OREANDA-NEWS. Russia's decision to redirect the South Stream natural gas pipeline is as much a reflection of weak European demand as it is of geo-political tensions or European desire to reduce reliance on Russian gas, Fitch Ratings says. Instead of going from Russia to Bulgaria and on to Austria, the pipeline is now intended to connect Russia with Turkey.

Like the failed Nabucco pipeline project before it, South Stream faced significant challenges, in particular ensuring sufficient end-demand. The original plan had support from some southern and central European countries as it would have secured their supplies by adding an alternative route that didn't pass through Ukraine.

But Fitch believe that there is little appetite among large utilities to commit to more long-term import contracts. This is because demand has been cyclically and structurally weak as market economics favour other sources of electricity generation in many countries. The amount of gas flowing to central Europe via Ukraine has fallen in recent months as volumes through the Nord Stream pipeline via Germany have increased. Looking at capacity alone, European demand for Russian gas can be satisfied by Nord Stream and the pipelines through Ukraine in the medium term.

Fitch expect natural gas consumption for electricity generation to gradually decline over the next decade, while overall European gas demand, including industrial, commercial and residential use, will grow only marginally. The first sustained increase in gas-fired generation probably won't come until around 2026 as the full effects of retired coal and nuclear capacity are felt.

The new plan for South Stream will see the pipeline, which has a potential capacity of 63 billion cubic metres a year, redirected to Turkey. The gas could then potentially be exported on to Greece and Italy. This plan could be positive for Turkey if it becomes a significant transit country but Fitch do not believe there is an immediate market for the extra gas in Italy or Greece.

Of the 63bcm capacity, 14bcm is earmarked for Turkey's own consumption and Gazprom will offer Turkey a 6% price discount as part of the deal. This would increase Turkey's reliance on Gazprom, which supplied around 59% of Turkey's annual gas consumption in 2013.

Turkey also increased purchases of Russian gas in 9M14, by about 1.4bcm compared with 9M13, while Germany's purchases of Russian gas declined by 1.9bcm over the same period. Overall, Gazprom gas sales to Europe including Turkey declined by 4.6bcm or 4% in 9M14.