South Stream Project. Análisis del proyecto de gas natural conocido como South Stream. Prof Daniel...

7/30/2019 South Stream Project. Anlisis del proyecto de gas natural conocido como South Stream. Prof Daniel P. Ahn, Colu

1/19

PROJECT FINANCE 2012

S t r e a mS O U T H

Dragan&Micic&(dm2792)

Gonzalo&Salgado&(gbs2112)

Dijana&Sarenac&(

Secil&Topak&(st2658)

Jack&Voorhees&(jmv2162)


2/19

PROJECT FINANCE - SOUTH STREAM

! Page 2

CONTENTS

.........................................................................................................................Introduction 3..............................................................................................................................Valuation 4

.................................................................................................................Geopolitical Risk 5...........................................................................................Financial and Operational Risk 6

Planned route of South Stream


3/19

Page 3

IntroductionDespite the current economic crisis, analyses show that the upward gas demand trend in Europe will continue

over the long term. According to Eurogas estimates, demand for gas in the EU will increase from 440 mtoe (489

bcm) today to 625 mtoe (694 bcm) by 2030. European production accounted for 59% of 2005 supplies to the EU

gas markets and is expected to drop to 33% by 2020 and to 25% by 2030. Due to increased demand and

significant reduction of domestic gas production in the coming years, the EU will need to increase its natural ga

imports. Transport bottlenecks in gas supply during peak periods are already being felt and will continue to

plague Europe in the years to come. To address this issue, a gas pipeline has been proposed totransport Russian

natural gas through the Black Sea to Bulgaria and further to Greece, Italy, Serbia, Austria and Slovenia. The

project is a rival to the planned Nabucco pipeline.

The South Stream pipeline project was announced on 23 June 2007, when the Italian energy company Eni the

Russian Gazprom signed a Memorandum of Understanding for construction of South Stream. The objective o

the project is to meet the growing demand for natural gas in Europe, to ensure supply flexibility and security, to

stimulate economic progress and create new jobs in participating countries. The South Stream pipeline brings

with it many potential benefits such as: increased supply of gas and energy security, the opportunity to develop

national gas transmission networks, and economic benefit from gas transit for countries in the region.


4/19

Page 4

Mayor Participants

South Streams shareholders are leading energy companies boasting wide experience in pipeline construction

and operation.&Gazprom operates 156,000 kilometere of pipelines, the longest network in the world and has a

positive working history with Eni, as the two have partnered up in the past to construct the 396 km Blue Stream

gas pipeline which brings Russian gas to Turkey over the Black Sea bottom at depths of over 2,000 meters.

On January 18, 2008, Gazprom and Eni set up a Special Purpose Vehicle (SPV), the South Stream AG, in

which both parties hold a 50% stake and is the main operating project company. South Stream Transport AG (a

joint company of Gazprom, Eni, Electrite de France and Wintershall) will be the proprietor of the pipeline's

underwater length and it was set up to plan, build and subsequently operate the new offshore gas pipeline. After

Saipem, a subsidiary of Eni, completed the feasibility study for the offshore section in 2010, a number of cross

country agreements and joint ventures (JV) were established in each of the transit states.

Consortium:

1 Offshore&section:&South&Stream&AG&(Gazprom&and&ENI&50:50);&according&to&a&memorandum&signed

on&19&June&2010&by&Gazprom,&ENI&and&EdF,&a&minimum&of&10%&of&(ENIs)&shares&are&to&be&taken&by&

EdF&by&the&end&of&2010

2 Overland&sections&to&be&built&by&Gazprom&in&cooperation&with:

o&&&&&&&DESFA&(Greek&section,&JV&50:50),

o&&&&&&&Srbijagas&(Serbian&section,&JV&(51:49),

o&&&&&&&Bulgarian&Energy&Holding&(Bulgarian&section,&JV&50:50),o&&&&&&&OMV&(Austrian&section,&JV&50:50),

o&&&&&&&Geoplin&Plinovodi&(Slovenian&section,&JV&50:50),

o&&&&&&&MFB&(Hungarian&section,&JV&50:50)


5/19

Page 5

Cross Country Agreements

Russia and Bulgaria reached an agreement on Bulgaria's participation in the project which

was signed on January 18, 2008. The two countries agreed to set up an equally owned

company to build and operate the Bulgarian section of the pipeline. On January 25

2008, Russia and Serbia signed an agreement to route a northern pipe of South Stream

through Serbia and to create a joint venture (51-49 Gazprom Serbijagas) to build the

Serbian section of the pipeline and large gas storage facility near Banatski Dvor in Serbia

At the same time, Gazprom and the state-owned Hungarian Development Bank MFB

agreed to set up an equally owned joint company (50-50 JV) to build and operate the

Hungarian section of the pipeline. Shortly after, on April 29, 2008, Russia and Greec

signed an intergovernmental agreement on cooperation in construction and operation o

the Greek section of South Stream. On May 15, 2009, in Sochi, in presence of the Prime

Minister of Russia Vladimir Putin and the Prime Minister of Italy Silvio Berlusconi, th

gas companies of Russia, Italy, Bulgaria, Serbia and Greece signed an agreement on

construction of the South Stream pipeline. On August 6, 2009, the Prime Minister o

Russia Vladimir Putin and the Prime Minister of Turkey Recep Tayyip Erdoan in

attendance of the Prime Minister of Italy Silvio Berlusconi signed a protocol routing the

pipeline through the Turkish territorial waters. On 14 November 2009, Russia andSlovenia agreed on the terms of which a part of the pipeline will run through Slovenia to

Northern Italy, effectively creating a joint venture between Gazprom and Geoplin.

On 2 March 2010, Russia and Croatia

signed an agreement on construction of a

South Stream section through Croatia.

France joined last, as on June 9 2010,

Gazprom, Eni, and lectricit de Francepubl ished a jo in t press re l ease

confirming that EDF will join the

project.


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Page 6

Technical Aspects

Total expected capacity of the South Stream pipeline is 63 billion cubic meters of natural gas per year. Serbia

Hungary and Slovenia alone make up10 billion cubic meters. At least two gas storage facilities will be

constructed: an underground one in Hungary (capacity: 1 billion cubic meters) and one in Serbia (capacity:3.2

billion cubic meters). Others storage facilities are in the works depending on how the project goes and which

countries stay in.

Costs to build the pipeline are estimated at :1924 billion including the construction of offshore section which

will cost of8.6 billion. he cost of onshore sections will depend of the exact route of the pipeline. The fina

investment decision is expected by November 2012. As of the writing of this report, the completion date of the

South Stream pipeline is set for December 31, 2015.


7/19

Page 7

Global MarketExcess&global&gas&supply

Between&2010*2035&almost&all&continents&

see& gas& supply& rise& significantly,& but& in&

Europe& it& continues& to& decline.& Gas&

reserves& in& the& world& are& highly&

concentrated& in& only& a& few& countries.&

Russia& (23.7%),& Iran& (15.8%),& and& Qatar&

(13.5%).&Other&countries&reserves&do&not&

exceed& 4.3%& (BP,& 2010,& p.& 22).& But&

unconventional&gas&has&come&to&change&

the&picture.

In& the& IEA& GAS& Scenario& the& share& of&

natural& gas& in&the&energy& mix& increases&

from& 21%& to& 25%,& pushing& coal& into&

decline& and& overtaking& it& by& 2030.& Over&

the& period& 2010*2035& non*OECD&

countries&will&account&for&nearly& 80%&of&

demand&growth.&In&2035,&Chinas&demand&growths & matching& that& of& the& entire&

European& Union,& Middle& East& demand&

a lm os t& do ubl es ,& a nd& i n& I ndi a& it&

quadruplicates.& Power& generation&

remains&the&dominant&sector&for&gas.

L NG& c ar go es& a re & b ei ng&

deviated& away& from& America&

mostly&because&of& the&cheap&

gas &price&there.&In&an&gradually&

liquid&market,&coupled&with&a&

transitory&decline&in&European&

economic& and& decline& in&

industrial& activity& after& the&

2007& financial& crises,& has&

resulted& in& an& over& stock&

becoming&available&in&Europe.&

All&this&causes&spot&gas&prices&

to&been&driven&down,&well&under&half&of&

oil&prices&for&most&of&2009.

Gas&is&still&not&a &commodity&free&market&

good&trade&as&oil.&There&are&4&big&markets&

with&different&prices&(Henry&Hub,&US).&Gas&

index,& like& henry& hub,& use& to& move& in&

parallel&with&oil&prices.&Today&gas&markets&

are& seeing& a& dislocation& affecting& oil*

indexed&pricing&under&long*term&pipeline&

contracts.& This& has& encouraged& major&

European& buyers& (Eni & or& Eon)& to&

renegotiate&conditions&for&pipeline&gas.&

Demand recovery

Gas demand in the

world returned to a

growth path in

2010, mainly driven

b y e c o n o m i c

activity in emerging

markets, especially

those in Asia and Middle East.

After the devastation of Fukushima, as

a consequence of the Japanese

earthquake, gas demand Asia increase

(and so it price by $2). In order to

supply equal energy into the grid Japan

may need around 20 extra LNG

cargoes per month. This gas has been

provided at high prices and may have a

deeper effect in the Asia gas market if

they move out of nuclear energy into

gas.

The European commission alter that

Europe may be short by 100 Bcm ofgas if further supplies migrate to Asia.

$7.

92

LNGPipeline

$2

.41

$6.17

$5.48

$5.39

$0.40

$3.44

$3.36

$4.31

$2.57

$5.68

$0.88

$2.8

7

$2.51$

2.20

$4.25

$4.66

$6.40

Qatar $4.05($4.59)

$4.55

$5.89

$4.61

$5.81

inidadd Tobago

inidadd Tobago

igeria

igeria

$1.29

$2.48

$

2.23

$4.01

$5.28

$5.02

$7.53

Indicative costs for potential new sources of gas delivereto Europe, 2020 ($/MBt

Excess global supply

Demand Recovery

Unconventional gas boom


8/19

Page 8

n Europe, gas is mainly used for

heating in households, commercial areas

nd for industrial purposes. But gas used

or power generation has been

increasing sharply. The share of natural

gas in the European is expected to rise

up to 27- 29% by 2030, attributed

mainly to higher demand from the

power generation sector.

Gas reserves in Europe arent very

abundant. Europe's major domestic

producers have followed a declining

path. Only Norway shows a consistent

increase-offsetting decline. UK

became a net importer of

natural gas in 2 0 0 4. The

main part comes from

Russia (23%), followed

by Norway (18%) and Algeria

(9%) (Eurogas, 2009, p. 7).

Moreover Sweden, Ireland, Finland

and many other states are dependent

on just one monopoly supplier Gazprom

(Russia), while others like Greece,

Hungary and Austria are more than 80%

dependent on this company.

Since November 2000, the European

Commission has already alerted in it

first Green Paper that in the next 20-30years up to 70% of the EU energy

demand will have to be imported

(Eurogas, 2010, p. 9). To reinforce it

future energy security, the commission

strategy is to emphasize the wides

possible energy mix, a neutral policy

regarding nuclear energy, diversification

of energy supply, and promotion o

renewable energies. The Commission

policy is based on maintaining the

balance of the three objectives aiming

on (1) economic competitiveness

markets and efficiency, (2) environment

and on (3) securing energy supply.

Algeria

10%

Nigeria2%

Libya2%

Egyp

t1%

Qatar3%

Oman


9/19

Page 9

Unconventional GasUnconven]onal&gas&is&defined&as&occurring&in&source&rocks&

with&very&low&porosity&and&permeability,&which&means&that&

it& can& only& be& recovered& through& a& process& of& fracturing&

the& rock& to&create&ar]ficial&pathways&for&the&gas&to& flow.&

The& category& includes& shale& gas,& ]ght& gas& (found& in&

rela]vely& impermeable& sands),& and& coalbed& methane&

(CBM).&Explora]on&for&shale&and&other&unconven]onal&gas&

reserves&is&currently&at&a&very&early&stage&across&Europe.

Li le& ac]vity& has&been& carry& out&in& Europe.& Most& of& the&

seismic& acquisi]on& and& explora]on& drilling& is& being& done&

by&private&companies.&Cedigaz& es]mates&that,&since&2006,&

around& 50& companies& have& become& ac]ve& in& shale& gas&

explora]on,&ranging&from&the&majors&to&large&u]li]es,&and&

minnows&to&state&oil&&gas&companies,&though&dominated&

by&small&companies&>60&%&of&players.&The&majority&of&

them& are& engaged& in& data& acquisi]on& for& appraisal&

purposes;& however& wells& have& so& far& been& spudded& in&

Poland,&Germany,&the&Netherlands,&and&the&UK.

In&the& US,&shale&gas& development&was& encouraged&by& a&

number&of&factors:&a&compe]]ve,&entrepreneurial&sector;&

extensive& shallow& reserves;& financial& incen]ves& for&

landowners& to& allow& rig& access;& a& suppor]ve&regulatory&

frame;&and& key& breakthroughs&in& horizontal& drilling& and&

fracturing&technologies.&In&Europe,&and&principally&in&the&

EU,& companies&will&face& a& number&of& barriers,&including&

for&example:

Lack&of&regula]on&and&policies;

High& number& of& countries, & and& so& more& spread

licensing&regimes;

Difficul]es&in&leasing&the&areas;

Deeper,& smaller,& more& fragmented& and& clay*heavy

deposits,&resul]ng&in&lower&materiality;

Offshore&placement&of&the&most&favorable&reservoirs;

Absence&of&drilling&rigs;

Difficul]es&in&land&access&and&more&populate&areas;

Strict& environmental& regula]on& ,& and&popula]on& with

higher& standards,& with& special& apprehensions& ove

fracking&chemicals&and&aquifer&effluence;

Higher&rig&rates&and&drilling&costs&as&a& consecuence&of

deeper&wells,&greater&s]mula]on,&more&fracking&stages

and&longer&horizontal&sec]ons&will&be&needed;&and&

Higher&labor&costs&and&lack&of&labor&skills


10/19

Page 10

Unconventional Gas

Western& European& is& more& likely& to&

develop&unconven]onal&gas.&For&them&

gas&independence&from&Russia&is&more&

important.& As& a& consequence,& Poland&

and&Ukraine&are&likely&to&push&towards&

commercial&shale&gas&produc]on.&But&

supply&will&focus&on&their&own&na]onal&

demand.

Higher& development& costs & are& offset&

by& higher&gas& prices.& But&by& the&]me&

when& unconven]onal& gas& reserves&

c om e& o n& s tr ea m, & E ur op e' s& o wn&

current& supply& will& have& vanished.&

WoodMac& believes& that& European&

shale&gas&flows&are&unlikely&to&disrupt&

the& pricing& of& long*term& contracts& to&

the& extent& they& have& done& in& North&

A me r ic a .& I ns te a d,& d ri ve n& p ri ce&

movements& are& more& likely& to& come&

from& compe]]on& of& LNG& (which& is&

a l r e a d y& h a p p e n i n g )& a n d

u nc on ve n] on al& g as& f ro m& N or th

America&and&other&regions.

The& op]mal& model& for& Europe& is& s]l

unclear.& There& is& a& broad& consensus

among& experts& at& the& IEA,& BP,& and

OIES,& that& there& will& be&no& significant

shale&gas&produc]on&in&Europe&before

2 023& at& th e& e ar li est .& B y& 20 30

renewable& energy& will& be& a& mayo

player& taking& a & big& peace& of& the

market& leaving& expensive& energy

sources&out&of&the&market.&

Experts&have&clarified& the& size& of& thec h a l l e n g e& b y& c o m p u ] n g& t h e

investment& and& number& of& rigs& tha

would& be& required& for& shale& gas& to

make& a& significant& contribu]on& to

European& supply.& Douglas& Westwood

es]mates&that&commercial&produc]on

of& 2.8& Bcm& of& unconven]onal& gas

(including& CBM& and& ]ght & gas)& inEurope& per& year& would& require& 700

wells,&and&an&investment&of&around&$1

0& billion/year.& At& an& average& of& six

wells&per&year&per&rig,&this&equates&to

at&least&116&rigs.


11/19

Page 11

Risk

Completion&Risk

For& this& proposes& the& EPC& will & be&

develop& by& just& one& company& for& the&

hold&project&to&ensure&a&coordination&in&

all&the&faces,&a&risk&that&will&be&present&

in&the&case&we&use&several&construction&

companies.&It&will&be&a&turnkey&fix&price&

EP C,& a llo ca tin g& t he & r is k& o n& t he&

constructer&side.

The& engineer& of& the& project& is& being&

done& by& a& best*in*place& company& that&

will& ensure& the& correct& design& and& so&

operation&of&the&project.&

C on st ru ct io n& c om pa ny& h as & b ee n&

selected& from& an& experience& company&

that& has&an& excellent& track& of& building&

pipelines.& It& also& has& a& strong& balance&

shee t& and& will& ha ve& to& prov ide&

competitions& guaranties.& It& has& also& a&

joint& agreement& with& a& technology&

company& how& will& provide& the& know*

how.

Production&Risk

Shortfalls&in& the&expected&gas& reserves&

are& major& risk& of& the& project.& So& far&

Gazprom& does& not& hold& sufficient& gas&

proven& reserves& for& the& whole& live& of&

the&project.& &This&risk&is &managed&by& a&

fix& fee& contract& with& a& take& or& pay&

c la us e& t ha t& e ns ur es & i ts & p ay me nt&

independently& of& the& deliver& and&

operation&of&the&pipeline.

Operational&Risk

This&risk&is&not&considerable&when&it&is&

associated& only& with& pure& operations.&

There& are& worldwide& pipelines& so&

operation& of& them& is& well& known& and&

the& operation& company& has & very& high&

experience&in&the&business.

If&we&consider&local&issues,&and&because&

of&the&different&regions&it&goes&through,&

operation&can&be&a&risk&like&access&to&a

the& point& in& the& pipeline,& not& having

stolen&pieces,&etc.

Legal&risk

Change&in&EU&regulation&is&a&risk&related

to& the& enforcement& to& use& renewable

energy,& leaving& the& project& without

market.&For&this&the&project&will&hire&BC

group& the& reinforce& our& internal& view

that& during& the& next& 25& years& EU& wil

still&need&conventional&energy&to&cover

its&demand&(see&technology&risk).&

Dispute&resolution&is&very&problematic,

even&more&if&we&take&into&account&that

t he& p ro je ct s& i s& c ro ss in g& t hr ou gh

different& countries & and& jurisdictions

For& this& the& project& will& be& under& a

single& jurisdiction.& Dispute& resolution

will& be& agree& under& arbitration& in& the

ICC&International&Court&of&Arbitration.


12/19

Page 12

Energy&supply&risk

E ne rg y& i s& t he& m os t& i mp or ta nt&

r es ou rc e& u se& b y& t he& p ip el in e.&

Compressor& run& base& on& electricity.&

Thi s& i s& t he & m os t& sig nifi can t&

o pe ra ]o na l& c os t& f or& t he&

project.& The& project& will&

h a v e& a& p u t& o r& p a y&

c ont ra ct& w it h& E NEL& a&

mayor& European& electrical&

company,&ensuring&the&electricity&

supply&for&the&project.

Environmental&Risk

M e t h a n e& l e a k& i s& t h e& m a j o r&

environmental& risk.& For& this& offset&

carbon& credits& will& be& purchase& to&

compensate& this& environment& effect.&

Visual& effect& is& other& environmental&

risk. & Sec]ons& of& the& line& will& go&

underground& in& areas& of& valuable&

l an ds ca pe & o r& u rb an& a re as .& T he&

p ip el in e& w il l& n ot& c ro ss & t hr ou gh&

na]onal&parks&or&other&reserve&areas.

Community& is& a& mayor& risk& in& the&

p ro je ct .& L oc al & p eo pl e& w il l& h av e&

preference&in&the&

hiring& sec]on,& and& community& work&

will&be&done&at&all&]me&trying& to&bring&

especial&benefits&to&local&people.

Technology&risk

There& is& no& technology& major& risk&

r el at ed& w it h& t he & b ui ld in g& a nd

Opera]on& of& the& pipeline.& Since& the

technology& is& well& known& and& has

been& used& in& the& industry& for& long]me(more&than&20&years),&there&is

no&risk.&The&project&will&not&use

a n y & n e w & u n p r o v e d

technology.

Technology& is& a& mayo

risk& when& it& comes& up& to

alterna]ve& source& of& energy

especially&renewable.&EU&is&pushing&to

strongly& increase& renewable& share& in

the&market,&which&competes&with&gas

Studies& for& experts& will& be& acquired

Market& projec]ons&show& that& during

the& next&20& & 25& years& EU& reserves

are&in&a&diminishing&path&and&energy

demand& will& increase.& Solar& energy

will& only& be& able& to& generate& during

day&]me,& leaving& peak&demand&open

for&other&source&of&energy&to&backup

Space& hea]ng,& one& of& the& mayors

demand&sources,&will&s]ll&relay&in&gas.


13/19

Page 14

Project Structure

Since& the& project& has& several&

different& companies& incorporate&

between&Gazprom&and&government&

entities& the& project& needs& to& be&

structure&in&a &way&that&allocates&risk&

properly&and&can&be&financeable.

These& national& entitys& will& have&

property& rights& over& a& portion& of&

land& in& the& boundary& of& their&

county.& The& goals& of& these& entities&

are& mainly& to& incorporate& de& local&

g ov er nm en t& i nt o& t he & p ro je ct&

reducing& the& political& risk,& and&

bringing& in& the& future& off& taker& of&

the&gas&in&order&to&ensure&market.

Financing& each&of& these&entities&by&

its &own& will& be& a &mayor& challenge.&

Even& more& this& structure& will& be&

highly&risky& for&the&banks,&who&will&

prefer&looking&at&South&Stream&as&a&

single&project&and& dealing& with& one&

single& entity& for& the& hold.& For& this&

dealing&with&a&single&SPV&is&a&much&

suitable& way& of& structuring& the&

project.& For&this,& there& will& be& one&

SPV& as&the&unique&vehicle.&This&will&

be&owned&

At&the&other&side& we&need& to& look&

after& the& credit& ranking& of& the&

p ro je ct .& F or & t hi s& r ea so ns& t he&

sponsors&of& the&SPV& will&be& the& off&

takers&with&the& higher& rating& to&be&

able&to&get&highest&credit&rating&and&

so&the&lowest&interest&rate.&For&this&

reason& the& European& Development&

Bank& will& be& part& of& the& SPV& as&

holder&too.

Take%or%Pay%

Fee%

Na,onal%PPP%as%

Equity%Holders%

SPV%

Project%

Company%

Shareholder%

Agreement%

EPC%

Constric,on%

Company%

Tecnology%

Company%

Market%

Field%

Put%or%Pay%

Fee%

O&M%

Company%

O&M%

Agreement%

SPV%with%

Na,onal%

en,,es%

European%

Dev.%Bank%


14/19

Page 15

Financing StructureP ay me nt s& w il l& b e& d un e& i n& a n&interna]onal& account& overseas& (New&

York)& in& the& Trustee.& All& project& cash&

flows& will& flow& through& one& of& the&

project& accounts& maintained& by& the&

trustee& and& charged& to& the& project&

l en de rs .& T he re & w il l& b e& d et ai le d&

mechanics& rela]ng& to& the& calcula]on&

of& projec t& c over& ra]os& and& the&

prepara]on& of& banking& cases& and&

forecas]ng& informa]on& with& respect&

to&the&project.

Debt&will&be&finance&by&a&combina]on&

of&syndicate&loan&and&bonds.&This&will&

be& done& by&the &Arranger&who& will& be&

Ci].&Loan&will&be&divided&into&senior&

loan& and& non& senior& (managing&

loan).

ECAs&will&

also& &be&

i n v o l v e&

s p e c i a l l y& O e s t e r r e i c h i s c h e&Kontrollbank&AG&(OeKB),&Euler&Hermes&

Deutschland&AG,&Coffee,&and&others.&

The& financing& documenta]on& will&

encompass:

Loan& Agreements& (off& Shore & and& on&

Shore):

* Purpose&of&the&finance&and&Principal;&

* conditions& precedent& to& lending& *&

legal& opinions,& board& resolutions,&

government& approvals,& waiver&

letters,&experts'&reports&and&financial&

statements.

* Interest& rate& and& debt& service/

repayment& profile& and& informationreporting&system;

* l imitations& on& recourse& to& the

borrower& and/or& other& parties

dedicated&applications&of&cashflows;

* protective&clauses&*& taxes,&increased

costs,&market&disruption;

* restrictive& covenants& *& borrowing

restrictions,& negative& pledge,& par

passu;

* events&of&default;&and

* dispute&resolution.

Security&documents;

Trust;

G u a r a n t e e s ,

comfort& lettersand& other& s u p p o r t

documents;&and

F i n a n c i n g

d o c u m e n t s


15/19

Page 16

Geopolitical RiskIn&last&couple&of&years,&both&European&Union&and&the&Russian&Federation&were&victims&of&the&absence&of

alternative&gas& transportation&routes&that&would&prevent&Ukraine&and& Belarus&to& abuse&their&privileged

status& of&gas& corridors& between& Russia& and&rest& of&Europe.& For& that& reason&development& of&alternative

routes& is& priority& for& Russia& and& one& of& the& priorities& for& European& Union.& Second& EU& priority& is

diversi_ication& of& suppliers.& In& addition& to& this,& Russia& is& using& South& Stream& as& a& leverage& in& order& to

acquire&full&or&partial&ownership&in&Ukrainian&gas&pipeline.

How&important&will&be&delivery&of&gas&to&EU&is&probably&best&described&in&the&EU&Energy&Road&Map&2050

which&states& that& Gas$will$be$ critical$for$ the$transformation$ of$the$ energy$ system.&Substitution&of

coal& (and& oil)& with& gas& in& the& short& to& medium& term& could& help& to& reduce& emissions& with& existing

technologies&until&at&least&2030&or&2035.&&In&addition,&development&of&the&production&of&gas&in&EU27&see&

continual&decline&since&1999&and&in&2009&it&was&25&percent&lower&than&in&a&base&year.

For&all&these&reasons,&since&the&Berlin&wall&tumbled&never&has&Europe&observed&such&a&geopolitical&game

as&it& is&observing&today.& Economic& and&political& independence&of&many&countries& have&been&put&in& the

pot.


16/19

Page 17

One&of&the&elements&that&will&make&any&valuation&of&the&South&Stream&project&dif_icult&is&the&problem&of

bundling.&In&March&2012,&the&Parliament&of&Bulgaria&decided&to&drop&Belene&nuclear&power&plan&deal&that&

was& signed& with& Russia.& Shortly& after& that& Bulgarian& Economy& and& Energy& Minister& Delyan& Dobrev

traveled&to& Moscow& to& try&to& persuade&the&Russian&side& not&to&take&Bulgaria&to& court.& As&a& result&of&the

meeting& on& March& 30,& 2012& Bulgaria& and& Russia& have& agreed& and& declared& that& a& _inal& investment

decision&on& the&South&Stream&gas& pipeline&will&be &taken& in&November.& For&that& reason,& it&is& dif_icult& to

valuate&this&Russian&decision&as&an&investment&element.&

If& South& Stream& is& built,& there& are& also& other& political& elements& that& might& in_luence& the& project

Exploitation&of&shale&gas&in&Bulgaria&is&not&in&Russian&interest&and&as&Russian&fears&grew&similar&pattern

was& observed& by& Bulgarian& environmental& organizations.& Bowing& to& public& pressure,& the& government

recently&withdrew&a&shale&gas& exploration&permit&it& granted&last&year&to&U.S.& oil& company&Chevron&over

concerns& that& the& extraction& technique& known& as& "fracking"& might& harm& the& environment.& As& a

consequence&of&this&decision,&U.S.& Secretary&of&State& Hillary&Rodham&Clinton&visited&Bulgaria,& and&urged

the& country& to& break& its& energy& dependence& on& Russia& by& diversifying& its& oil& and& gas& supplies.& It& is

believed&that&Eastern&Europe's&reliance&on&Russia&for&energy&leaves&it&vulnerable&to&"unhealthy"&politica

pressure&from&Moscow.& This&can&be&changed&in&future,&and&it&can&reduce&gas&price&on&which&Russian&side

relies.&

Bulgaria&depends&today&on&Russia&for&89%&of&its&petrol,&100%&of&its&natural&gas&and&all&of&the&nuclear&fuel&

needed&for&its&Kozloduy&nuclear&power&station&which&has&two&functioning&reactors.&Such&high&dependence

will&probably&force&Bulgaria&to&participate&in&other&projects&that&will&diversify&its&supplyside&sources.

Bulgaria

Indeed,& on&April& 4,&2012&the& Bulgarian&government&declared&the&Nabucco&pipeline&project&an&object&o

national& importance,& with& priority& status.& This& status& facilitates& and& accelerates& the& permitting& and

licensing&procedures&for&building&this&pipeline&on&Bulgarian&territory.

While& this& sovereign&decision& of&Bulgaria&might&have& additional& in_luence&to& future& valuations& of& South

Stream&it&is&believed&that& March&30&agreement&is&a&result&of &Gazproms&determination&to&accelerate&work

on&South&Stream&to&establish&it&before&the&EU&introduces&regulations&that&will&force&it&to&open&pipelines&to&

other&suppliers&in&2013.

It&is&also&not&so&clear&how&much&Russia&can&rely&on&Bulgaria&having&in&mind&that&in&addition&to&dropping

Belene&nuclear&plant&project& this&country&withdrew&in&December&2011&from&the&BurgasAlexandroupoli

oil&pipeline.


17/19

Page 18

On&March&22& and&25,& Romanias&Foreign&Affairs&Minister,& Cristian&Diaconescu,& announced&on&television

that& a& legal& dispute& (litigium)&exists& between& Romania& and& Bulgaria& over& the& delimitation& of& their

maritime&border,&continental&shelf,&and&exclusive&economic&zones&in&the&Black&Sea.&The&dispute&affects,&in&

one&way& or&another,& ExxonMobils&oil& and&gas& exploration&plans& in&Bulgarian&waters,& Gazproms& South

Stream&project,&and&the&EUbacked&Nabucco&project.

Romania& and& Bulgaria& are& negotiating& since& 1994& over& delimiting& their& maritime& border,& continenta

shelf,& and&exclusive& economic&zones.& By&various&counts,& either& 14&or&17&rounds& of&RomanianBulgarian

negotiation&have& been&held& since& 1994&at& the&expert& level.& Emphasizing&this& issue&again&could&result&in

protracted&negotiation&and&litigation&between&the&two&countries.&Alternatively,&it&could&force&remapping&

and&other&adjustments&to&South&Stream.&The&existence&of&a&legal&dispute&would&require&this&project&to&stay

out&of& the&disputed&area,&at& least&pending&its& adjudication.&As& a&third&possibility,& Gazprom&and&Bulgaria

would&have&to&apply&for&Romanian&consent&in&order&to&lay&the&pipeline&through&the&nowdisputed&area.

Romania

TurkeyIn&December&2011,&Turkey&gave&approval&to&South&

Stream.&Russia&was& expecting&that& permission&for&

construction&of&the&pipeline&would&be&given&by&the&

end& of& October&2010,& but& demands& from& Turkey&for& seismic& reports& on& the& pipeline& route& that&

would&pass&through&Turkey's&Exclusive&Economic&

Zone& in& the& Black& Sea& have& delayed& the& project.&

Gazprom& completed& the& technical& and& ecological&

aspects&of&the&South&Stream&route&and&submitted&

it& to& the& governments& of& Russia,& Turkey& and&

Bulgaria&in&April&2011.&

It&is&possible&that&Turkey&postponed&its&approval&in&order&to&get&better&gas&prices&during&renegotiation&of&

the&agreement&that& bring& Russian& gas& to& the&country.& According& to& the&old&agreement& signed& in& 1986

either&side&had&to& notify& the&other&of &its&intention&to&terminate&the& contract&six& months&before&Dec.& 31

2011,&or&the&contract&would&continue&for&_ive&more&years.&Initially&Turkey&terminated&agreement&but&later

it&extendedlongterm&gas&purchase&contracts&from&the&West&Pipeline&until& 2021&and&2025&together&withgiving&approval&for&South&Stream.


18/19

Page 19

&&&&&&&&&&&&&&&$S$C$E$N$A$R$I$O$S

&&&&&&&&&&&&&&&&NABUCCO&TRIUMPH

EU&decrease&energy&dependence&from

Russia

Russian&energy&leverage&diminished&and

country&international&position&deteriorates

EU&can&dictate&prices&to&some&extent

U.S.&sphere&of&in_luence&fostered&over

Ukraine

&&&&&&&&&&&&&&&&COMPETING&PIPELINES

&&&&&&&&&&&&&&&&RUSSIAN&SUPREMACY&&&&&&&&&&&&WINTER&IN&EUROPE

Low&gas&prices&in&Europe&and&economic

boom

Increased&political&importance&of&Turkey

Higher&costs&for&supplying&countries&and

possible&dif_iculties&in&securing&necessary&&

natural&gas&supplies

Ukraine&in_luence&decrease&but&it&seeks

closer&connections&with&West&to&prevent&social&disturbances

Russian&in_luence&increases&in&Belarus,

Bulgaria,&Serbia,&Turkmenistan&and&Ukraine

Russian&economy&is&catching&up

Russia&dictates&price&of&natural&gas&in

Europe

Further&decrease&in&natural&gas&suppliesin&Europe

Increased&prices&and&slow&economic&growth

Ukraine&and&Belarus&de_initely&enter

Russian&orbit&

Negative&environmental&impact&due&to&start

of&shale&oil&and&gas&development&in&the&

countries&of&the&region

ScenariosIn&the&future&four&scenarios&are&possible:

I. Competing& Pipelines.& This& scenario& assumes& that& both& South& Stream& and& Nabucco& or& some& shorter

version&of&Nabucco&are&in&process&of&implementation.

II.& Russian& Supremacy& declares&triumph& of&Russia&and& its& ability& to& control& the& price&of&natural& gas& in

Europe.

III.& Winter& in& Europe.& Under& this& scenario& neither& side& plan&to& implement& project.& Imaginary& projects

serve& to& pressure& other& countries& to& serve& geopolitical& interests& of& big& players.& Russia& acquire

ownership&in&Ukraines&pipeline&and&abandon&South&Stream.

IV.& Nabucco& Triumph& scenario& means& that& the& Nabucco& is& taking& upper& hand& and& that& EU& supply

diversi_ication&policy&triumphs&while&South&Stream&is&abandoned.


19/19

Problems&with&EU&regulations&are&not&new&to&Gazprom.&Following&the&European&Commission's&decision&to

invalidate& Austrian& OMV's& sale& to& Gazprom& of& a& 50%& stake& in& the& Baumgarten& distribution& center

Gazprom&lost& interest&decreased.& After& losing&partownership&in&this&major& continental& hub&Austria&wil

be& ordinary& importer& country& without& advantages& of& a& transit& country& and& distribution& center& as

originally&planned.&

Even&if&built&South&Stream&can&expect&many&obstacles.&At&the&moment,&its&foremost&goal&is&to&stop&and&roll&

back&the&implementation&of&the&EU's&Third&Legislative&Package&on&the&European&energy&market.&That&anti

monopoly&legislation&requires&separation&("unbundling")&of&gas&production&and&sales&from&transportation

and&storage.&As&such,&it&bars&a&vertically&integrated&monopoly&such&as&Gazprom&from&holding&ownership

stakes&in&pipelines&and&storage&sites&on&EU&territory.&This&package&should&be&adopted&in &March&2013&and

for& that& reason&Russia& and&Gazprom& are& trying& to& wrap& up&whole&project&before&the&end&of& 2012.& This

doesnt&mean&that&Gazprom&will&not&face&regulatory&problems&in&future.&

Risks - Conclusion

Probably&the&most&challenging&for&South&Stream&will&be&environmental&compliance&requirements.

Scenario& analysis& shows& that& despite& of& dif_iculties& and& despite& of& political& games& around& the& project

South&Stream&can&be&developed.&Realistically,&South& Stream& &will&start&with&smaller&volume&and&gradually

it& will& increase.& At&one&point,& development&of&shale&gas& in&Europe&might&decrease&gas&price&but&another

probably&larger&impact&will&be&from&increase&in& LNG&supply&that&will&be&coming&to&Europe&mainly&from

Nigeria,&Trinidad&and&Tobago&and&Qatar.&Finally,&eve ntual&development&of &gas&upstream&projects&in&Israe

and&Cyprus&might&be&the&most&important&challenges& for&Russia&and&Gazprom .&However,&maritime&dispute

between&these&countries&and&Turkey&could&postpone&development&of&these&sites&inde_initely.

South Stream Project. Análisis del proyecto de gas natural conocido como South Stream. Prof Daniel...

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