Gazprom Signs South Stream Deal with Serbia

MOSCOW (Dow Jones Newswires), December 24, 2008

Russia and Serbia Wednesday finalized a major energy deal, which includes building the controversial South Stream gas pipeline across the Central European country en route to Western Europe undermining the European Union-backed Nabucco gas pipeline.

The deal, which was signed by Russian President Dmitry Medvedev and his Serbian counterpart Boris Tadic in Moscow on Wednesday, also involves Russia taking control of Serbia's state oil company Naftna Industrija Srbije, or NIS, and envisions building gas storage facilities in Serbia.

The South Stream pipeline, which is to be developed by Russia's state-controlled gas giant OAO Gazprom and Italy's Eni SpA, is to become a major artery bringing gas from Russia to southern Europe. The pipeline has raised concerns in Europe over energy security. Critics say it is designed to undermine the E.U.-backed Nabucco pipeline intended to help the E.U. diversify its natural-gas supply by bringing gas from Azerbaijan and Central Asia to the heart of Europe.

Russia already supplies a quarter of Europe's gas demand, and the South Stream will carry another 31 billion cubic meters of gas a year to European customers, once it is finished. Deliveries are scheduled to start by 2013, but Gazprom said last month that it may revise its South Stream pipeline project due to the global financial crisis.

The pipeline will run from under the Black Sea to Bulgaria and then branch into two stretches. The first stretch is expected to run to the southwest via Bulgaria and Greece to Italy. The second stretch is expected to run to the northwest via Bulgaria, Serbia, Slovenia, and Austria. The energy deal between Russia and Serbia had been long-awaited. The two sides signed a memorandum of understanding in January this year, but the deal had been delayed due criticism from sections of the Serbian government that NIS, the state oil company, was being sold too cheaply.

Under the deal, OAO Gazprom Neft, the oil arm of Gazprom, will buy a 51% stake in NIS for EUR400 million and invest EUR500 million in upgrading its facilities before 2012, Gazprom Neft said. NIS is one of the biggest oil companies in Central Europe. Apart from refining capacity of 7.3 million tons a year, the company owns 500 retail petrol stations and produces 1 million tons of crude oil a year, or around 20,000 barrels a day, in Serbia and Angola.

Copyright (c) 2008 Dow Jones & Company, Inc.