Serbia signs up Gazprom subsidiary to build South Stream section

By bne IntelliNews July 9, 2014

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The operator of Serbia's section of the South Stream gas pipeline signed on July 8 a €2.1bn deal with a subsidiary of Russian gas giant Gazprom for the construction of the route through the country. The deal confirms Serbia's continued support for the project, which seeks to ship massive volumes of Russian gas into the EU while bypassing Ukraine, despite pressure from the EU to put work on the project on hold. 

Serbia's state-owned gas utility Srbijagas signed off on the contract with Gazprom unit Centrgaz. Gazprom said in a statement that its subsidiary had been selected from among four bidders from Russia and Serbia through a tender process launched in March. 

The Serbian section of the pipeline will be operated by South Stream d.o.o., a joint venture between Gazprom and Srbijagas, which hold 51% and 49% respectively. Centrgaz will be responsible for provision of equipment and materials, as well as construction of the pipeline, the statement explains. Serbian companies will be sub-contracted to carry out parts of the project.

Ahead of the signing, Serbian Prime Minister Aleksandar Vucic, who is currently on a visit to Moscow, reiterated that construction of the pipeline is in Serbia's interests, according to a statement on the Serbian government's website. Insisting it will guarantee the country's energy security, Vucic also claimed to have attained the best deal of any of the country's set to host the 63bn-cubic-metre monster.

Serbia is among the last countries signing the agreement, he noted, before adding that while cash-strapped Serbia will invest €19m in the pipeline section, the "Russian Federation" will pump in over €2bn. Belgrade later reported Vucic enjoyed a warm meeting with Russian President Vladimir Putin, at which the pair spoke of closer economic partnership.

Question marks

After running below the Black Sea and docking in Bulgaria, the main line of South Stream is planned to plough a 422km course across Serbia, before crossing Hungary to dock in Austria. Additional branches in Serbia's region would offer supply to Croatia and Republika Srpska. According to Gazprom, the first gas is expected to flow through the Serbian section of the pipeline by 2016, with the full network becoming fully operational by 2018. 

However, a huge question mark hangs above South Stream. Brussels has long insisted the pipeline must respect regulations that demand third party access to energy infrastructure. With the bloc's opposition having risen during the crisis in Ukraine, MEPs voted in April to suspend work on the project.

However, Serbia - as well as the EU member states involved - continue to push for it to continue. On June 24, an agreement was signed between Gazprom and Austrian state energy firm OMV to begin work on an Austrian section. 

Bulgaria, which is fully dependent on Russian gas, has also called on Brussels to consider the needs of countries in the region. Sofia halted construction work last month after the European Commission demanded it suspend the project. 

Brussels moved quickly to leverage claims the country may have broken public procurement laws by favoring local and Russian bidders. The selection of Russia's Stroitransgaz, owned by sanctions-hit businessman Gennady Timchenko, to build the €3.5bn Bulgarian section was a particular issue.

In a statement released on June 22, Serbia’s Deputy Prime Minister Zorana Mihajlovic declared the halt in Bulgaria would effectively suspend the Serbian section. “Bulgaria is the center," he said. "Until Bulgaria finishes negotiations with Brussels and the European Union and Russia, the project is suspended. Either way, the first and second scenarios mean there will be a delay in the construction in our country”. However, Vucic quickly denied Serbia would delay the project.

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