Gazprom launches work on South Stream in Bulgaria – from afar

Written by on October 31, 2013 in Business - No comments

Gazprom chief executive Alexey Miller and Bulgarian Prime Minister Plamen Oresharski launched the construction on the South Stream gas pipeline in Bulgarian on October 31 – if only from afar, watching the ceremonial “first welding” of pipes via teleconference from the Cabinet building in Sofia.

Miller and Oresharski watched ceremony at Rassovo, in the northeastern district of Montana, on a large screen following a four-hour meeting.

This was the second time Miller came to Sofia since the current government took office in late May. After that first visit, in July, Oresharski said that the project had run into delays and was behind schedule; a month later, Bulgaria’s Environment Ministry approved the environmental impact assessment study.

On October 31, Oresharski said that Bulgaria had largely managed to catch up to the original schedule. Commenting on the lengthy meeting with Miller, he said: “This morning we thought that we had almost everything agreed, but there are always details popping up that need clarification.”

The main topic of the meeting, Oresharski and Economy Minister Dragomir Stoynev said, was the issue of financing the Bulgarian stretch of the project.

Previously, Gazprom was expected to foot the construction bill, with Bulgaria paying back its half of the costs from transit fees paid over a period of 15 years. The new terms envision that the costs will be covered by a loan that Bulgarian Energy Holding (BEH) would take on (70 per cent) and its own funds (30 per cent).

The BEH loan will be 620 million euro, carrying a 4.25 per cent interest rate and repayable over a period of 22 years, Stoynev said. He did not say who will be providing the loan.

Instead of giving up on transit fees, Bulgaria would receive dividends – which Stoynev estimated at 715 million euro – as soon as the pipeline begins operating at full capacity, meaning 2018, he said.

(The exact wording of the terms, however, could prove important given the problems Gazprom has had with South Stream’s twin in the Baltic Sea, Nord Stream, which continues to operate below full capacity.)

Additionally, Gazprom agreed that the finished pipeline would operate under Bulgarian law, meaning it would be subject to the European Union’s third energy package regulations that require access for third-party suppliers to the gas grid infrastructure.

Gazprom has been trying to secure an exemption from the regulations for South Stream, but the European Commission, which does not see the project as vital for its efforts to diversify the EU’s sources of gas, has steadfastly refused to grant one.

As expected, Miller re-iterated Gazprom’s familiar narrative that the pipeline was a major step towards EU’s energy security because it delivered gas straight from Russia, bypassing transit countries – an unsubtle reference to Ukraine, which whom Moscow has had two “gas price wars” since 2006 (and may have a third one brewing later this winter).

Miller also touted South Stream as a “catalyst for economic development in the region” that would bring 3.5 billion euro in investment to Bulgaria. This is yet the latest increase in the cost of South Stream’s Bulgarian stretch, rising from 3.1 billion euro Miller spoke of during his visit in July.

Such uncertainty is characteristic for the project as a whole, as its final costs remain unclear, although some estimates put the final price tag on South Stream alone at up to $30 billion. Adding in the cost of expanding the gas grid and infrastructure in southern Russia, which currently could not meet Gazprom’s needs given South Stream’s stated full capacity of 63 billion cubic metres a year, the total amount that Gazprom will have to invest may reach $50 billion, according to pessimistic estimates.

Despite the high costs and the uncertainty of getting EU’s regulatory exemption, Russia remains determined to build South Stream in order to completely cut off gas transit through Ukraine. The project’s critics say that the political arguments outweigh the economic rationale, but Gazprom has always rejected such claims, saying that South Stream was a viable project.

(Photo: Jayesh Nair)

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Alex Bivol is the news editor of The Sofia Globe.