Russia presses for deal to tie up Serbia's energy sector

By bne IntelliNews January 16, 2008

Nicholas Watson in Prague -

With Russian President Vladimir Putin's visit to Bulgaria on January 17-18 primarily concerned with the ceremonial act of signing an agreement to build the Burgas-Alexandroupolis oil pipeline, Russian officials are pressing hard for a deal with neighbouring Serbia to tie up its entire energy sector in one fell swoop.

Though the details remain sketchy, various statements from officials and leaks to media outlets indicate the outline of a deal whereby Russia would route part of its planned South Stream gas pipeline, which will carry Russian gas under the Black Sea to Greece, through Serbia and set up three Russian-controlled joint companies - one for oil and two for gas - on Serbia's territory.

According to the Financial Times, in the oil sector Gazprom is now proposing to acquire a 51% stake in the state-owned Petroleum Industry of Serbia (NIS) for €400m in cash, with a pledge to invest another €500m in the company's aging two refineries, which have a refining capacity of 214,830 barrels per day (b/d). This is higher than a previous offer which Mladjan Dinkic, Serbia's economy minister, described as "humiliating;" Serbia believes the firm is worth about €2bn.

Gazprom officials wouldn't comment on the FT report, except to say that intense negotiations are continuing ahead of Putin's upcoming visit to Sofia.

NIS is one of the last large oil firms in the region left in state hands and its privatization slated for later this year is being eagerly awaited by a host of foreign oil majors, such as Austria's OMV, Hungary's Mol, Greece's Hellenic Petroleum Group, Poland's PKN Orlen, and Romania's Rompetrol. However, those firms won't get a look in if Russia succeeds in pre-empting any competitive tender for it, something that the EU has already voiced concerns over.

Speaking to the BBC on January 10, Krisztina Nagy, spokeswoman for the EU enlargement commissioner's office, said: "The Commission hopes that the sale of an important asset such as the Serbian oil company will be open and driven by objective, commercial and economic interests."

South Stream heads north?

The two gas companies proposed by Gazprom would be formed around a northward branch through Serbia of the planned South Stream gas pipeline. The Russians want to announce the final route of the South Stream gas pipeline, which is a joint project of Gazprom and Italy's ENI, also on Putin's trip to Sofia, hence the haste to tie up this overarching energy deal with Serbia. South Stream will run from Russia across the seabed of the Black Sea to Bulgaria, from where it could split into two, with the main arm running westward via Greece to Italy, and another possibly going through Serbia and onto Central Europe.

Gazprom proposes setting up a 51%-49% venture with the state-owned Srbijagas to build and operate this pipeline. To further increase Serbia's security of supply, Gazprom also proposes a similar joint venture to build an underground gas storage site at Banatski Dvor in the northern province of Vojvodina.

Gazprom, its subsidiary Gazpromneft and NIS would retain a monopoly on refining and a protective ban on private-sector oil and gas imports for five years, effectively tying up the country's entire energy sector, which is in direct contrast to what is happening in the EU where the energy markets are being liberalised.

Any deal, though, will have to navigate the shifting and murky waters of Serbian politics. While the lead party in the current governing coalition, the Democratic Party of Serbia led by Prime Minister Vojislav Kostunica, is generally thought to lean more toward Moscow, the other main coalition party of President Boris Tadic is ostensibly more Western oriented and less keen to allow Russia to get its hands on its energy sector. While acknowledging that Gazprom would make a good strategic partner for NIS, Tadic told local radio on December 31 that: "We cannot sell NIS for nothing, nor can the company be handed over to any partner for political reasons." Russia is backing Serbia over its attempt to prevent the breakaway province of Kosovo from seceding.

A junior member of the ruling coalition, G17 Plus, is even more adamant against doing any exclusive deal with Russia. G17 Plus spokesman Nikola Papak told the Serbian news agency BETA that NIS should be privatized through a tender, thereby getting a much better price than what Gazprom is offering.

Critics of the deal also note that Serbia wants to become a regional hub for Russian gas and thus get large fees from the transit of Russian gas across its territory. However, Gazprom is proposing that the part of the South Stream pipeline running through Serbia will only have an annual capacity of 10bn cubic metres (cm), far lower than the 30bn cm capacity pipeline that will run through Greece to Italy.

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Russia presses for deal to tie up Serbia's energy sector

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