Cherished Russian Balkan Pipeline Project Apparently Dead

Under Russian Prime Minister/former President soon to apparently be President Vladimir Putin, Russia’s energy monopolies, among them state natural gas behemoth Gazprom and pipeline monopoly Transneft have had a powerful advocate in the Kremlin.

That said, a high priority Transneft project, a trans-Balkan pipeline intended to link Bulgaria’s western Black Sea coastal port of Burgas to Greece’s Alexandroupolis Adriatic harbor on the Aegean, has apparently bitten the dust.

Following over a year of negotiations, on 15 March 2008 amid great fanfare, Russian President Vladimir Putin, Greek Prime Minister Costas Karamanlis, and Bulgarian Prime Minister Sergei Stanishev assembled in Athens to initial an agreement on a $1.25 billion, 173-mile-long pipeline connecting Burgas with Alexandroupolis in a project that subsequently became informally known as the “Trans Balkan Pipeline.”

Under the final terms of the agreement, the Russian Federation was to own 51 percent of the project, with Bulgaria and Greece each receiving 24.5 percent. The Russian majority share was to be divided equally between Transneft, Gazprom Neft and Rosneft, each with a 33.3 percent stake. Then Russian President Putin was not above a little diplomatic arm-twisting to advance the project, visiting Greece twice to move the project along and warning Greece and Bulgaria in February 2007 as negotiations faltered that the Russian Federation would develop alternative routes if a final pipeline agreement was not quickly concluded, which it was the following year.

Two major Black Sea powers supported the concept, the Russian Federation and Turkey. The channel would establish a direct route for Russian crude oil to Western clients bypassing the Bosporus, relieving pressure on the Turkey’s congested Bosporus and Dardanelles maritime channel, a goal long sought by the Turkish government.

The only downside of the project for Ankara was that it would be deprived of transit revenues from any similar pipelines crossing Turkish territory in Thrace, but no matter, as it would relieve tanker congestions in the Turkish Straits.

The pipeline, 15 years in the planning, was originally scheduled for completion in 2009. The completion date was then pushed back to 2012. The Burgas-Alexandroupolis pipeline was designed to transport 35 million tons annually, or 700,000 barrels, of Russian and Kazakh oil to Western markets each day, with the possibility of expansion to carry up to 50 million barrels per year.

Well, it’s apparently back to the drawing boards, as on 7 December the Bulgarian Finance Minister Simeon Djankov announced that his government was withdrawing from the project.

According to a report of the Bulgarska Telegrafna Agentsiia news agency, Djankov remarked, “Bulgaria has withdrawn from the project, because it cannot be implemented on its terms and using the financial indicators stipulated in the 2007 agreement.”

So, what financial terms was Djankov alluding to? 

Well, cash-flush Transneft repeatedly complained in the Russian media that Bulgaria was failing to finance its part of the project, hinting that in return Transneft would minimize its own spending on the pipeline. Las month Transneft department for foreign economic operations head Ilya Kazenkin whined that scofflaw Bulgaria continued to accrue its debts on the oil pipeline construction project, which he put at amounted to $8.3 million.

Obviously blindsided by Djankov’s pronouncement, Transneft said the same day that it had not yet received any official notice on Bulgaria’s withdrawal from the project.

Not softening the reasons for Bulgaria’s withdrawal Bulgarian, Minister of Economy, Energy and Tourism Traicho Traikov said bluntly during a 9 December interview with private TV station Nova TV, "First there was talk of a partnership involving shares of 1/3 for each of the parties with guaranteed oil supplies and project financing. Then it turned out that the project would be half-owned by Russia, while the other half would be for Bulgaria and Greece, in order to secure oil deliveries. Later on it appeared that even this could not guarantee the economic feasibility of the scheme and that it could not be built using project financing."

In the two decades since the collapse of the USSR and the fall of Communism in eastern Europe, divergences have opened up between Moscow and its former Easter European satrapies more than Putin and his inner circle seem to acknowledge.

Bulgaria, a member of both NATO and the European Union, was simply unwilling to see Russia move the goalposts when it saw fit, as Traikov’s remarks undiplomatically indicated. Combined with the genuine economic distress in Greece, the pipeline’s western terminus, and it is more than understandable why Bulgaria ultimately pulled the plug on its participation. As Traikov indicated, after Russia had unilaterally gamed the pipeline participation shares, the “Trans Balkan Pipeline” became a transit, rather than energy, project for Bulgaria and "In the end, we had to decide whether or not to invest the money, given that the project has no energy or strategic importance for our country."

There is a lesson here for Russia’s overly greedy energy monopolists regarding their former East European acolytes – the only question is if they’re capable of understanding it.

By. John C.K. Daly of Oilprice.com