Putin caps foreign policy with energy deals in Southeast Europe

By bne IntelliNews January 18, 2008

Derek Brower in London -

Russia laid its strategic cards on the table Friday, January 18 as President Vladimir Putin used a summit in Sofia to sign new energy deals that will increase the country's influence across Southeast Europe. If the foreign trip is Putin's last as president, as some analysts believe, it would be a symbolic final foray: the deal-making in the Balkans reinforces one of the main themes of his presidency - the extension of Russia's energy interests across Central and Eastern Europe.

An agreement with Sofia gives Bulgaria a 50% stake in the section of the South Stream gas pipeline that will cross the country. The €8bn project, to be built by Gazprom and Italy's Eni, will cross the Black Sea before entering Bulgaria. It will export up to 31bn cubic metres a year (cm/y) of gas to Central Europe, says Gazprom.

Securing a 50% stake in the pipeline was a victory for Bulgaria, claims Sofia. According to Prime Minister Sergey Stanishev, Russia had, until the previous day, wanted to keep 51% of the company that will manage the section of the line that crosses Bulgaria. Whether Russia's agreement to parity in the holding company was simply PR or actually represented a climb down, Sofia also stands to gain "hundreds of millions of euros" in transit fees when South Stream begins exporting gas across the country, says Petar Kanev, deputy head of the parliamentary economics committee.

A planned oil pipeline from the Bulgarian port of Burgas to Alexandroupolis, on the Aegean coast in Greece, also took a step forward in Sofia. A three-way agreement signed between Russia, Greece and Bulgaria establishes the company that will develop it, giving Russian firms Rosneft, GazpromNeft and Transneft a 51% stake, with Greek and Bulgarian companies taking the remainder.

That pipeline, which will ship 35m tonnes a year (t/y) in its first stage and up to 50m t/y later, isn't just a boon for Greece and Bulgaria - which will gain transit fees for handling the oil - it's also a key plank in Russia's ambition to control the export of Central Asian crude to Western markets. With Kazakh oil exports set to more than double with the coming-on-stream of new production in the Caspian, Astana has pleaded with the Caspian Pipeline Consortium (CPC) to increase the capacity of its export system that ships crude from the Caspian to Russia's Black Sea port of Novorossyisk. Transneft, which operates that pipeline system, recently agreed: but only if Kazakh companies in turn agree to ship their crude through Burgas-Alexandroupolis once it crosses the Black Sea. Astana's concession to those terms will guarantee the take-up of capacity on the new Balkan pipeline - but will effectively nix the plans of Kyiv and Warsaw to land Central Asian crude in Odessa and pipe it to Polish refineries in Gdansk and Plock.

The shareholding agreement for the Burgas-Alexandroupolis pipeline will also be a blow to Chevron, one of the largest foreign producers in Kazakhstan and a partner in the CPC pipeline. Sources at the oil major told bne last year that the company wanted to enter the Burgas-Alexandroupolis project "on equal terms" with the Russian companies. Friday's deal cuts the US firm out altogether.

Quid pro quo

Not everything is necessarily going Russia's way. Gazprom's attempt to win control of the Serbian energy sector remained in the balance during the Sofia summit. The Russian company has offered €400m to buy 51% of Petroleum Industry of Serbia (NIS), the country's dominant oil company. Critics such as Economy Minister Mladjan Dinkic from within the government in Belgrade, call the offer "humiliating," and Serbian Deputy Prime Minister Bozidar Djelic said the talks with Gazprom were proving "very difficult."

Prior to Gazprom's offer, the Serbian government had planned to auction an initial 25% stake in NIS. With Russia's Lukoil, Austria's OMV and Hungary's Mol all interested, analysts expected the price to exceed the €2bn value the government put on the company.

In exchange for the low offer, Gazprom says it will guarantee Serbia's gas supply in the long term - no small thing, given regular shortages in the country. It has made vaguer promises to Belgrade about routing the South Stream gas pipeline through Serbia and build a 10bn cm/y gas storage facility in Banatski Dvor. However, leaked details of a draft protocol between Gazprom and Belgrade say the company has demanded a 51% stake in all the country's gas infrastructure, guarantees of free-transit of its gas and access to all capacity of pipelines and storage. That would hand over control of Serbia's energy sector to Gazprom.

Jonathan Stern of Oxford's Institute for Energy Studies says the move would make sense for Gazprom, allowing it to buy assets whose value will only increase "when Serbia becomes a fully paid-up member of the international community". Yet, say analysts, the likelihood of the main trunk line of South Stream passing through Serbia is small; more probable is a spur line that would supply Serbia and Bosnia-Herzegovina.

In the background to the proposed deal is Russia's support for Serbia over the Kosovo issue. Pristina is expected to declare its independence after Serbia's presidential elections on January 20. Germany and the US have already said they will recognise the province and have urged the EU to do the same. Boris Tadic, who is running for reelection as president of Serbia, told the UN in New York on January 17 that Belgrade would never acknowledge an independent Kosovo and that the issue threatens to tear apart the region again.

Russia, conscious of its own autonomy-minded regions, says it will back Belgrade. That helps to explain the enthusiasm for the Gazprom deal of Vojislav Kostonica, Serbia's prime minister. The deal for NIS is "very much a political reward for Russia's support over Kosovo," says Andrew Neff, a regional analyst at Global Insight.

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Putin caps foreign policy with energy deals in Southeast Europe

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