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The South Stream pipeline project will
generate losses for both the Russian budget and Gazprom
Gazprom has made a statement on the implementation of the South
Stream project regardless of financial conditions. In fact this
means that Gazprom and Russia’s government are willing to take a
loss if it helps to win the race with the competing Nabucco
pipeline. The South Stream project, same as the Nord Stream pipeline
in the Baltic Sea, makes no commercial sense. According to Gazprom,
both pipelines are not to increase volumes of gas exported to
Europe, which means no additional revenues and profits.
The two pipelines are designed to improve flexibility of gas
supplies. The losses to be taken by Russia are significant.
First, Gazprom wants to
invest over
$26
billion (Gazprom’s share in foreign and Russian sections of South
Stream) into the project that increases costs without generating
extra profits. South Stream is unable to give any added value for
Gazprom. I wonder what the foreign shareholders of Gazprom think
about it.
Second, Gazprom is
willing to buy all Central Asian and Azeri gas and to re-export it
to Europe instead of Russian gas, losing a profit of $100 million
per 1 bcm. Note that re-exports of foreign gas generate no profits,
because the sellers do not give Gazprom any profit margin and pay no
commission. To export more Turkmen or Azeri gas, Gazprom has to
reduce exports of its own gas, which means reduction of the most
profitable business segment of the company.
Third, the government of
Russia is willing to cut its budget revenues. Re-exports of foreign
gas are tax free, while exports of Russian gas are subject of
customs duty – 30% of the contract value. A the current price,
exporting 1 bcm of Azeri or Turkmen gas instead of gas produced in
Russia means a loss of $85 million for the state budget. Apparently,
the government considers spiting Nabucco a higher priority than
maximizing budget revenues and profits of Gazprom.
The EU should find an
answer to a simple question. Why Russia is promoting a money-losing
project? As the Kremlin and Gazprom side put it now, the EU gets all
the benefits and Gazprom gets all the costs. It is too good to be
true.
Mikhail
Korchemkin
April 27, 2009
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