Gazprom links gas price to South Steam participation

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Russia’s Gazprom and the Bulgarian government have reached a deal under which Bulgaria will commit to the developing the South Stream pipeline while simultaneously signing a long-term pricing agreement for Russian natural gas.

 

Gazprom Export Director Alexander Medvedev and Bulgarian Energy Minister Delyan Dobrev said yesterday (27 August) the separate agreements on the gas pipeline and on delivery price would be signed on 15 November, Bulgarian news media reported.

The first agreement concerns Bulgaria’s participation in the Gazprom-favoured South Stream (see background). The country is key to the project, as the offshore section of the pipeline under the Black Sea reaches the Bulgarian coast north of Varna (see map) and then runs across the country before splitting in two branches – one to the to the Baumgarten gas hub near Vienna, the other one through Greece and the Ionian Sea to Italy.

Bulgaria is expected to sign an investment agreement to finance its part of the project. Dobrev said that Bulgaria’s share would be significantly lower than the one billion leva (about €500 million) mentioned before, which the country would be hard-pressed to afford.

Bulgaria and Gazprom will have a 50% stake in a pipeline infrastructure consortium. An 8% profit rate was agreed for the South Stream-Bulgaria consortium.

Natural gas pricing pact

The second agreement concerns a gas import agreement for a period of seven years. Bulgaria’s current import accord with Gazprom ends at the beginning of 2013.

No details emerged of the deal, but Medvedev confirmed that Gazprom would follow through with an 11% discount – promised to Bulgaria for the period of 1 April until 31 December – as a condition for the country’s commitment to South Stream.

EU countries negotiate gas imports with Gazprom individually. As a result, some countries get much better deals than others. Gazprom insists that the gas pricing agreements should be kept confidential.

Medvedev was quoted as saying that “it is not by chance” that the two documents will be signed simultaneously, although “independent from each other”.

The construction of South Stream on Russian territory has already begun, Medvedev also announced. The South Stream website shows that Southern Corridor project on Russian territory consists of an 834-km pipeline between the Pisarevka compressor station in the Voronezh Oblast and Krasnodar Krai, where four compressor stations and an interconnector will be located.

Medvedev also said that the construction of the offshore section will begin in December. Last year, then-Russian President Dmitry Medvedev ordered that South Stream should be built “at maximum capacity” and Gazprom CEO Alexei Miller promised that construction would begin in December 2012.

First gas to reach Bulgaria in 2015

The Gazprom export director was quoted as saying that the first Russian gas through the new pipeline will reach Bulgaria in 2015.

The Gazprom-favoured pipeline has been in competition with a number of other pipeline projects under the heading of “Southern gas corridor”, aiming at bringing gas to Western Europe from the Shah Deniz offshore field in Azerbaijan. Gas from Azerbaijan is expected to come upstream in 2017.

The European Commission does not see South Stream as a means to improve the European Union's energy security, mainly because the gas comes from Russia, already its major supplier. However, Brussels says that EU members are free to choose their infrastructure priorities, as long as EU energy legislation is respected.

Gazprom’s Medvedev and Dobrev also discussed the construction of gas power stations in Bulgaria and the extension of the country’s underground gas reservoir in Chiren, near the city of Vratsa, news media reported.

South Stream is a planned natural gas pipeline running across the Black Sea to Bulgaria, with one branch going to Greece and Italy, and another one to Romania, Serbia, Hungary, Slovenia and Austria.

Russia recently announced that it would more than double its planned capacity from 31 billion cubic metres per year (bcm/y) to 63 bcm/y.

South Stream's website says the pipeline is "aimed at strengthening European energy security" by eliminating transit through Ukraine, as "another real step toward executing the Gazprom strategy to diversify the Russian natural gas supply routes."

Gazprom owns 50% of the €15-billion South Stream project, while Eni has 20% and EDF and Wintershall each own 15%. As planned, 30% of the financing will be paid by the shareholders and the bulk would come from credit financing.

Eni is Gazprom's partner in the construction of South Stream's offshore section. Last year, Turkey approved the route through its Black Sea economic zone, allowing the corridor to bypass Ukraine, which opposes South Stream project because it would lose important transit income.

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