Russia, Bulgaria set to sign South Stream gas pipeline agreement; However, controversy over pipeline continues in Serbia

Russia and Bulgaria are expected to sign an intergovernmental agreement January 17 or 18 on building South Stream, the major new natural gas pipeline across the Black Sea to Europe, a Russian government source said January 15.

However, the project continues to court controversy in neighboring Serbia, where a deal to sell Serbia's oil and gas monopoly NIS to Russia's Gazprom in exchange for the routing of the South Stream pipeline through Serbia, which could be signed January 18, is still dividing opinion.

The deal with Bulgaria could be sealed during Russian President Vladimir Putin's official visit to Sofia, the source said, although he added that there are still some obstacles.

"From our side there is willingness to sign, but there are technical issues that need to be sorted out," the source said. Putin's press office declined to comment on whether or not the agreement would be signed. The Kremlin web site confirmed that Putin would visit Bulgaria on January 17 and 18, but did not give any details of his agenda.

A Bulgarian government spokesman said he doubted whether the document was ready to be signed at the end of this week. "It is under consideration by both countries, but there is not enough information about the readiness at this time for the project to be signed," he said.

The pipeline, expected to start operating in 2013, would bring 30 billion cubic meters/year of Russian gas across the Black Sea to the Bulgarian coast, from where it would be shipped on to Europe via two as yet undecided routes.

The project, led by Russia's Gazprom and Italy's Eni, has gathered pace over recent months. At the end of November the companies agreed to set up a 50:50 special purpose vehicle to conduct feasibility studies for the project by the end of 2008. Other partners may be considered for the pipeline.

Gazprom CEO Alexei Miller will be visiting Sofia as part of the Russian delegation, his spokesman Sergei Kupriyanov said.

Industry observers believe there are no obstacles to the signing of a framework agreement sealing the political will to build the new gas route. "I don't see any real contradictions for the deal not to be signed. In fact, this is the highlight of Putin's visit to Sofia," said Konstantin Simonov, director of Russian think tank the National Energy Security Fund.

Putin is pushing to sign important energy deals before his presidential tenure expires in March, he said. After another major pipeline deal involving Bulgaria, the construction of the new Burgas-Alexandroupolis oil line, received final blessing in December, Putin is determined to seal the South Stream deal as well, he said.

The agreement is most likely to refer to the marine section of the pipeline, which will be built by the two Black Sea littoral states. Detailed agreements on routing and other partners could be left until later, he added.

The South Stream project also is linked to a controversial energy deal between Russia and Serbia, through which the new pipeline is likely to run onward from Bulgaria. At the end of last year, Russia and Serbia drafted a wide-ranging energy partnership agreement that would see Russia route South Stream through Serbia in exchange for an interest in state-owned oil company NIS and the right to build gas storage in the country.

However, the deal has come under attack from Serbian economy minister Mladjan Dinkic, who has said the proposed agreement massively undervalues NIS. Gazprom is reported to have offered to buy 51% of NIS for just Eur400 million ($588 million), which Dinkic last month described as "humiliating for Serbia."

Dinkic said Gazprom had also offered to invest Eur500 million in modernizing NIS' two refineries.

Dinkic said Gazprom had not offered any guarantees that South Stream would definitely pass through Serbia and that the project would not be completed until 2013 at the earliest, while giving up control of NIS would be immediate. Dinkic wants NIS to be excluded from the agreement and for it to be limited to gas. However, the rest of the Serbian government seems committed to adopting the draft agreement.

The Gazprom spokesman declined January 15 to comment on the planned deal with Serbia or say when it would be signed. But in an opinion piece to the Serb daily newspaper Politika January 13, Gazprom Deputy CEO Alexander Medvedev said Russia and Serbia had long enjoyed good cooperation and that he saw "even more room for even closer cooperation in the future, which will create a win-win situation for all sides, Gazprom's stockholders as well as Serbia and the rest of Europe."

The sale of NIS to Gazprom also has sparked concern in the European Commission, which has urged Serbia to conduct the sale of NIS in a transparent way through a tender as it had originally intended. A number of companies have tentatively expressed interest in taking part in a tender for NIS, including Hungary's MOL, Dutch-based Rompetrol, Poland's PKN Orlen, Russia's Lukoil and Austria's OMV.

The privatization of NIS has been on the agenda for a number of years and had been due to begin before the end of 2007. However, it has been delayed repeatedly by political wrangling. NIS owns the country's two refineries, the 100,000 b/d Pancevo and the 60,000 b/d Novi Sad plants, which are both in need of modernization.

Observers have suggested that the closer relations between Russian and Serbia in the energy sphere are linked to Russia's support for Serbia regarding the future status of the region of Kosovo. Kosovo is seeking independence from Serbia, and has the support of some members of the EU, while Russia has warned against a unilateral declaration of independence for Kosovo, fearing an escalation of tensions in the Balkan region.

Anna Shiryaevskaya, with Stuart Elliott in London

Published: Platts Oilgram News 4, Volume 86, Issue 12

(c) 2008 McGraw-Hill, Inc.