Gazprom Backs Out Of $2.6 Billion Pipeline Contract

Gazprom’s decision to back out of $2.6 billion contract with the Italian oilfield services company Saipem to build a section of the proposed Turkish Stream pipeline beneath the Black sea could set back the entire project by at least six months, if not kill it altogether, according to at least one analyst.

Saipem, a Milan-based subsidiary of the Italian energy giant Eni, said July 9 that it was formally notified that the contract had been canceled as one of its ships was arriving in Russian waters. The vessel was about to begin laying sections of the pipeline, which is meant to help Russia export its gas to Western Europe while also bypassing Ukraine.

As part of that strategy, state-owned Gazprom already has begun shipping gas to European Union customers through Nord Stream, a pipeline under the Baltic Sea to Germany. It had proposed a second route that would have piped gas under the Black Sea to Bulgaria, then to the rest of Europe.

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That project, called South Stream, was scrapped in December because of an EU rule that forbids one entity from owning both the pipeline and the gas it carries through EU territory. Russia then proposed an alternate route, Turkish Stream, which would carry the gas through Turkey, then on to Europe.

Now that Gazprom has canceled its contract with Saipem, Nicholas Green, a senior research analyst at Sanford C. Bernstein in London, told The New York Times that he wonders whether Russia has given up on Turkish Stream altogether. Even if Gazprom stays with the project, he said, the contract cancellation has set back the project by at least six months.

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Gazprom said it is looking for other potential partners, but Green said the Russian company’s behavior may have made many of them leery about signing contracts with the giant gas company. “I would imagine that international contractors would definitely think twice” about working with Gazprom, he said. Meanwhile, Turkey so far hasn’t even agreed to allow the pipeline on its territory.

In a statement, Saipem said the reason for the contract’s termination was “convenience,” a standard term in such contract language, and that the deal allowed for it to be compensated by Gazprom. For its part, South Stream Transport, the Gazprom subsidiary in charge of the pipeline’s offshore segments, said the contract was scrapped because of “numerous operational and commercial issues.”

“Other project-related works remain ongoing,” South Stream Transport said in the statement, “and the company will commence discussions with potential offshore pipe-laying contractors for line one of the Turk Stream project shortly.”

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Because of the cancellation of South Stream and the current impediments to Turkish Stream, Bank of America Merrill Lynch issued a brief report recommending that Gazprom abandon its plans to build new pipelines from scratch and instead focus on better political and business relations with Ukraine.

“We believe that a better solution for Gazprom would be to join forces with the EU and Ukraine to upgrade Ukraine’s existing infrastructure,” the report said. “While such a solution would be commercially preferable, we realize that, under current geopolitical tendencies, it could be hard to achieve.”

That may be an understatement. Moscow’s relations have become increasingly strained not only with Ukraine but also with the EU and the United States because of the fighting in Ukraine. Western nations say Russia is providing deep support to Ukrainian separatists and have responded with stiff economic sanctions on Russia.

By Andy Tully of Oilprice.com

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