Bloomberg News

Serbia May Start Work on South Stream Soon, Build Gas Plants

October 10, 2011

Oct. 10 (Bloomberg) -- Construction of Serbia’s section of the South Stream gas pipeline may begin by the end of the year, said the head of Srbijagas,the Balkan country’s state-owned gas company.

The 400-kilometer (250-mile) stretch, estimated to cost 1.38 billion euros ($1.86 billion) with transit capacity of 34 billion square meters of natural gas a year, may also enable Serbia to build two to four gas-fired power plants. Srbijagas will seek government approval and partners for developing the plants, which would provide power and steam for communal heating after the South Stream’s expected completion in 2015.

“I expect that, by the end of the year, since we are about a year ahead of other partners, we’ll be in the position to begin construction of the geostrategic energy project,” Srbijagas General Director Dusan Bajatovic said at an Oct. 8 conference in the former Yugoslav republic.

Serbia is seeking to diversify its gas imports that currently come from Hungary through Ukraine to be less vulnerable to delivery disruptions. Among the nations involved in the OAO Gazprom-led project, it was the first to complete a feasibility study for its part of the pipe.

Serbia joined the project as part of a broader agreement when OAO GazpromNeft bought Naftna Industrija Srbije AD, Serbia’s dominant oil producer and refiner, in 2009. An upgrade of Serb natural gas reservoir Banatski Dvor is also included.

The first phase of upgrading the depot to a capacity of 300 million cubic meters has been completed, enabling a 60-day backup for Srbijagas’s more-than 75,000 consumers in case of disruption, Bajatovic said. Srbijagas now mulls work on another reservoir, Srpski Itebej, where it could store up to 1 billion cubic meters, he said.

Russia Deliveries

Russia wants to deliver as much as 63 billion cubic meters of gas a year to the European Union under the Black Sea through the South Stream. It will be the second link bypassing Ukraine after the Nord Stream pipeline.

The pipeline will run 900 kilometers (560 miles) under the Black Sea to the Balkans and may cost 15.5 billion euros ($21.8 billion), including the onshore sections.

Srbijagas and Gazprom have formed the South Stream Serbia AG joint venture for developing the pipeline, 51 percent-owned by Gazprom. This puts Serbia’s portion of the investment at almost 700 million euros.

Bajatovic did not elaborate on financing for the Serbian section, saying only the cost, as well as Srbijagas’s debts of more than 600 million euros, ultimately need to be taken care by the Serbian government as the owner.

Raising Gas Prices

Serbia will increase its regulated gas prices this month by 15 percent on average, which will help Srbijagas narrow its losses, “but it won’t eliminate them” Bajatovic said.

He warned the government that “someone will eventually have to foot the bill” for using the price caps on gas as a “form of welfare” amid unemployment of almost 23 percent.

The state will soon give guarantees for another 190 million euro in loans that Srbijagas needs, after it backed the borrowing of 210 million euros from seven banks in July, the CEO said.

Still, Srbijagas is sticking to its plan to venture into insurance and possibly banking with Gazprom because OAO Gazprombank is “our biggest creditor and we want to share market risks with them,” Bajatovic said. A local license for Sogaz OAO, a Russian insurer, is expected “within days” he said.

--Editors: James M. Gomez, Douglas Lytle

To contact the reporter on this story: Misha Savic in Belgrade at msavic2@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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