Energy Deals With Russia

Economic News

22 Jul 2010
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Russian President Vladimir Putin's recent visit to Bulgaria saw a flurry of energy agreements signed between the two countries. The finalisation of key contracts regarding nuclear power and oil and gas transmission is central to Bulgaria's efforts to advance itself as an exporter and transmitter of energy to South-eastern Europe.

While Putin declared that, as a result of the deals, Bulgaria had "unconditionally become a key link in the European energy chain," many analysts believed more significant was the victory for Moscow over the EU's attempts to diversify energy supplies away from Russia.

One of the most significant of the eight bilateral deals signed between Putin and Bulgarian President Georgi Parvanov during Putin's stay in Sofia on January 17 and 18 confirmed that the Russian company Atomstroyexport would supply two 1000 MW reactors for the nuclear power plant to be constructed at Belene, 250 km northeast of the capital. It is slated for completion in 2014. In addition Putin told local press that Russia had set aside 3.8bn euros, the estimated total cost of the Belene project, to provide a loan to Bulgaria should the country need it.

While the reactor heads will be supplied by Germany's Siemens and France's Areva, the choice of Atomstroyexport's AES92 reactors is significant, confirming the Russian company's ability to operate under EU safety standards. In 2006 two Russian manufactured reactors at Bulgaria's existing nuclear power plant in Kozloduy were closed due to safety concerns, as a condition of the country's entrance into the EU. In the aftermath of the closure Bulgaria, once a major exporter of electricity, has faced shortages so great that all electricity exports were temporarily suspended this month.
The new plant should help Bulgaria get back on track, with production costs for one kilowatt hour of electricity estimated to be as low as 0.37 euros.

Petar Dimitrov, the minister of energy and economy, told press, "The opportunity to generate cheap electricity is in accordance with Bulgaria's economic interests. The electricity deficit in the region is expected to reach 50% in coming years."

Another deal inked between Putin and Parvanov saw the creation of the International Project Company (IPC), which will carry out a feasibility study on the proposed Burgas-Alexandroupolis oil pipeline. The 285 km pipeline will take oil from the Bulgarian port of Burgas, site of Russian Lukoil's Neftochim refinery, to Alexandroupolis on the Greek Aegean.

In March 2007 a trilateral agreement was signed giving Russia 51% shareholding in the project and Greece and Bulgaria 24.5% each. Construction of the pipeline will not commence for at least six months and oil from the Kashagan oilfield in Kazakhstan, which will supply the pipeline, is scheduled to start flowing in 2010.

Most important, however, was the deal signed by the two leaders to construct the South Stream gas pipeline. This 10bn euro project will link Russia to the Burgas refinery by means of a 900 km pipeline, with a capacity of 30 billion cubic metres (bcm), laid under the Black Sea, which will be constructed by Russian gas giant Gazprom and Italian energy firm Eni. From Bulgaria the gas will be forked off south to Italy and Greece and north to several Central European countries.

The move for a new pipeline comes amidst longstanding worries over securing the EU's energy sources. Andris Piebalgs, the EU commissioner for energy, told OBG, "The EU is getting more and more dependent on external suppliers. Diversification of sources and transit routes are crucial to enhance the security of the gas supply to the EU." In 2006 Russia briefly cut supplies to Ukraine, and by extension Europe, for political reasons, and European countries are becoming increasingly concerned about the possibility of Russia using such measures in the future.

The signing of the South Stream deal has led to speculation about the future of the Nabucco pipeline. Supported by the EU as a means of diversifying gas supply away from Russia, the 3300 km project is planned to annually transport up to 31 bcm of gas from fields in the Caspian region and Middle East via Turkey and Bulgaria to Baumgarten, a major Austrian gas hub. While the two pipelines are not mutually exclusive, many analysts have predicted that Bulgaria's support for the South Stream project may spell the end for Nabucco, especially as both Iran and Russia have the right to veto construction under the Caspian Sea.

In a speech on January 17 at the National Palace of Culture, Parvanov said, "Bulgaria has always suffered from its strategic location, and the time has come to reap the benefits from our geographic position." However, the political advantage that the South Stream pipeline in particular will give Moscow is likely to cause contention in Brussels. The deals signed have left some questioning how the country will balance relations with its old Russian ally with its responsibilities as an EU member state.

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