South Stream Gas Project Price Jumps
31.07.2008 (17:51) | RBC
Investment in the South Stream gas pipeline project will reach approximately $20 billion, Russian Energy Minister Sergei Shmatko said yesterday.The twofold increase in the price, from $10 billion at the beginning of the year, could slow the project down, experts warn.
The 900km (550-mile) South Stream will pass under the Black Sea to Bulgaria, and then split into two arms: the northern section stretching to Romania, Hungary, the Czech Republic and Austria; and the southern arm going through Bulgaria to southern Italy. The new pipeline, with a capacity of up to 30 billion cubic meters a year, is expected to become operational in 2013. Bulgaria, Serbia, Hungary and Greece have already signed up to the project.
Discussing South Stream with Italian Industry Minister Claudio Scajola yesterday, Shmatko described it as “a very interesting project estimated at $20 billion.” This is twice as much as preliminary estimates announced by ENI CEO Paolo Scaroni earlier this year. At that point he estimated the entire project at over $10 billion. Both Gazprom and ENI refused to comment on news of the latest increase in the project’s cost.
Shmatko also discussed the pipeline with Christos Folias, the Greek Minister of Development. The Russian Energy Minister stressed that foot-dragging on the project would affect its cost and its reputation. Therefore, to speed up the decision-making process, Shmatko offered to set up a joint monitoring group, and the proposal was accepted by the Greek side.
Meanwhile, the final price of the project may be even higher than $20 billion. “No final calculations have been prepared yet, and the $20 billion figure is not based on accurate calculations,” said Alexander Nazarov, an analyst at IFC Metropol. The increase in the cost estimates could also be a result of inflation, he noted, referring to a 50 percent increase in pipeline prices since the start of the year. Another reason is the weakening of the US dollar, which has lost about 5 percent of its value over the period, or some new technical data could have been obtained, necessitating changes in the proposed route of the pipeline.
The twofold increase in the price will hardly frighten off the project participants, but it could delay the construction, Nazarov believes. At this point, he expects the project members to pay more attention to the technical and feasibility study.
The price increase to $20 billion means an additional RUB 30 billion (approx. $1.28bn) for Gazprom, which is about 3-4 percent of the group’s estimated capital expenses in 2010-2012. “This is not a critical increase for Gazprom,” Nazarov concluded.
Despite higher costs, South Stream remains profitable due to the rising price for natural gas, says Sergei Pravosudov, Director of the National Energy Institute. For his part, Mikhail Korchemkin, Director of East European Gas Analysis, expects South Stream’s cost estimates to be revised upwards repeatedly in the future. He added that Nabucco, a rival gas pipeline project, would be 30-40 percent cheaper, meaning that gas transportation costs would also be lower compared to South Stream, which could persuade Azerbaijan to opt for Nabucco.
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