Gazprom Raises Full Cost South Stream Project to Over €56 Billion

Gazprom has increased the cost of its Southern Corridor project from Rub 510 Billion (€12.5 Bn, $17.0 Bn) to Rub 739 Billion (€18.5 Bn, $23.8 Bn). Southern Corridor is designed to supply gas to the South Stream pipeline. The Southern Corridor will be fed via the Bovanenkovo-Ukhta-Pochinki pipeline route, a part of the Yamal Megaproject. The Pochinki compressor station is the end point of the Ukhta-Pochinki pipeline and the start point of the Southern Corridor.

Based on the officially published project costs, the cost of the Bovanenkovo-Pochinki link can be estimated at Rub 750 Billion (€18.5 Bn, $25.0 Bn) at the lowest. Gazprom prefers to consider this investment as a part of the overall system expense.This way about two-thirds of the capital expenses can be allocated to the cost of supply of Russian consumers, which would make it easier to lobby for higher price of gas in Russia. However, without the South Stream pipeline, both the Southern Corridor and the Bovanenkovo-Ukhta-Pochinki projects are not needed. Note that having the South Stream project, Gazprom could deliver the required volumes of gas to Pochinki via a short link from Bovanenkovo to Yamburg and the existing pipelines of West Siberia.

The total cost of the South Stream project with its feeding pipelines and the financing expenses is to exceed €56 Billion or $73 Billion. Out of the total, about €46 Billion ($60 Bn) will be paid by Gazprom and the rest by its foreign partners. Notably, this investment will increase the gas transmission costs and reduce profits of the shareholders of Gazprom.

High cost of the Southern Corridor pipelines can not be explained by  climatic, geographic or terrain conditions of Southern European Russia. It is worth noting that earlier this year Gazprom reported declining expenditures on pipe products because of the drop of price of steel pipe.

Mikhail Korchemkin

Our thanks to East European Gas Analysis, a Natural Gas Europe Industry Partner