Wednesday, July 11, 2012

Higher Priced Gas Not Detering South Stream

Faced with competition from TANAP, Nabucco-West, LNG and alternative fuels, Gazprom is coming to grips with lower anticipated revenues from their proposed South Stream pipeline.  Sergei Komlev, head of price formation for Gazprom Export, believes Europe will buy the gas anyway.  In June, he told the World National Oil Companies Congress in London, "Our estimate is that the difference (between hub-priced gas and South Stream supplies) is $2 per million British thermal units," according to Reuters.  Komlev said the price would be attractive because Gazprom would provide South Stream gas via long-term contracts, which would provide more security of supply than spot-priced hub gas.

Revenues will suffer, however, because of price breaks to various countries.  As an example, to keep Bulgaria in the South Stream consortium, Gazprom has agreed to an 11% price discount for the upcoming year, a loss of USD 115 million.  Bulgarian Economy and Energy Minister Delyan Dobrev gave the results of these negotiations to reporters in June.  "Currently, there is no danger of Bulgaria not participating in South Stream," he said.  "We support the South Stream project.  We believe it is profitable for Bulgaria, but we have to specify all the details."

While Dobrev is pleased with the negotiations, there is a question as to whether Bulgaria can finance its share of the pipeline.  According to an unconfirmed source, Gazprom might pay for the Bulgarian section of the pipeline and then repay itself by deducting the gas transit fees the company would otherwise owe the country.  Regardless of the financing, South Stream has begun the Environmental Impact Statement for the 250 kilometer section that will run off the Bulgarian Coast, according to the Sofia News Agency.

South Stream has also recruited a new member of the consortium, Macedonia.  According to Macedonian Vice Premier and Minister of Finance Zoran Stavreski, membership will secure gas supplies for future generations of Macedonians, although the country was not originally considered for membership.  "This was in fact done (through a myriad of contacts and high-ranging talks) from a position where there were no plans to be included in the project," he said.  "There is no more dilemma--Macedonia is joining the international gas pipeline corridor 'South Stream' as it has been agreed between PM Nikola Gruevski and President Vladimir Putin.  We've received the text of the draft-agreement."

Russian President Putin continues to remain optimistic toward the project, and in June said the pipeline could begin natural-gas flows as early as 2014.  This would inaugerate the pipeline years before the Nabucco-West rival, which is scheduled for completion in 2017-2018.