Silvio Berlusconi will support South Stream in word.
Today Russia finally has an answer to the European Union's plans for the Nabucco gas pipeline. Prime Minister Vladimir Putin is meeting with his Italian counterpart Silvio Berlusconi, in Sochi, where they will issue a joint announcement on the South Stream gas pipeline project. In addition, Gazprom is signing a corresponding agreement with Greece's DESFA, Bulgaria's Bulgarian Energy Holding, and Serbia's Srbijagas. However, even Silvio Berlusconi's purely symbolic participation in this event is something for which Russian business will have to pay dearly.
Silvio Berlusconi's visit to Russia should go down in history as the day that the South Stream pipeline project was born. Due to Gazprom's planning, Mr Berlusconi's visit has been timed to coincide with signing of agreements with the project's four other participants: Italy's ENI, Greece's DESFA, Bulgaria's Bulgarian Energy Holding, and Serbia's Srbijagas. Yesterday, official Gazprom representative Sergei Kupriyanov told Kommersant that Russia would thus respond with concrete steps to the political declaration made at the EU's "New Silk Road Southern Energy Corridor" conference in Prague. This means that Russia has consciously gathered all the project's participants in Sochi on the same day in order to achieve the maximum publicity effect, and demonstrate that Moscow has something to counter the EU's latest attempt to breathe new life into Nabucco.
The South Stream pipeline is a joint project between Gazprom and the Italian company ENI, which will supply Russian and Central Asian gas to Europe across the Black Sea. The undersea section of the pipeline will be 900 kilometres long, and its maximum depth will be 2,000 metres. The project's cost will exceed 20 billion Euros. A memorandum concerning the pipeline was signed in Rome on the 23 of June, 2007. The company managing the project, South Stream AG, was registered in Switzerland on 18 January 2008. The gas pipeline's initial capacity could be increased from 30 billion to 47 billion cubic metres. Incidentally, despite Silvio Berlusconi's personal appearance in Sochi, the Italians are still the weak link in the South Stream project, having periodically reported on existing contradictions right up to the very last minute.
Literally two days before his visit to Russia, ENI executive Paolo Scaroni said in Egypt that "There is still nothing definite, and we have still not reached an agreement on South Stream." As a result, it became apparent yesterday that the Italian involvement in South Stream is in practice limited to Mr Berlusconi's presence in Sochi. Accordingly, as the Prime Minister's press secretary Dmitry Peskov said yesterday, Gazprom and ENI will not be signing the long awaited agreement, and will instead issue a routine interim document that is an amendment to the previously signed Memorandum of Understanding on long-term steps towards the realisation of the South Stream project. The new document stipulates that a joint venture be launched for the construction of the underwater portions of the gas pipeline, which include a segment from Russia to Bulgaria along the bottom of the Black Sea, and a segment from Greece to Italy along the bottom of the Adriatic.
Moreover, Italy remains the only country involved in the project that has not signed an agreement with the Russia government on this issue. Bulgaria, Hungary, Serbia and Greece all did so last year. For this reason, the presence of Silvio Berlusconi in Sochi should be seen more as a public relations victory for Mr Putin than a step towards the implementation of the South Stream project. The truth is that Italy's real position towards the pipeline is nowhere near as friendly as Silvio Berlusconi's rhetoric. The Italian Minister of the Economy Claudio Scaiola recently participated in a conference in Sofia, where he said that the "strategic challenge for the Italian government is diversifying its gas supply", and that "the completion of the Italian-Algerian ‘GALSI' pipeline in 2013 and the Interconnector Italian-Turkish-Greek project, which will be supplied by gas from Azerbaijan, will enable Italy to free itself from its almost complete dependence on Russian gas." The Minister also added that "Russia should not consider itself to be the sole master of Europe's gas market".
The real achievement in Sochi today was not the interim memorandum with Italy, but rather the agreements with the Bulgarian, Greek, and Serbian gas corporations. These companies will be represented in Sochi by their top executives, since the political leaders of the respective countries, unlike Silvio Berlusconi, have not given the project their personal blessing. Agreements with these three countries are due to be signed in succession. They stipulate the creation of three joint ventures, which will carry out the construction of the South Stream through Bulgaria, Serbia and Greece. Each of the businesses, like South Stream AG itself, will be registered in Swiss city of Zug, which has a prominent Gazprom presence and is home to the headquarters of Nord Stream, Shtokman Development, Rosukrenergo, and the company RosGaz, which, since the beginning of this year, has begun to sell gas to Hungary instead of Rosukrenergo. Gazprom has so far not recognised RosGaz as one of its affiliates.
Maia Khristova, а public relations expert at Bulgarian Energy Holding, confirmed yesterday that Bulgarian Energy Holding EAD CEO Galina Tosheva will sign an agreement with Gazprom on May 15 that will launch a joint venture to build the Bulgarian section of South Stream. As expected, this agreement will stipulate that new pipelines will be built in the country, and that Bulgaria's existing gas pipeline system will be used exclusively for the country's domestic needs. This was confirmed at the end of April, after discussions with the Bulgarian Prime Minister Sergei Stanishev in Moscow. This exact issue had been the key point of contention between Russia and Bulgaria on the South Stream project: Gazprom had previously proposed that gas be transported in Bulgaria using existing pipelines. Incidentally, Reuters reported as late as yesterday that not all points of contention between Gazprom and the Bulgarian company had been overcome. The news service cited Bulgarian Energy Holding as its source, and said that the continued disagreement is the reason that no representative of the Bulgarian Government is going to Sochi.
The General Director of Srbijagas, Dusan Bajatovic, confirmed that he plans to sign an agreement with Gazprom that will allow the construction of a gas pipeline in Serbia (450km), with an annual capacity of over 20 billion cubic metres of gas. He added that the capacity could be increased. The Greek gas pipeline system management company DESFA, which split from the state-owned company DEFA in 2007, also said that they will sign a basic agreement on 15 May for general cooperation with Gazprom in the launching of a joint venture that will construct a pipeline in Greece with a capacity of 10 billion cubic metres. Gazprom will get 50% of shares in three out of four of the joint ventures, and will get 51% of the shares of the venture with Srbijagas.
An assessment of the feasibility of the Greek part of the pipeline will be ready, says DESFA, no later than September of 2009, and a detailed plan for the whole project is due by the middle of 2010. The final investment proposal has to be ready by mid 2011, and the financial agreements will be signed subsequently. The pipeline will begin operation by the end of 2015, say DESFA representatives.
To secure its success in the continuing "gas wars of nerves", besides signing the three agreements with Europen countries, Russia will host another event: Recep Tayyip Erdogan, one of the key players in the Nabucco project, will visit Sochi on Sunday. As Dmitry Peskov, the Russian Prime Minister's press secretary, stressed yesterday, the main topic of discussion will be energy, including gas supply routes. Incidentally, the Turkish Prime Minister is a good friend of Silvio Berlusconi. It's just only last week Turkish President Abdullah Gul, whose office is largely ceremonial, signed the European declaration on getting the "Southern Energy Corridor" project underway. . It should make Europeans worry that Prime Minister Erdogan, the man with the real power in Turkey, is coming to Sochi to meet with Vladimir Putin.
This kind of propagandistic triumph for South Stream would have been impossible without the personal participation of the Italian Prime Minister. It is possible that in exchange for his support of Gazprom, Berlusconi could ask Vladimir Putin for concessions on several projects that are important for Italy.
As Kommersant has already reported, in early April, at the request of the Italians, Gazprom bought a 20% share in Gazprom-Neft from ENI for $4.1 billion, which is almost double its market value. In addition, ENI is asking Gazprom to buy its shares in SeverEnergy for $1.2 billion, (which the Italians bought in April of 2007 during the Yukos oil company auction when they also signed an agreement stipulating that Gazprom repurchase a 20% share in Gazprom Neft and a 51% share in SeverEnergy from ENI). In addition, the Italian export credit agency SACE asked for additional collateral from Gazprom in the form of foreign currency revenues of the Russian gas monopoly. In light of the financial crisis, this kind of partnership with the Italians is extremely unprofitable for Gazprom, but nonetheless the company has been forced to take these steps for political reasons.
Silvio Berlusconi's likely requests for Vladimir Putin will not be restricted to the energy sector. Kommersant's sources suggest that the Italian government is very worried by the developing situation at Rusal's Eurallumina plant in Sardinia. In February of this year, Rusal announced that due to the sharp fall in both demand and prices for aluminium oxide on the world market, beginning from March 1, 2009 work there would be halted for one year. The Italian government has repeatedly stated that it would not allow the factory to close and lay off a significant number of employees. In March, Eurallumina and the Italian government signed a memorandum of understanding. However the Italian authorities do not consider the crisis situation at the factory resolved. .
It is most likely that a host of other important bilateral economic projects will be discussed during today's meetings in Sochi. Taking into account that unshakeable, although still quite abstract, support that Silvio Berlusconi has shown for Russian gas, it is likely that Vladimir Putin will find Berlusconi's offers difficult to refuse.
Natalia Djodjua, Tamila Zygar