Russia's South Stream pipeline hits financial snags

By bne IntelliNews October 10, 2014

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With sanctions closing off international capital markets to Russia's oil and gas sector, Kremlin-owned Gazprom has postponed its attempts to raise project financing for its controversial South Stream pipeline until the first quarter of 2015, a source in the company told Interfax. At the same time, Gazprom announced that the costs of South Stream will rise 47% to €23.5bn. 

"As for the timeframe, to draw project funding by the end of 2014, this is not now the case. The shareholders have now set the task of arranging funding in the first quarter of next year," the source in South Stream Transport told Interfax on October 9. South Stream AG is 50% owned by Gazprom, with Italy's Eni holding a 20% stake, Germany's Wintershall 15% and France's EDF 15%.

The South Stream pipeline, planned to cross the bed of the Black Sea from the Russian coast to Bulgaria, is a crucial part in the Kremlin's strategy to ship gas directly to the European Union, circumventing Ukraine, which it regards as an unreliable transit country. The first part of the plan was the construction of the Nord Stream pipeline transiting the Baltic Sea from Russia to Germany, which went on stream in 2011.

Gazprom has not itself been targeted by sanctions, because of the strategic importance of the company to Europe, but restrictions placed on access of other Russian state-owned energy giants and banks are believed to be spilling over to Gazprom. However, the Interfax source denied that any credit institution had refused to work with the company. 

At the same time, first deputy head of Gazprom's finance department said that the costs of the pipeline will be 47% higher than originally planned, totaling €23.5bn - €14 billion for the underground section and € 9.5bn for the overland section crossing the Balkans to Italy. The cost of the Russian part of the pipeline appears to remain at R739bn.

"If no project financing is attracted, Gazprom’s total financing of the project could double from the currently assumed $23bn until end of 2018, depending on how much its partners, can or rather cannot, muster," wrote Sberbank's Alex Fak. "Gazprom could also turn to the Russian government for part of the funding," he adds.

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