Pipeline Politics

Economic News

22 Jul 2010
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With rising oil prices and traffic in the Bosphorus Strait becoming more congested every year, there has been much talk recently in Sofia about pipeline projects in South-eastern Europe. Since 1994 Bulgaria, along with Greece, has been locked in discussions with Russia over a project to create a new transit line across the south-eastern toe of the Balkans. Yet up to now, these talks have been without success.

The scheme would allow Russian oil to pass down a pipeline from the Bulgarian Black Sea port of Burgas to the Greek Aegean port of Alexandroupolis.

The project's latest expert talks, held in Athens last week, did not seem to produce any breakthrough either. Despite some positive rhetoric and a new proposed memorandum of understanding to be signed in early December, the two countries do not seem to be any closer in committing Russia to the strategically important trilateral project.

According to the initial plan, the length of the pipeline will be 290 km and will allow the transit of 35m tonnes of Russian crude a year. The oil will be transported by tankers from Novorossiysk to Burgas and then transited through the pipe to the Greek Aegean coast. The total cost of the project is said to be in excess of $800m - half of which would have to be invested in Bulgaria. Additional port services, transit charges and electricity sold to pump oil on Bulgarian soil, experts say, could add another $30m-40m to Bulgaria's revenue stream per annum. It is therefore clear why the Bulgarian government is keen to see this project through.

While many had hoped an agreement could be reached during the visit to Sofia last month of Russian Prime Minister Mikhail Fradkov, the future of the pipeline project remained uncertain on his departure. Speaking to journalists in Sofia on October 19, Fradkov said that the pipeline project "depends on its economic effectiveness" and that the Russian side was "analysing carefully the economic study of the oil pipeline and other competitive options."

However, local media were not entirely persuaded that this was the main reason for the lack of decision. Several newspapers claimed the pipeline project hinges on the Bulgarian government's assurances that it will give preferential access to Russian companies in the construction of Bulgaria's second nuclear power plant at Belene. Even if these speculations are true, the Bulgarian government seems to have repelled such overtures, in public at any rate, by recently announcing that an open tender would be held to award the nuclear power plant construction contract.

Meanwhile, Minister of Energy and Energy Resources Milko Kovachev told journalists recently that Russia's AtomStroyExport is already in partnership with Framatome of France, which is one of the three candidates to supply the technology for the Belene plant. However, the vendor, Kovachev insisted, "will be selected through a competitive tender on the basis of the offered price for the future electricity output and in accordance with international nuclear safety standards."

The latest talks in Athens have, however, highlighted a number of other sticking points which could still derail the pipeline project. According to several local media sources, Russia wishes to raise its share of equity participation, which was initially set at 33% for each country. In addition, Russia has previously asked for tax relief and price concessions on land purchased for the pipeline on Greek and Bulgarian territory, as well as state guarantees to investors. Russia has also resisted accepting any obligations on transit volumes.

The head of Russia's Lukoil, Vagit Alekperov, has reportedly said the project costs could also be higher due to existing tax regulations and land prices in Bulgaria and Greece.
The latest memorandum, proposed in Athens this week and to be ratified in December, says, "The sides are putting great efforts into increasing the economic attractiveness of the project and its competitive advantage over alternative routes for transporting oil."

According to surveys oil tankers can wait for nine days or so to pass through the Bosphorus, while in 2005 the stay is expected to increase to 11 days. Due to this, there has been a compelling and growing reason to find alternative routes for the oil.

"For the past two years the Bulgarian side has made considerable efforts to clarify the new philosophy and update the economic and technical parameters of the project," the Athens statement continued.

Meanwhile, Russia is also proposing another alternative route. This would see a pipeline from Kiyikoy on Turkey's Black Sea coast to Ibrikbaba on Turkey's Gulf of Saros in the Northern Aegean. According to preliminary estimates, this route would be much shorter than Burgas-Alexandroupolis and would give Russia the same access to the Mediterranean. Experts also claim this project would be much more cost-effective. It would also involve only one other country - Turkey.

Yet, sacrificing the Burgas-Alexandropoulos pipeline in favour of Kiyikoy-Ibrikbka would impact Moscow's relationship with Sofia, because the alternative pipeline bypasses both Bulgaria and Greece.

With oil prices reaching new heights and greater demand for secure non-OPEC supplies, the Russians know they have the upper hand when it comes to the Burgas-Alexandropolous pipeline project. However, it looks as if a decision could be reached if a compromise can be made on equity stakes, tax and land concessions, and maybe the Belene power plant construction too. Yet it is ultimately for Moscow to decide how it wants to use its oil bargaining power to promote its geostrategic goals in South-eastern Europe.

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