Ukrainian gas transmission system may cost more than South Stream construction

Alexey Miller, Chairman of the Gazprom Management Committee reported today to Vladimir Putin, Prime Minister of the Russian Federation on the negotiations with Ukraine in the gas sector and, in this regard, on the South Stream project implementation.

According to Alexey Miller, Ukrainian partners estimate that the Ukrainian gas transmission system will cost USD 20 billion. In addition, the GTS upgrade, according to various estimates, will require another EUR 2–3 to 7–8 billion. Moreover, the Ukrainian party insists on the Russian gas price discount, which will cost Gazprom some USD 9 billion a year.

While the South Stream project is estimated to cost EUR 16.5 billion, EUR 10 billion out of this amount will be spent on the offshore section and EUR 6.5 billion – the onshore section.

Vladimir Putin ordered to continue negotiations with Ukrainian partners, “on the assumption that Ukraine has always been, it is and, I hope, will remain a strategic partner of ours”, yet to speed up the South Stream project execution. And to start constructing it as early as in 2012, instead of 2013.

Gazprom website Editorial Board

 

Transcript of the meeting beginning:

Vladimir Putin: Mr. Miller, today we will talk about the entire scope of Gazprom's business – the winter weather hasn't actually set in for the European part of the country, but it will surely come. You have already reported on the large-scale power generation and Gazprom's achievements, but let's begin with South Stream. I would like to thank You and all those who were engaged in the project. Together with our Turkish friends we have made another crucial step forward. When do you think the construction could start?

Alexey Miller: Indeed, the Turkish party's permit to operate in its exclusive economic zone on the Black Sea shelf means a great progress for beginning the offshore gas pipeline construction under the Black Sea from Russia to Bulgaria and from Russia to Europe. All the design and pre-construction surveys on the Black Sea shelf are to be completed before the end of 2012. We are planning to start the offshore section construction in early 2013 – within a little more than a year, to finish the pipe construction – in December 2015 and to supply first commercial gas to Europe – in late 2015.

Vladimir Putin: I think it will be more appropriate to start next year, by the end of it. It doesn't make a great difference, but 2012 would be better for the start.

Alexey Miller: All right, Mr. Putin, we will do this.

Vladimir Putin: What is the total financing amount? I mean the offshore and the onshore sections.

Alexey Miller: The total financing for the offshore section makes up EUR 10 billion according to the comprehensive feasibility study that is ready now (expert review is performed). The four-string pipe stretches 925 kilometers and has the design capacity of 63 billion cubic meters of gas.

Vladimir Putin: What about the onshore section?

Alexey Miller: The onshore section will receive EUR 6.5 billion. It is a little longer than 2 thousand kilometers.

Vladimir Putin: The total amount is nearly EUR 15 billion then?

Alexey Miller: A little more than EUR 15 billion.

Vladimir Putin: How do you share the financial burden between the Russian party and the foreign participants such as German BASF, Italian Eni and Electricite de France?

Alexey Miller: The financial burden is proportionate to a participant's stake in the project: Eni holds 20 per cent, while the remaining part is distributed between Electricite de France and the German companies. Gazprom, on its part, holds 50 per cent. We suppose that 30 per cent of the financing will be raised through the equity capital provided by the project shareholders and 70 per cent will come from debt financing.

Vladimir Putin: Briefly speaking, if the total amount is EUR 15 billion, then Russia's share is around EUR 7.5 billion?

Alexey Miller: Yes, this is Russia's share. The foreign participants from Italy, France and Germany take part exclusively in the offshore section construction and joint ventures in transiting countries will finance the national sections on a stand-alone basis.

Vladimir Putin: It runs through Bulgaria...

Alexey Miller: Bulgaria, Serbia, Hungary, Slovenia, Austria, it also has gas laterals to Croatia and Republika Srpska. Consideration is being given to a possible gas lateral to Macedonia...

Vladimir Putin: Have we signed the required documents will all the European transiting countries?

Alexey Miller: Intergovernmental agreements have been signed with all the countries. As you know, we have signed all necessary corporate documents for joint ventures as well. They are legally established and have started operations. Prospecting is underway on all national transit sections and we have launched the spatial planning. That is, we are absolutely on schedule and aware that no obstacles at any section may arise and prevent the project compliance with the deadline: end of 2015 – first gas supplies.

Vladimir Putin: Mr. Miller, let me draw your attention to the fact that Ukraine remains our main strategic partner in this activity aimed at supplying our gas feedstock to European consumers. The bulk of gas is pumped through this country. We have contracts in force for gas supply to Ukraine's consumers as well as for gas transit to Europe. I remember seven or eight years ago we negotiated a consortium with Ukrainian and European partners and we also signed a Memorandum among Germany, Russia and Ukraine then.

Alexey Miller: It was back in 2003, Mr. Putin.

Vladimir Putin: Yes, it was. What is the outlook of the joint efforts in this area?

Alexey Miller: The idea of a consortium has been put by our Ukrainian colleagues on the agenda of negotiations on the gas cooperation just within the recent months. We have thoroughly addressed with our Ukrainian colleagues a possible creation of a gas transmission consortium, in particular, with participation of Gazprom. The negotiations are still in progress, there is a common vision of mutual approaches, understanding of general figures as well as an agreement that next January we will return to the negotiating table with our Ukrainian colleagues.

Vladimir Putin: How do our Ukrainian friends evaluate the cost of Ukraine's gas transmission system?

Alexey Miller: The application amount is considerable. Our Ukrainian friends have announced USD 20 billion as the cost of Ukraine's gas transmission system. This is a great amount taking into account the significant funds needed for the system upgrade. Currently, we may discuss a certain spread, an estimate: what funds are required to upgrade the Ukrainian gas transmission system? The figures vary from EUR 2–3 billion to EUR 7–8 billion. Therefore, the cost of Ukraine's gas transmission system is not limited to the purchase of the company's equity. It also implies the awareness that significant funds will be required afterwards for the system upgrade.

Vladimir Putin: As far as I understand, a substantial gas discount was also negotiated here. What is the approximate annual rate?

Alexey Miller: Our Ukrainian colleagues linked this issue to the gas price discount. In terms of volumes, 40 billion cubic meters of gas is the amount Ukraine has to offtake under the gas supply contract in force...

Vladimir Putin: You mean to buy.

Alexey Miller: Yes, to buy. The discount would be around USD 9 billion per year.

Vladimir Putin: Mr. Miller, I understand that these are complicated, industry-specific issues. Yet, I ask you to resume these negotiations with our Ukrainian friends considering that Ukraine was, is and, I hope, will remain our strategic partner within this joint activity. I mean the growing demands of European consumers that are also conditioned by the abandonment of nuclear energy in some European countries. No doubt Ukraine's gas transmission system will be in demand and I want you to continue the negotiations with our Ukrainian friends. I hope the negotiations will have a logical end.

Alexey Miller: Mr. Putin, immediately after the end of the New Year vacations we will resume the negotiations with our Ukrainian colleagues according to your assignment.

Vladimir Putin: All right.

(based on the materials published at the official website of the Russian Prime Minister)