Very likely, on August 6
Russia will get permission to build the South Stream pipeline in the
exclusive economic zone (EEZ) of Turkey. Russia will be closer to
"the final solution of the Ukrainian problem" of Gazprom.
Bypassing the EEZ or
continental shelf of Ukraine extends the submarine route by some 100
km and adds $1.3-1.5 billion of investment cost. The total cost of
construction out of the Russian territory is estimated at $25-30
billion, with Gazprom's share representing over a half of the sum.
Gazprom needs to invest another $20-22 billion to build new pipelines to
deliver gas from the Bovanenkovo field to the Black Sea. If the
Nabucco project is cancelled, Gazprom would need to invest few more
billions of dollars into the new pipeline from Turkmenistan to
Russia (Caspian Gas Pipeline).
In case both Nord Stream
and South Stream pipelines are commissioned at full capacity,
Russian gas transit via Ukraine is to go down to a mere 25-50
bcm/year. The Ukrainian transit expense of Gazprom will drop from
$3.0-3.5 bn (without South Stream) to $1.0-2.0 billion. As a matter
of fact, operating expenses at the new pipelines will exceed the
savings in transit costs. There are no other benefits from the
$35-40-bn investment of Gazprom.
Gazprom is very unlikely
to get any profit margin from the gas exporters of Azerbaijan and
Central Asia that can get a full European price by selling gas
directly to Europe without the brokerage service of Gazprom. Any
talk about the profit margin for Gazprom will initiate demands for
freedom of international transit of gas across Russian territory.
The only way Gazprom can slow down the process of setting the
freedom of international gas transit in Russia is by paying the full
European price for foreign gas.
Therefore, Gazprom will
have to re-export all foreign gas without profit or may be at loss.
The export basket of Gazprom is limited by the contracted volumes,
so Gazprom would need to reduce exports of Russian gas which will
result in lower profits.
From the standpoint of
Russian budget, re-exports are unprofitable because these
transactions are free of customs duties. Russian gas is subject to
customs duty (30% of the contract gross value).
In fact, the Russian
government is fighting to prevent Turkmenistan from selling some 20
bcm/year directly to Europe. A decade ago Gazprom has won a similar
race by building the Blue Stream pipeline to Turkey. Turkmenistan's
plan to export 16 bcm/year to Turkey has never been realized
(according to Botas, the agreement was signed on May 21, 1999).
It is clear that
Turkmenistan has lost billions of dollars because it did not have
direct access to European markets, especially in the period of
record prices of gas. The gains of Gazprom are not that obvious. In
my view, Gazprom could have generated much higher profits by
building the Yamal-Europe-2 pipeline instead of a more expensive
Blue Stream project. Note that the 33 bcm/year Yamal-Europe-1
pipeline was commissioned at about the same time with the more
expensive Blue Stream project (16 bcm/year). Yamal-Europe is
operating at full capacity for nearly four years while the Blue
Stream is still loaded by two-thirds.
Russian government has
to consider the Blue Stream project as a complete loss because the
pipeline does not generate any customs duties. The Blue Stream
exports were freed from excise tax and export duties in 1999, when
the average price of European exports of Gazprom was $65/mcm. Since
then the average price went up to $472 and then down to $211, but
the Blue Stream exports are still free of customs duties.
Note that from the
commissioning day, the Yamal-Europe pipeline has generated about $16
billion of excise taxes and duties; while the Blue Stream pipeline
got $3.5 billion of budget subsidies (the state budget did not get
$3.5 billion). Surprisingly, the subsidies have already exceeded the
total investment cost of Blue Stream ($3.2 billion)!
South Stream is likely
to be a bigger loss than the Blue Stream project. The new Russian
pipeline is designed to diversify the supply routes, which means the
same volumes of gas will be exported by a new route. It will not
increase the profit of Gazprom, but it will increase the operating
Despite all the negative
characteristics, South Stream has a major advantage over the Nabucco
pipeline. The Russian project does not have to be profitable. South
Stream is included into the governmental plan. Therefore, it has to
be built at any cost. However, it does not mean the Nabucco project
will be abandoned.
August 5, 2009
Reproduction or use of materials
is allowed only with reference to East European Gas Analysis or