprus is now, despite all promises to the contrary, the template for what will happen to all the countries to the right of Cyprus on the chart above.

It’s only a matter of “when.”

Zero Hedge

When Will Deposit Haircuts Take Place In Other European Countries?

The Stunning Differences in European Costs of Labor: Or Why “Competitiveness” Is A Beggar-Thy-Neighbor Strategy

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Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

The ominous term, “competitiveness” has been bandied about as the real issue, the one that causes European countries, in particular some of those stuck in the Eurozone, to sink ever deeper into their fiasco. To fix that issue, “structural reforms,” or austerity, have been invoked regardless of how much blood might stain the streets. And a core element of these structural reforms is bringing down the cost of labor.

In Europe’s private-sector, the cost of labor—gross earnings plus employer-paid social contributions, pensions, disability, etc.—is marked by stunning differences. At the bottom of the spectrum is Bulgaria: the average private sector employee costs a company €3.70 per hour worked; in manufacturing even less, €2.90. Romania is right there at €4.50 and €3.80 respectively. Near the top of the spectrum is Belgium at €40.40 and €41.90 per hour worked. But no one beats the Swedes: €41.90 and €43.80. Per hour worked, the average Swedish employee costs a manufacturer over 15 times more than an employee in Bulgaria.

So, relocate all manufacturing plants from Sweden to Bulgaria? Or Romania? Even Greece would be a great place. The cost of labor there is only €14.70 per hour worked, about a third of what it costs up north. It’s the only country in the EU where the average cost of labor actually fell in 2012—and by 6.8%!

But in Spain, which struggles with a similar unemployment problem, cost of labor rose by 1.1% to €20.90, in Italy by 1.7% to €21.90, in Germany by 2.8% to €31, in France by 1.9% to €34.90. The biggest gainers in percentage terms were at the bottom: in Bulgaria, cost of labor rose 6.4%, a whopping €0.24 per hour! In euro terms, the biggest gainers were at the top: cost of labor in Sweden rose 3.5%, or about €1.50 per hour! The cost of labor at the top is running away.

Based on data from the German statistical agency Destatis, this is what it looked like in 2012:

 

But if enough Swedish companies—and not just manufacturers but all kinds of companies—packed up their machines and robots and cubicles and headed south, unemployment would rise in Sweden. Once unemployment pushes deeply into the double digits, executives will defend their delocalization decisions by lamenting the cost of labor, and soon the government will be talking feverishly about “structural reforms,” without meaning it, and that’s where France is right now. But eventually the situation might deteriorate and pressure wages and associated costs. This has happened in Greece. And they’re all competing with the US, China, Mexico, Bangladesh…. Because competitiveness is not just a beggar-thy-neighbor system.

Alas, the rejuvenated “sick man of Europe,” Germany, isn’t surviving just by cutting its cost of labor. At €31 per hour, it was 32% higher than the EU average, though 11% lower than in France. In manufacturing, it was even more striking: Germany’s cost of labor of €35.20 per hour was 47% higher than the EU average, but still 3% lower than in France. Productivity, infrastructure, transportation costs, corruption, training and education, etc. all figure prominently into this equation. Cost of labor is not the only factor.

Yet German workers have been hit hard: between 2001 and 2010, the cost of labor grew 16%, less than the rate of inflation, while in France, for example, it grew 35%, and in southern countries it jumped far more. In 2011 and 2012, Germany’s cost of labor began to rise with renewed vigor, up 5.9%, but so did France’s at 5.4%.

Much of this money was absorbed by the costs of social contributions, pensions, etc. And they can be breathtaking. The graph below shows these additional costs to the employer per €100 in gross wages paid.

So an average worker in Sweden who earns €100 for a certain number of hours in gross wages costs his employer an additional €51, for a total cost of €151. A Maltese worker, who’d work about three times as long for the same pay, would cost the employer only an additional €10, so €110. And a Bulgarian worker who’d work about 15 times as long for the same pay would cost an additional €18, so €118. This is a conundrum looking for a solution.

Over time, “competitiveness” hollows out the middle and lower classes in some “rich” countries—this has been happening in the US and Germany for years—balloon the middle class in other countries, and make the top in all countries immensely rich. For many people, it’s nothing to look forward to.

Italy has Beppe Grillo, but with European governments reeling from self-inflicted crises, and the euro debacle descending into a tragi-comic farce, one wonders who the real clowns are – especially here in Spain, where ministers gorge themselves on the public purse, leaving behind a trail of evidence so obvious that even the mainstream media can’t ignore it. Read….Will the Real Clowns Please Stand Up?

Zero Hedge

The Stunning Differences in European Costs of Labor: Or Why “Competitiveness” Is A Beggar-Thy-Neighbor Strategy