Gazprom may go solo on Turkish Stream construction

By bne IntelliNews July 9, 2015

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Gazprom has broken off a $2.2bn contract with Italian energy engineering giant Saipem to lay a natural gas pipeline to Turkey under the Black Sea to bypass Ukraine, and may be contemplating using domestic firms to lay the line.  

It had proved impossible to reach an agreement with Saipem on "many working and commercial issues" related to the project, Gazprom said in a statement. The Russian natural gas giant added that it will start talks with other potential contractors soon.

Russian Energy Minister Aleksander Novak said on July 9 the decision was purely technical and would not effect the pipeline's construction. "The project continues to be implemented. We are continuing to work with our Turkish partners on the intergovernmental agreements. That is [to say], this is a technical issue that is being resolved between Gazprom and the commercial organisation," Interfax news agency quoted Novak as saying.

Saipem had two contracts with Gazprom to build two strings of the planned South Stream pipeline from Russia with landfall in Bulgaria, which Russia abandoned in December 2014, replacing the project with a new route to Turkey.
But Gazprom kept Saipem waiting after the decision to reroute the planned pipeline. According to business daily Kommersant, Gazprom has been paying Saipem €50mn per month for having two pipe-laying ships stand idle. In addition, Saipem's Black Sea fleet is booked for another customer later in the year, Interfax reported.

Gazprom might now be preparing to go it alone on construction, according to press reports, in order to reduce the project's vulnerability to any escalation of sanctions by the West. Sources quoted by the news agency noted that Gazprom provided guarantees to Gazprombank on a $1bn loan to Russian domestic pipelaying company Mezhregiontruboprovodstroy (MRTS), implying that these funds could be used to buy two second-hand pipelaying vessels. This would enable Gazprom to build Turkish Stream and also a second string to the existing Baltic Sea pipeline Nordstream, without being vulnerable to harsher sanctions that could force contracted Western partners to pull out mid-project. The move would also fit with the Kremlin's declared strategy of import substitution.

Gazprom has pledged to reroute gas currently supplied to Europe via Ukraine by 2019, calling Ukraine an unreliable transit country. However, as talks with Turkey prove to be protracted, Russian President Vladimir Putin in early July allowed Gazprom head Aleksei Miller to start talks with Ukraine on possible transit after 2019.

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