Stream

S O U T H
Dragan&Micic&(dm2792) Gonzalo&Salgado&(gbs2112) Dijana&Sarenac&( Secil&Topak&(st2658) Jack&Voorhees&(jmv2162)

PROJECT FINANCE 2012

PROJECT FINANCE - SOUTH STREAM

Planned route of South Stream

CONTENTS
Introduction ......................................................................................................................... 3 Valuation .............................................................................................................................. 4 Geopolitical Risk ................................................................................................................. 5 Financial and Operational Risk ........................................................................................... 6

Page 2

Introduction
Despite the current economic crisis, analyses show that the upward gas demand trend in Europe will continue over the long term. According to Eurogas estimates, demand for gas in the EU will increase from 440 mtoe (489 bcm) today to 625 mtoe (694 bcm) by 2030. European production accounted for 59% of 2005 supplies to the EU gas markets and is expected to drop to 33% by 2020 and to 25% by 2030. Due to increased demand and significant reduction of domestic gas production in the coming years, the EU will need to increase its natural gas imports. Transport bottlenecks in gas supply during peak periods are already being felt and will continue to plague Europe in the years to come. To address this issue, a gas pipeline has been proposed to transport Russian natural gas through the Black Sea to Bulgaria and further to Greece, Italy, Serbia, Austria and Slovenia. The project is a rival to the planned Nabucco pipeline.

The South Stream pipeline project was announced on 23 June 2007, when the Italian energy company Eni the Russian Gazprom signed a Memorandum of Understanding for construction of South Stream. The objective of the project is to meet the growing demand for natural gas in Europe, to ensure supply flexibility and security, to stimulate economic progress and create new jobs in participating countries. The South Stream pipeline brings with it many potential benefits such as: increased supply of gas and energy security, the opportunity to develop national gas transmission networks, and economic benefit from gas transit for countries in the region.

Page 3

Mayor Participants
South Streams shareholders are leading energy companies boasting wide experience in pipeline construction and operation.& Gazprom operates 156,000 kilometere of pipelines, the longest network in the world and has a positive working history with Eni, as the two have partnered up in the past to construct the 396 km Blue Stream gas pipeline which brings Russian gas to Turkey over the Black Sea bottom at depths of over 2,000 meters. On January 18, 2008, Gazprom and Eni set up a Special Purpose Vehicle (SPV), the South Stream AG, in which both parties hold a 50% stake and is the main operating project company. South Stream Transport AG (a joint company of Gazprom, Eni, Electrite de France and Wintershall) will be the proprietor of the pipeline's underwater length and it was set up to plan, build and subsequently operate the new offshore gas pipeline. After Saipem, a subsidiary of Eni, completed the feasibility study for the offshore section in 2010, a number of cross country agreements and joint ventures (JV) were established in each of the transit states.

Consortium: 1 Offshore&section:&South&Stream&AG&(Gazprom&and&ENI&50:50);&according&to&a&memorandum&signed& on&19&June&2010&by&Gazprom,&ENI&and&EdF,&a&minimum&of&10%&of&(ENIs)&shares&are&to&be&taken&by& EdF&by&the&end&of&2010 2 Overland&sections&to&be&built&by&Gazprom&in&cooperation&with: o&&&&&&&DESFA&(Greek&section,&JV&50:50), o&&&&&&&Srbijagas&(Serbian&section,&JV&(51:49), o&&&&&&&Bulgarian&Energy&Holding&(Bulgarian&section,&JV&50:50), o&&&&&&&OMV&(Austrian&section,&JV&50:50), o&&&&&&&Geoplin&Plinovodi&(Slovenian&section,&JV&50:50), o&&&&&&&MFB&(Hungarian&section,&JV&50:50)

Page 4

Cross Country Agreements

Russia and Bulgaria reached an agreement on Bulgaria's participation in the project which was signed on January 18, 2008. The two countries agreed to set up an equally owned company to build and operate the Bulgarian section of the pipeline. On January 25, 2008, Russia and Serbia signed an agreement to route a northern pipe of South Stream through Serbia and to create a joint venture (51-49 Gazprom Serbijagas) to build the Serbian section of the pipeline and large gas storage facility near Banatski Dvor in Serbia. At the same time, Gazprom and the state-owned Hungarian Development Bank MFB agreed to set up an equally owned joint company (50-50 JV) to build and operate the Hungarian section of the pipeline. Shortly after, on April 29, 2008, Russia and Greece signed an intergovernmental agreement on cooperation in construction and operation of the Greek section of South Stream. On May 15, 2009, in Sochi, in presence of the Prime Minister of Russia Vladimir Putin and the Prime Minister of Italy Silvio Berlusconi, the gas companies of Russia, Italy, Bulgaria, Serbia and Greece signed an agreement on construction of the South Stream pipeline. On August 6, 2009, the Prime Minister of Russia Vladimir Putin and the Prime Minister of Turkey Recep Tayyip Erdoan in attendance of the Prime Minister of Italy Silvio Berlusconi signed a protocol routing the pipeline through the Turkish territorial waters. On 14 November 2009, Russia and Slovenia agreed on the terms of which a part of the pipeline will run through Slovenia to Northern Italy, effectively creating a joint venture between Gazprom and Geoplin. On 2 March 2010, Russia and Croatia signed an agreement on construction of a South Stream section through Croatia. France joined last, as on June 9 2010, Gazprom, Eni, and lectricit de France published a joint press release confirming that EDF will join the project.

Page 5

Technical Aspects
Total expected capacity of the South Stream pipeline is 63 billion cubic meters of natural gas per year. Serbia, Hungary and Slovenia alone make up10 billion cubic meters. At least two gas storage facilities will be constructed: an underground one in Hungary (capacity: 1 billion cubic meters) and one in Serbia (capacity: 3.2 billion cubic meters). Others storage facilities are in the works depending on how the project goes and which countries stay in. Costs to build the pipeline are estimated at : 1924 billion including the construction of offshore section which will cost of 8.6 billion. he cost of onshore sections will depend of the exact route of the pipeline. The final investment decision is expected by November 2012. As of the writing of this report, the completion date of the South Stream pipeline is set for December 31, 2015.

Page 6

ply sources and not just one of transit routes. The main rival of Nabucco is South Stream. This project was announced by Gazprom and the Italian company ENI in June 2007. South Stream gas pipeline is planned to stretch from Russia across the Black Sea bed to Bulgaria, where it would split into two, with the southern pipe going to Greece and Italy, and the northern one going through the Balkans to Hungary and Austria. The pipeline is planned to carry 63 billion cubic meters (bcm) of natural gas per year. The completion is due by 2015

Global Market
Excess&global&gas&supply Between&2010*2035&almost&all&continents& see& gas& supply& rise& significantly,& but& in& Europe& it& continues& to& decline.& Gas& reserves& in& the& world& are& highly& concentrated& in& only& a& few& countries.& Russia&(23.7%),& Iran& (15.8%),& and& Qatar& (13.5%).&Other&countries&reserves&do&not& exceed& 4.3%& (BP,& 2010,& p.& 22).& But& unconventional&gas&has&come&to&change& the&picture. In& the& IEA& GAS& Scenario& the& share& of& natural&gas&in& the&energy& mix& increases& from& 21%& to& 25%,& pushing& coal& into& decline&and& overtaking& it& by& 2030.& Over& the& period& 2010*2035& non*OECD& countries&will&account&for&nearly& 80%&of& demand&growth.&In&2035,&Chinas&demand& growths & matching& that& of& the& entire& European& Union,& Middle& East& demand& almost& doubles,& and& in& India& it& quadruplicates.& Power& generation& remains&the&dominant&sector&for&gas.

LNG& cargoes& are& being& deviated& away&from&America& mostly&because&of& the&cheap& gas &price&there.&In&an&gradually& liquid&market,&coupled&with&a& transitory&decline&in&European& economic& and& decline& in&Trinidad industrial& activity& after& the& 2007& financial& crises,& has&Nigeria resulted& in& an& over& stock&
LNG Pipeline

Indicative costs for potential new sources of gas delivered to Europe, 2020 ($/MBtu)
$7 .92

$7.

53

$2 .4

$6.17

$5
.3 9

.48

$5

and Tobago $5.81 $4.61 Trinidad and Tobago $5.89

$0.4

0
.29 $1

$5.

$3.44

28 $5.0

$5.68

8 $0.8
$2.8

$3.

becoming&available&in&Europe.& Nigeria All&this&causes&spot&gas&prices& oil&prices&for&most&of&2009.

$2.

Source, IEA, WEO 2009, Parius 2009. to&been&driven&down,&well&under&half&of& those in Asia and Middle East.

After the devastation of Fukushima, as

$4

5 $4.5

.3

$4.25 $4.66

51

$6

$2.
.40
1

36 $2.

48

57

$4.01
$2 .23

Gas&is&still&not&a &commodity&free&market& a consequence of the Japanese good&trade&as&oil.&There&are&4 &big&markets& earthquake, gas demand Asia increase with&different&prices&(Henry&Hub,&US).&Gas& (and so it price by $2). In order to index,& like& henry& hub,& use& to& move& in& supply equal energy into the grid Japan parallel&with&oil&prices.&Today&gas&markets& may need around 20 extra LNG are& seeing& a& dislocation& affecting& oil* indexed&pricing&under&long*term&pipeline& contracts.& This& has& encouraged& major& renegotiate&conditions&for&pipeline&gas.&

European& buyers& (Eni& or& Eon)& to& deeper effect in the Asia gas market if

$2

.20

Qatar $4.05 ($4.59)

67

cargoes per month. This gas has been provided at high prices and may have a they move out of nuclear energy into gas. The European commission alter that Europe may be short by 100 Bcm of gas if further supplies migrate to Asia.

Demand recovery Gas demand in the world returned to a growth path in 2010, mainly driven by economic activity in emerging markets, especially

Excess global supply Demand Recovery Unconventional gas boom

Page 7

European gas supply & demand

The EUs evolving Black Sea and CACR energy strategy

The EUs dependence on the import of natural gas is widely seen as the Achilles heel of Europes energy security because its growing reliance on the more environmentally friendly natural sharply. In resource Europe, that gas has is mainly for increasing gas created used an increasing dependency on The share of natural Hungary and Austria are more than 80% 14 Since the is expected to rise dependent on this company. aheating few and gas in the2000, European inproblematic households, suppliers. commercial areas November European Commision has already warned in its rst Green Paand for industrial purposes. But gas used up to 27- 29% by 2030, attributed per that in the next 20-30 years up to 70% cent of the Unions Since November 2000, the European to higher f o r pdemand ower g e n e r a t i o50%) n ha s b e e nto mainly energy (presently will have be imported. In re- demand from the

power generation sector.

* Others 2% % Tobago 1 % Trinidad <1 Oman % ar 3 Qat % pt 1 Egy 2% ya Lib 2% ria

Commission has already alerted in its first Green Paper that in the next 20-30

Gas reserves in Europe arent very years up to 70% of the EU energy abundant. Europe's major domestic demand will have to be imported producers have followed a declining (Eurogas, 2010, p. 9). To reinforce its path. Only Norway shows a consistent future energy security, the commissions increase-offsetting decline. UK strategy is to emphasize the widest became a net importer of possible energy mix, a neutral policy natural gas in 2 0 0 4. The regarding nuclear energy, diversification main part comes from of energy supply, and promotion of Russia (23%), followed renewable energies. The Commissions
us no ige tion Ind duc o Pr 36%

Alg e 10 ria %

Source: Eurogas Statistical Report 2010 (http://www.eurogas.org/uploaded/Eurogas%20Statistical%20Report%202010_Final%20 291110.pdf)

ge Ni

2009 Breakdown of EU27 Supplies

by Norway (18%) and Algeria policy is based on maintaining the (9%) (Eurogas, 2009, p. 7). balance of the three objectives aiming Moreover Sweden, Ireland, Finland on (1) economic competitiveness, and many other states are dependent markets and efficiency, (2) environment, on just one monopoly supplier Gazprom and on (3) securing energy supply.
ay Norw % 0 2

a ssi Ru % 23

(Russia), while others like Greece, *Including supplies from sources which
can not be identified

Page 8

Unconventional Gas
Unconven]onal&gas&is&dened&as&occurring&in&source&rocks& with&very&low&porosity&and&permeability,&which&means&that& it&can& only& be& recovered& through& a&process& of& fracturing& the& rock& to& create&ar]cial&pathways &for&the&gas&to& ow.& The& category& includes& shale& gas,& ]ght& gas & (found& in& rela]vely& impermeable& sands),& and& coalbed& methane& (CBM).&Explora]on&for&shale&and&other&unconven]onal&gas& reserves&is&currently&at&a&very&early&stage&across&Europe. Li`le&ac]vity& has&been& carry& out&in& Europe.& Most& of& the& seismic& acquisi]on& and& explora]on&drilling& is&being& done& by&private&companies.&Cedigaz& es]mates&that,&since&2006,& around& 50& companies& have& become& ac]ve& in& shale& gas& explora]on,&ranging&from&the&majors&to&large&u]li]es,&and& minnows &to&state&oil&&&gas&companies,&though&dominated& by&small&companies&>60&%&of&players.&The&majority&of& them& are& engaged& in& data & acquisi]on& for& appraisal& purposes;& however& wells& have& so& far& been& spudded& in& Poland,&Germany,&the&Netherlands,&and&the&UK. In&the&US,&shale& gas&development& was&encouraged&by& a& number&of&factors:&a&compe]]ve,&entrepreneurial&sector;& extensive& shallow& reserves;& nancial& incen]ves& for& landowners& to& allow& rig& access;& a& suppor]ve& regulatory& frame;& and& key& breakthroughs&in& horizontal&drilling& and& fracturing&technologies.& In&Europe,&and& principally&in&the& EU,& companies& will&face& a&number& of& barriers,& including& for&example: Lack&of&regula]on&and&policies; High& number& of& countries,& and& so& more& spread& licensing&regimes; Dicul]es&in&leasing&the&areas; Deeper,& smaller,& more& fragmented& and& clay*heavy& deposits,&resul]ng&in&lower&materiality; Oshore&placement&of&the&most&favorable&reservoirs; Absence&of&drilling&rigs; Dicul]es&in&land&access&and&more&populate&areas; Strict& environmental& regula]on& ,& and& popula]on& with& higher& standards,& with& special& apprehensions& over& fracking&chemicals&and&aquifer&euence; Higher&rig&rates&and&drilling& costs&as&a&consecuence&of& deeper&wells,&greater&s]mula]on,&more&fracking& stages& and&longer&horizontal&sec]ons&will&be&needed;&and& Higher&labor&costs&and&lack&of&labor&skills

Page 9

Unconventional Gas
Western& European& is& more& likely& to& when& unconven]onal& gas& reserves& a l r e a d y& h a p p e n i n g )& a n d& develop&unconven]onal&gas.&For&them& come& on& stream,& Europe's& own& unconven]onal& gas& from& North& gas&independence&from&Russia&is&more& current& supply& will& have& vanished.& America&and&other&regions. important.& As&a& consequence,& Poland& WoodMac& believes& that& European& and&Ukraine&are&likely&to&push&towards& shale&gas&ows&are&unlikely&to&disrupt& commercial&shale& gas&produc]on.&But& the& pricing& of& long*term& contracts& to& supply&will&focus&on&their&own&na]onal& the& extent& they& have& done& in& North& demand. Higher& development& costs & are& oset& by& higher& gas&prices.& But& by& the& ]me& America.& Instead,& driven& price& movements& are& more& likely& to& come& from& compe]]on& of& LNG& (which& is& The& op]mal& model& for& Europe& is&s]ll& unclear.& There& is& a& broad& consensus& among& experts& at& the& IEA,& BP,& and& OIES,& that& there&will&be& no&signicant& shale&gas&produc]on&in&Europe&before& 2023& at& the& earliest.& By& 2030& renewable& energy& will& be& a& mayor& player& taking& a& big& peace& of& the& market& leaving& expensive& energy& sources&out&of&the&market.& Experts& have& claried& the& size& of& the& c h a l l e n g e& b y& c o m p u ] n g& t h e& investment& and& number& of& rigs& that& would& be& required& for& shale& gas& to& make& a& signicant& contribu]on& to& European& supply.& Douglas& Westwood& es]mates&that&commercial&produc]on& of& 2.8& Bcm& of& unconven]onal& gas& (including& CBM& and& ]ght& gas)& in& Europe& per& year& would& require& 700& wells,&and&an&investment&of& around&$1& 0& billion/year.& At& an& average& of& six& wells&per&year&per&rig,&this&equates &to& at&least&116&rigs.

Page 10

Risk
Completion&Risk company& how& will& provide& the& know* operation&can&be&a &risk&like&access&to&all& the& point& in& the& pipeline,& not& having& stolen&pieces,&etc. For& this& proposes& the& EPC& will& be& how. develop& by& just& one& company& for& the& Production&Risk hold&project&to&ensure&a&coordination&in& Shortfalls&in& the&expected&gas&reserves& Legal&risk all&the&faces,&a &risk&that&will&be&present& are& major& risk& of& the& project.& So& far& Change&in&EU&regulation&is&a&risk&related& in&the&case&we&use&several&construction& Gazprom& does& not& hold& sufficient& gas& to& the& enforcement& to& use&renewable& companies.&It&will&be&a&turnkey&fix&price& proven& reserves& for& the& whole& live& of& energy,& leaving& the& project& without& EPC,& allocating& the& risk& on& the& the&project.& &This &risk&is &managed& by& a& market.&For&this&the&project&will&hire&BC& constructer&side. fix& fee& contract& with& a & take& or& pay& group& the& reinforce& our& internal& view& The& engineer& of& the& project& is& being& clause& that& ensures& its& payment& that& during& the& next& 25& years& EU& will& done& by& a& best*in*place&company& that& independently& of& the& deliver& and& still&need&conventional&energy&to&cover& will& ensure& the& correct& design& and& so& operation&of&the&pipeline. operation&of&the&project.& Operational&Risk its&demand&(see&technology&risk).& Dispute&resolution&is&very&problematic,&

Construction& company& has& been& This&risk&is&not&considerable&when&it&is& even&more&if&we&take&into&account&that& selected& from& an& experience& company& associated& only& with& pure& operations.& the& projects& is& crossing& through& that& has&an& excellent& track& of& building& There& are& worldwide& pipelines & so& different& countries & and& jurisdictions.& pipelines.& It& also& has &a& strong& balance& operation& of& them& is &well& known& and& For& this& the& project& will& be& under& a& sheet& and& will& have& to& provide& the& operation& company& has&very& high& single& jurisdiction.& Dispute& resolution& will& be& agree&under& arbitration& in& the& competitions& guaranties.& It& has &also& a& experience&in&the&business. joint& agreement& with& a& technology& If&we&consider&local&issues,&and&because& of&the&different&regions&it&goes&through,& ICC&International&Court&of&Arbitration.

Page 11

Energy&supply&risk Energy& is& the& most& important& resource& use& by& the& pipeline.& Compressor& run& base& on& electricity.& This& is& the& most& signicant& opera]onal& cost& for& the& project.& The& project& will& h a v e& a& p u t& o r& p a y& contract& with& ENEL& a& mayor& European& electrical& company,&ensuring&the&electricity& supply&for&the&project.

Community& is& a& mayor& risk& in& the& related& with& the& building& and& project.& Local& people& will& have& Opera]on& of& the& pipeline.& Since& the& technology& is& well& known& and& has& been& used& in& the& industry& for& long& ]me(more&than&20&years),&there&is& no&risk.&The&project&will&not&use& a n y& n e w& u n p r o v e d& technology. Technology& is & a& mayor& risk& when& it& comes & up& to& alterna]ve& source& of& energy,& especially&renewable.&EU&is&pushing&to& strongly& increase& renewable&share&in& the&market,&which&competes&with&gas.& Studies& for& experts& will& be& acquired.& & Market& projec]ons&show& that& during& the& next& 20& & 25& years& EU& reserves& are&in&a&diminishing&path&and&energy& preference&in& the& hiring& sec]on,& and& community& work& will&be&done&at&all&]me&trying&to&bring& especial&benets&to&local&people. Technology&risk There& is& no& technology& major& risk& demand& will& increase.& Solar& energy& will& only& be& able& to& generate& during& day& ]me,& leaving& peak&demand&open& for&other&source&of&energy&to&backup.& Space& hea]ng,& one& of& the& mayors& demand&sources,&will&s]ll&relay&in&gas.

Environmental&Risk M e t h a n e& l e a k& i s& t h e& m a j o r& environmental& risk.& For& this& oset& carbon& credits & will& be& purchase& to& compensate&this& environment& eect.& Visual& eect& is& other& environmental& risk.& Sec]ons& of& the& line& will& go& underground& in& areas & of& valuable& landscape& or& urban& areas.& The& pipeline& will& not& cross& through& na]onal&parks&or&other&reserve&areas.

Page 12

Project Structure
Since& the& project& has& several& different& companies& incorporate& bringing& in& the& future& off& taker& of& the&gas&in&order&to&ensure&market. be&owned& At& the&other& side& we& need& to& look& after& the& credit& ranking& of& the& project.& For& this& reasons& the& sponsors&of& the&SPV& will&be&the&off& takers&with&the& higher& rating& to&be& able&to&get&highest&credit&rating&and& so&the&lowest&interest&rate.&For&this& reason& the&European& Development& Bank& will& be& part& of& the& SPV& as& holder&too. between&Gazprom&and&government& Financing& each&of& these&entities&by& entities& the& project& needs & to& be& its&own& will&be& a &mayor& challenge.& structure&in&a &way&that&allocates &risk& Even& more& this& structure& will& be& properly&and&can&be&financeable. These& national& entitys& will& have& property& rights& over& a& portion& of& land& in& the& boundary& of& their& county.& The& goals&of& these& entities& are& mainly& to& incorporate& de& local& government& into& the& project& reducing& the& political& risk,& and& highly&risky& for&the&banks,& who& will& prefer&looking&at&South&Stream&as&a& single&project&and&dealing& with&one& single& entity& for& the& hold.& For& this& dealing&with&a&single&SPV& is&a &much& suitable& way& of& structuring& the& project.& For& this,& there& will& be& one& SPV& as&the&unique&vehicle.&This&will&

European% Dev.%Bank%

SPV%with% Na,onal% en,,es%

Na,onal%PPP%as% Equity%Holders%

Constric,on% Company%

Tecnology% Company%

EPC%

Shareholder% Agreement%

SPV% Project% Company%

Take%or%Pay% Fee%

Market%

Put%or%Pay% Fee% O&M% Agreement%

Field%

O&M% Company%

Page 14

Financing Structure
P a y m e n t s& w i l l& b e& d u n e& i n& a n& s p e c i a l l y& O e s t e r r e i c h i s c h e& interna]onal& account& overseas& (New& Kontrollbank&AG&(OeKB),&Euler&Hermes& York)& in& the& Trustee.& All& project& cash& Deutschland&AG,&Coee,&and&others.& ows& will& ow& through& one& of& the& The& nancing& documenta]on& will& project& accounts& maintained& by& the& encompass: trustee& and& charged& to& the& project& lenders.& There& will& be& detailed& mechanics& rela]ng& to& the& calcula]on& of& project& cover& ra]os& and& the& prepara]on& of& banking& cases& and& forecas]ng& informa]on& with& respect& to&the&project. Debt&will&be&nance&by&a&combina]on& of& syndicate&loan&and& bonds.& This&will& be&done&by& the&Arranger& who& will& be& Ci].&Loan&will&be&divided&into&senior& loan& and& non& senior& (managing& loan). ECAs &will& also& & be& i n v o l v e& and& other& Loan& Agreements& (off& Shore& and& on& Shore): * Purpose&of&the&finance&and&Principal;& * conditions& precedent& to& lending& *& legal& opinions,& board& resolutions,& government& approvals,& waiver& letters,&experts'&reports&and&financial& statements. * Interest& rate& and& debt& service/ repayment& profile& and& information& reporting&system; * limitations& on& recourse& to& the& borrower& and/or& other& parties;& dedicated&applications&of&cashflows; * protective&clauses&*&taxes,&increased& costs,&market&disruption; * restrictive& covenants& *& borrowing& restrictions,& negative& pledge,& pari& passu; * events&of&default;&and * dispute&resolution. Security&documents; Trust; G u a r a n t e e s ,& comfort& letters& s u p p o r t& documents;&and F i n a n c i n g& d o c u m e n t s ;&

Page 15

Geopolitical Risk
In&last& couple&of&years,&both&European&Union&and&the&Russian&Federation&were&victims&of&the&absence&of& alternative&gas& transportation&routes& that&would&prevent&Ukraine&and&Belarus& to& abuse&their& privileged& status& of& gas& corridors& between&Russia& and&rest& of&Europe.& For& that&reason&development& of& alternative& routes& is& priority& for& Russia& and& one& of& the& priorities& for& European& Union.& Second& EU& priority& is& diversi_ication& of&suppliers.& In& addition& to& this,& Russia& is& using& South& Stream& as& a& leverage& in& order& to& acquire&full&or&partial&ownership&in&Ukrainian&gas&pipeline. How&important&will&be&delivery&of&gas&to&EU&is&probably&best&described&in&the&EU&Energy&Road&Map&2050& which&states& that& Gas$will$ be$ critical$for$ the$ transformation$ of$the$ energy$ system.& Substitution& of& coal& (and& oil)& with& gas& in& the& short& to& medium& term& could& help& to& reduce& emissions& with& existing& technologies&until&at&least&2030&or&2035.&&In&addition,&development&of&the&production&of&gas&in&EUb27&see& continual&decline&since&1999&and&in&2009&it&was&25&percent&lower&than&in&a&base&year.

For&all&these&reasons,&since&the&Berlin&wall&tumbled&never&has&Europe&observed&such&a&geopolitical&game& as&it&is& observing&today.& Economic& and&political& independence&of&many& countries& have&been&put&in&the& pot.

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Bulgaria
One&of&the&elements&that&will&make&any& valuation&of&the&South&Stream&project&dif_icult&is&the&problem&of& bundling.&In&March&2012,&the&Parliament&of&Bulgaria&decided&to&drop&Belene&nuclear&power&plan&deal&that& was& signed& with& Russia.& Shortly& after& that& Bulgarian& Economy& and& Energy& Minister& Delyan& Dobrev& traveled&to& Moscow& to& try&to& persuade& the&Russian&side& not&to& take&Bulgaria&to&court.& As&a&result&of&the& meeting& on& March& 30,& 2012& Bulgaria& and& Russia& have& agreed& and& declared& that& a& _inal& investment& decision&on& the&South&Stream& gas& pipeline&will& be&taken& in&November.& For&that& reason,& it& is& dif_icult& to& valuate&this&Russian&decision&as&an&investment&element.& If& South& Stream& is& built,& there& are& also& other& political& elements& that& might& in_luence& the& project.& Exploitation&of&shale&gas& in&Bulgaria&is&not&in&Russian&interest&and&as&Russian&fears&grew&similar&pattern& was& observed& by& Bulgarian& environmental& organizations.& Bowing& to& public& pressure,& the& government& recently&withdrew&a&shale&gas& exploration&permit&it&granted&last&year& to& U.S.& oil& company&Chevron&over& concerns& that& the& extraction& technique& known& as& "fracking"& might& harm& the& environment.& As& a& consequence& of&this&decision,& U.S.& Secretary&of&State& Hillary&Rodham& Clinton&visited&Bulgaria,& and&urged& the& country& to& break& its& energy& dependence& on& Russia& by& diversifying& its& oil& and& gas& supplies.& It& is& believed&that&Eastern&Europe's&reliance&on&Russia&for&energy&leaves&it&vulnerable&to&"unhealthy"&political& pressure&from&Moscow.&This&can&be&changed&in&future,&and&it&can&reduce&gas&price&on&which&Russian&side& relies.& Bulgaria&depends&today&on&Russia&for&89%&of&its&petrol,&100%&of&its&natural&gas&and&all&of&the&nuclear&fuel& needed&for&its&Kozloduy&nuclear&power&station&which&has&two&functioning&reactors.&Such&high&dependence& will&probably&force&Bulgaria&to&participate&in&other&projects&that&will&diversify&its&supplybside&sources. Indeed,& on&April& 4,& 2012&the& Bulgarian&government&declared&the&Nabucco& pipeline&project& an&object& of& national& importance,& with& priority& status.& This& status& facilitates& and& accelerates& the& permitting& and& licensing&procedures&for&building&this&pipeline&on&Bulgarian&territory. While& this& sovereign&decision&of&Bulgaria&might&have& additional& in_luence&to& future& valuations& of&South& Stream&it&is&believed&that&March&30&agreement&is&a&result&of&Gazproms&determination&to&accelerate&work& on&South&Stream&to&establish&it&before&the&EU&introduces&regulations&that&will&force&it&to&open&pipelines&to& other&suppliers&in&2013. It&is&also&not& so& clear&how&much&Russia&can&rely&on&Bulgaria&having&in&mind&that& in&addition&to&dropping& Belene&nuclear&plant&project& this&country&withdrew&in&December&2011&from& the&BurgasbAlexandroupolis& oil&pipeline.
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Romania
On&March&22& and& 25,& Romanias& Foreign&Affairs& Minister,& Cristian&Diaconescu,& announced&on& television& that& a& legal& dispute& (litigium)& exists& between& Romania& and& Bulgaria& over& the& delimitation& of& their& maritime&border,&continental&shelf,&and&exclusive&economic&zones&in&the&Black&Sea.&The&dispute&affects,&in& one& way& or& another,& ExxonMobils& oil& and&gas& exploration& plans& in& Bulgarian& waters,& Gazproms& South& Stream&project,&and&the&EUbbacked&Nabucco&project. Romania& and& Bulgaria& are& negotiating& since& 1994& over& delimiting& their& maritime& border,& continental& shelf,& and& exclusive& economic& zones.& By&various&counts,& either& 14&or&17&rounds& of& RomanianbBulgarian& negotiation&have&been&held& since& 1994&at& the&expert& level.& Emphasizing&this& issue&again& could&result& in& protracted&negotiation&and&litigation&between&the&two&countries.&Alternatively,&it&could&force&rebmapping& and&other&adjustments&to&South&Stream.&The&existence&of&a&legal&dispute&would&require&this&project&to&stay& out& of&the& disputed&area,& at&least&pending&its&adjudication.& As& a& third&possibility,& Gazprom&and&Bulgaria& would&have&to&apply&for&Romanian&consent&in&order&to&lay&the&pipeline&through&the&nowbdisputed&area.

Turkey
In&December&2011,&Turkey&gave&approval&to&South& Stream.& Russia&was& expecting&that&permission&for& construction&of&the&pipeline&would&be&given&by&the& end& of& October& 2010,& but& demands& from& Turkey& for& seismic& reports& on& the& pipeline& route& that& would&pass&through&Turkey's&Exclusive&Economic& Zone& in& the& Black& Sea& have& delayed& the& project.& Gazprom& completed& the& technical& and& ecological& aspects& of& the&South& Stream&route&and&submitted& it& to& the& governments& of& Russia,& Turkey& and& Bulgaria&in&April&2011.& It&is&possible&that&Turkey&postponed&its&approval&in&order&to&get&better&gas&prices&during&renegotiation&of& the& agreement& that& bring& Russian& gas& to& the& country.& According& to& the& old& agreement& signed& in& 1986,& either&side&had&to& notify& the&other& of&its&intention&to& terminate&the& contract&six&months&before&Dec.& 31,& 2011,&or&the&contract&would&continue&for&_ive&more&years.&Initially&Turkey&terminated&agreement&but&later& it&extended longbterm&gas&purchase&contracts&from&the&West&Pipeline&until&2021&and&2025&together&with& giving&approval&for&South&Stream.
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Scenarios
In&the&future&four&scenarios&are&possible: I. Competing& Pipelines.& This& scenario& assumes& that& both& South& Stream& and& Nabucco& or& some& shorter& version&of&Nabucco&are&in&process&of&implementation. II.& Russian&Supremacy& declares& triumph& of& Russia& and&its& ability& to& control& the& price&of& natural& gas& in& Europe. III.& Winter& in& Europe.& Under& this& scenario& neither& side& plan& to& implement& project.& Imaginary& projects& serve& to& pressure& other& countries& to& serve& geopolitical& interests& of& big& players.& Russia& acquire& ownership&in&Ukraines&pipeline&and&abandon&South&Stream. IV.& Nabucco& Triumph& scenario& means& that& the& Nabucco& is& taking& upper& hand& and& that& EU& supply& diversi_ication&policy&triumphs&while&South&Stream&is&abandoned. &&&&&&&&&&&&&&&&NABUCCO&TRIUMPH EU&decrease&energy&dependence&from Russia Russian&energy&leverage&diminished&and country&international&position&deteriorates EU&can&dictate&prices&to&some&extent U.S.&sphere&of&in_luence&fostered&over Ukraine &&&&&&&&&&&&&&&&COMPETING&PIPELINES Low&gas&prices&in&Europe&and&economic boom Increased&political&importance&of&Turkey Higher&costs&for&supplying&countries&and possible&dif_iculties&in&securing&necessary&& natural&gas&supplies Ukraine&in_luence&decrease&but&it&seeks closer&connections&with&West&to&prevent& social&disturbances

&&&&&&&&&&&&&&& &&&&&&&&&&&&&WINTER&IN&EUROPE

$S$C$E$N$A$R$I$O$S
&&&&&&&&&&&&&&&&RUSSIAN&SUPREMACY

Further&decrease&in&natural&gas&supplies in&Europe Increased&prices&and&slow&economic&growth Ukraine&and&Belarus&de_initely&enter Russian&orbit& Negative&environmental&impact&due&to&start of&shale&oil&and&gas&development&in&the& countries&of&the&region

Russian&in_luence&increases&in&Belarus, Bulgaria,&Serbia,&Turkmenistan&and&Ukraine Russian&economy&is&catching&up Russia&dictates&price&of&natural&gas&in Europe

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Risks - Conclusion
Even&if&built&South&Stream&can&expect&many&obstacles.&At&the&moment,&its&foremost&goal&is&to&stop&and&roll& back&the&implementation&of&the&EU's&Third&Legislative&Package&on&the&European&energy&market.&That&antib monopoly&legislation&requires&separation&("unbundling")&of&gas&production&and&sales&from&transportation& and&storage.& As& such,&it&bars&a&vertically&integrated&monopoly&such&as& Gazprom&from&holding&ownership& stakes&in&pipelines&and&storage&sites&on&EU&territory.&This&package&should&be&adopted&in&March&2013&and& for& that&reason&Russia& and&Gazprom& are& trying& to& wrap&up& whole&project& before&the& end&of&2012.& This& doesnt&mean&that&Gazprom&will&not&face&regulatory&problems&in&future.&

Problems&with&EU&regulations&are&not&new&to&Gazprom.&Following&the&European&Commission's&decision&to& invalidate& Austrian& OMV's& sale& to& Gazprom& of& a& 50%& stake& in& the& Baumgarten& distribution& center& Gazprom&lost& interest&decreased.& After&losing&partbownership&in&this& major& continental& hub&Austria& will& be& ordinary& importer& country& without& advantages& of& a& transit& country& and& distribution& center& as& originally&planned.& Probably&the&most&challenging&for&South&Stream&will&be&environmental&compliance&requirements. Scenario& analysis& shows& that& despite& of& dif_iculties& and& despite& of& political& games& around& the& project,& South&Stream&can&be&developed.&Realistically,&South&Stream& &will&start&with&smaller&volume&and&gradually& it& will& increase.& At&one&point,& development&of&shale&gas& in&Europe&might& decrease& gas&price&but&another& probably& larger&impact&will&be&from&increase&in&LNG&supply& that& will& be&coming&to& Europe& mainly& from& Nigeria,& Trinidad&and&Tobago&and&Qatar.&Finally,&eventual&development&of&gas&upstream&projects&in&Israel& and&Cyprus&might&be&the&most&important&challenges&for&Russia&and&Gazprom.&However,&maritime&dispute& between&these&countries&and&Turkey&could&postpone&development&of&these&sites&inde_initely.
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