Russia's Gazprom to Invest up to $2.5 Billion as Part of the Energy Pact with Serbia

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Researched by Industrial Info Resources (Sugar Land, Texas)--Russian oil and gas major Gazprom OAO (OTC:OGZPY) (Moscow) announced that it will invest between $1 billion and $2.5 billion in Serbia's oil and gas sector as part of an energy agreement. The agreement was signed as a result of Gazprom's purchasing a 51% stake in Serbia's largest oil and gas company Naftna Industrija Sribje (NIS) (Novi Sad, Serbia). The company purchased the stake in NIS through subsidiary JSC Gazprom Neft (MCX:SIBN) (Moscow, Russia) for $559.5 million. NIS accounts for 72% of Serbia's oil and gas sector. The company has two refining units in Pancevo and Novi Sad, which have a combined refining capacity of 156,000 barrels per day. In 2007, NIS contributed more than $1.2 billion to the country's budget.

According to the agreement, Gazprom will also invest around $704 million to enhance the technology and operations of refineries in Serbia. The company will also build a 400-kilometer Serbian section on the South Stream pipeline. The total length of the pipeline project is 900 kilometers, connecting the compressor station at Beregovaya on the Black Sea coast to Italy and other destinations in Europe through Varna, Romania. Gazprom has recently indicated that it will expedite the construction of the South Stream pipeline because of the Ukraine oil-supply crisis. Ukraine, for the third time, refused to allow Russian gas to pass through its territory to Europe because of the absence of gas transfer agreements for this year. Ukraine is the main transit point for Russian gas to be moved into Europe and accounts for over 80% of the supply. Because of Ukraine's refusal, 18 countries in the European Union had to face sudden gas shortages.

The $13.93 billion South Stream pipeline project, a joint venture with ENI S.p.A (NYSE:E) (Rome, Italy), will help Russia circumvent Ukraine and directly supply Europe, providing energy security to the continent. The South Stream pipeline, which will have the capacity to carry more than 30 billion cubic meters of gas per year to Europe and other Balkan states, is expected to begin delivery in 2013.

Gazprom will also construct an underground storage depot at Banatski Dvor in Serbia near the Romanian border, and will buy a 51% stake in this venture from JP Sribijagas (Novi Sad). An investment of more than $180 million is expected on this project. The Banatski Dvor depot can dispense up to 1.6 million cubic meters of gas daily and will have a storage capacity of 300 million cubic meters. The agreement states that Gazprom will have exclusive rights to use all facilities of the depot. The feasibility study is in progress and is expected to be completed by June 2009.

The commissioning of the South Stream project is expected to make Serbia a regional hub for gas transit. With other Balkan countries slowly agreeing to participate, the country is expected to benefit extensively from transit fees. In talks held in September 2008 between both countries, it was agreed that the Serbian section of the pipeline will carry 21 billion to 22 billion cubic meters of gas, but now Serbia is pushing for 23 billion to 25 billion cubic meters of gas to be transported through the pipeline. The energy sector in Serbia contributes more than 10% to the country's GDP. Natural gas accounts for 15% of the fuel demand and Serbia imports 92% of the 2.4 billion cubic meters per year from Russia. Serbia hopes that the energy agreement with Russia will assist in attracting more investments into the country and subsequently help Serbia become a part of the European Union.

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