Gazprom in Serbia: How’s that working out?

A year and a half ago, I wrote a post about the sale of Serbia’s oil and gas company, NIS, to Russia’s Gazprom. Here were the high points:

— Gazprom was able to buy NIS for much, much less than its real value — 400 million euros for a company whose value was estimated to be more than 2 billion euros.

— The reasons for this have never been made clear. It may have involved corruption and/or a political quid pro quo for Russia’s support on Kosovo. Or perhaps the last Serbian government was just really bad at negotiating.

— The purchase was made without competitive bids, even several other large oil companies expressed interest, and two publicly stated that they would bid at least 2 billion euros.

— The deal gave Gazprom 51% ownership, but included provisions that ensured its total control. For instance, the Serbian government — which owns the other 49% — cannot sell its shares to anyone without Gazprom’s consent.

— Gazprom promised to assume NIS’s debts, which are about 600 million euros, mostly owed to the Serbian government, and also to invest about 500 million euros in NIS.

— Gazprom committed to building the South Stream gas pipeline through Serbia — giving Serbia transit fees — and also building a large gas storage facility at Banatski Dvor.

Okay, so. All that was a year ago. Since then, the deal has been signed and finalized. Gazprom formally took over NIS early this year; six of the ten members of the company’s board of directors are now Gazprom appointees, as are the Chairman of the Board and the company’s new general director. Although it was the last (Kostunica) government that negotiated the deal, the current (Cvetkovic) government has accepted it; three of the four Serbian board members are politicians involved with the current government.

So how’s it working out?

On the plus side, it looks like Gazprom will carry through with its commitment to invest in NIS. They’ve tendered bids for about $60 million of equipment so far, and are saying they’ll continue with this. So that’s good.

On the other hand, there hasn’t been a word about Gazprom repaying NIS’ debts to Serbia’s government. And Gazprom has been moving aggressively to collect debts owed to NIS. For instance, Serbia’s petrochemical company, Petrohemija, owes NIS about 80 million euros. NIS’s new management has been squeezing Petrohemija hard; refusing to deliver more crude oil until Petrohemija starts paying. The ironic result of this is that Petrohemija has had to borrow 10 million euros from the government of Serbia in order to stay afloat.

(I can’t really fault Gazprom on this. “Squeeze your debtors, make your creditors wait” is standard business practice everywhere. But it makes me wonder if the Serbian government thought this through.)

About 2,000 of NIS’s 12,500-strong workforce are being downsized. Gazprom is providing buyouts, with lump sum severance payments based on time with the company. So far the process has been fairly quiet. (Again, can’t fault Gazprom. State-owned energy companies everywhere tend to be overstaffed, so any investor would have done the same.)

Some work has begun at Banatski Dvor, though so far it’s upgrading the existing facility rather than building a new one.

NIS hasn’t paid any taxes yet, because it’s unclear whether it was operating at a profit or loss. An audit is in process.

Gasoline prices in Serbia? No big change there. They’ve tended to be high by regional standards, and they still are.

The South Stream gas pipeline? Well, that’s still under discussion. Russia recently announced that it had struck a deal with Turkey to run the pipeline through Turkish waters. Russia also says South Stream will be complete in 2012. That’s… probably impossible. A pipeline of this size and length, with long stretches underwater, would take at least three years to complete, and they’re still a long way from breaking ground. 2013 seems possible, with 2014 more likely.

Of course, even if South Stream does run through Serbia, it’s not likely to do Serbia much good. After all, it won’t be Serbia’s hand on the tap. It’ll be Gazprom gas going through a Gazprom-owned pipeline to customers who have made contracts with Gazprom. Unless the Serbs decide to nationalize the pipeline — very unlikely — they’ll have nothing to say about what goes through it and to where. All Serbia will do is help maintain the pipeline and collect a modest transit fee.

(Some supporters of the deal have claimed that it will give Serbia more “influence”. That’s just stupid. Major existing pipelines go through Moldova and Belarus; are those countries exerting much influence on the chancelleries of Europe?)

But anyway. A year and a half after the deal was made, six months after it was finalized, it looks like the Russians are keeping to the letter of their agreement. Of course, that should be easy, because it was a really good agreement for them. Still, there it is.

Comments?

15 thoughts on “Gazprom in Serbia: How’s that working out?

  1. Interesting piece, and I am glad to see that someone is following up on Gazprom’s Balkan takeover. However, staunch Russia critics that we are, I can’t help but feel that it is irrelevant if Russia “holding up its of a deal” which initially involved stealing 75% of the value of a publicly owned company … that belongs to all Serbians.

    Russia’s play in the Balkans has long been geopolitically complicated, and their interest in Serbia is most certainly not out of altruism and slavic brotherhood. Russia’s original support of Milosevic sought to avoid any intervention by NATO in the Balkan conflicts, as a precedent that we can clearly understand in contemporary terms. However, Slobodan took the idea of Russia’s support way too far, and ended up prompting the intervention.

    Nowadays we can see Gazprom and Russia taking advantage of a tragic situation, with a carefully managed isolation they hope to maintain. There are many reasons to believe, furthermore, that Serbia will be turned into a type of Ukraine, where shadowy third party gas traders registered in Switzerland can siphon money off from the transit of energy supply.

    I recommend your readers take a look at the YugoRosGas scandal to get an idea of what Belgrade has gotten itself into with the Russians, and it’s no mystery why Mladjan Dinkic, the only one to point out that Gazprom was ripping off Serbia, was forced to resign.

    http://www.robertamsterdam.com/2008/11/gazproms_yugorosgas_scandal_in_serbia.htm

  2. Let’s remember that this deal was brokered by the previous Kostunica-led government, who, yes, really were awful at negotiating, or, to take a more charitable view, were prepared to trade away material gain for, how shall we say, a spot under the Russian aegis, which may or may not be a figment of their imagination. But, at least in their understanding, cozying up to the Kremlin via Gazprom was a way to strengthen Serbia’s hand over Kosovo – an objective which the current goverment shares, even if they are a bit smarter in how they go about accomplishing it. Tadic might have also felt that, with the deal having gone ahead, the damage to Russian-Serbian relations would have been great if he suddenly did an about-face.

    It remains to be seen whether this smartens up the government about selling valuable state-owned assets to the Russians at bargain rates in the vain hope of remaining in their good graces.

  3. It is not as if Serbia has either:

    a) Significant natural gas resources of its own to sell into the rest of Europe, indeed it is a net oil and gas importer.

    b) The financial resources–not to mention political heft–to acquire enough natural gas resources internationally to sell the unused surplus into Europe (or anywhere else).

    The transit fees are hardly insignificant.

    That doesn’t mean that the retail petroleum product station network and refineries weren’t valuable and paid for, but the total nameplate capacity of both is just a bit more than 100 kb/d … and I don’t think they are especially sophisticated. (And, if they are bombed again as they were in 1999 it will be Gazprom that picks up the bill … and a clear attack on Russian interests.)

    And the fact of having the clear capability to shut off the flow of gas to Europe does, in fact, give Serbia a considerable card … given its past disagreements with the EU. Surely the recent imbroglio with Ukraine demonstrates that clearly.

    The storage hub, by the way, is especially important, because it would make Serbia a place from which spot additional supplies as required by events could be sent from–providing additional transit revenues.

    The fact that South Stream is tied so closely to the energy security planning of Italy doesn’t hurt Serbia either.

    Just sayin’

  4. @James, I’m no fan of Gazprom, but still — they’re keeping the letter of their agreement pretty well so far.

    @Quickbean, I agree. But I have my doubts… it looks like this government is getting cozy with Gazprom already.

    Doug M.

  5. @Freude Bud, I have to disagree.

    — Serbia has no gas or oil: this is irrelevant to the question of whether it was a good idea to sell its oil refinery and distribution network really cheap.

    — Transit fees: actually, the transit fees aren’t going to be that big. We’re probably talking a few tenths of a percent here, with an “in kind” option. (By way of comparison, Ukraine charges about 0.2% for its pipelines.)

    Let’s say Serbia negotiates for 0.3%. The value of that will depend on the market value of South Stream’s gas. Right now the Serbian branch is supposed to carry 10 bcm per annum, though that’s subject to discussion. Let’s say it will be 20 bcmpa. At $400 per thousand cubic meters, that’s about $8 billion per year. 0.3% of that would be… about $24 million per year. If gas prices double, which is certainly possible, it would be $48 million per year. Nice, but nothing to get excited about. Especially since it won’t start until at least 2013.

    — Bombed again: this is about as likely as a second US invasion of Normandy.

    “And the fact of having the clear capability to shut off the flow of gas to Europe does, in fact, give Serbia a considerable card … given its past disagreements with the EU. Surely the recent imbroglio with Ukraine demonstrates that clearly.”

    One, what past disagreements with the EU? Serbia desperately wants to be an EU candidate.

    Two, demonstrate what clearly? All Ukraine did was piss Europe off. The only reason they got away with it, sort of, was that most people blamed Russia more. Certainly turning Europe’s heat off has not resulted in any benefit to Ukraine.

    — Storage hub: Gazprom has promised storage hubs to Bulgaria and Hungary as well. Hmmm.

    “The fact that South Stream is tied so closely to the energy security planning of Italy doesn’t hurt Serbia either.”

    …the branch of South Stream that’s going to Italy is not the branch that’s going through Serbia.

    One other point that hasn’t been discussed: even if Gazprom never bought NIS, the South Stream route would probably still go through Serbia. For various reasons, Russia doesn’t really want that pipeline to go through Romania. That doesn’t leave a lot of other options.

    Doug M.

  6. Your points are good ones.

    Consider on the other hand:

    a) Though Ukraine pissed the EU off, today it was announced that the EBRD, EIB, and World Bank are considering about $1.4 billion in loans to Ukraine so it might pay for the nat gas in transit.

    b) Yes, Hungary and Bulgaria look ready to put storage hubs as well … currently the only one near Europe is in Ukraine. The presence of one is part of what makes Ukraine’s position so critical just now. Hungary’s of course is closest to most of the big consumers.

    c) I suspect if you were Serbian you would be less sanguine about Europe’s benevolent and amicable future relations than you are.

    d) Just because Italy is not the end point of the branch of South Stream passing through Serbia, does not mean that it does not tie its interests to it. The growing ties between Italy’s energy community and Russia’s may be seen as important.

    From the perspective of Russia, there is no need to have a branch going through Serbia at all … it works, but so would expanding the throughput of Nord Stream and expanding the South Stream pipe to Italy.

    Further: The “market value” of NIS in 2007 is just slightly distorted by the run up in the price of oil, but even so, I am curious on how you arrive at $2.8 billion? That said, you may be right that they could have held out for more.

  7. Back in 2007, KPMG Serbia audited NIS and gave its value as about 2.1 billion euros — that’s where the the $2.8 billion comes from. As you say, some of that may have been inflated by the 2007 spike in oil prices — but not that much. Also, the current euro/dollar exchange rate would make that more like $3 billion.

    Another data point: after the audit, Minister Dinkic originally said he didn’t want any bids lower than 2 billion euros — at that time, between $2.5 and $2.6 billion. Two major oil companies promptly announced that they “intended” to bid.

    So.

    — The northern branch of South Stream is small (the Italian branch will carry four or five times as much gas) and is intended to feed the smaller economies of Central Europe — Hungary, Austria, Bosnia, the Czech Republic. It’ll feed into existing pipeline networks, so it will be able to reach much of Germany too.

    Pipeline politics can get very speculative. Still, you’ll notice that (1) this gives every country in the region (except Romania!) an alternative gas supply that doesn’t go through Ukraine, thereby drastically reducing Ukraine’s leverage against Russia; and (2) it removes the incentive to support Nabucco.

    Doug M.

  8. How hard does this deal make blocking the supply of gas and oil to Serbia? And I guess after the sanctions that is a point Serbs care deeply about.

  9. Oliver, I doubt that. Nobody seriously thinks Serbia is going to repeat the 1990s.

    But since you ask, it would make it almost impossible to cut off natural gas supplies. Cutting off petroleum would be just as easy (or difficult) as it ever was. In the 1990s Serbia got most of its petroleum along the Danube, so with Austrian, Hungarian and Romanian cooperation it was easy to turn off the tap. That’s still the case today, so no change.

    Of course, smugglers promptly took up the slack, helping to create the klepto-capitalist class that still dominates much of Serbia’s economy today. Presumably if Serbia ever came under sanctions again — which is about as likely as Poland being invaded by Germany, but let’s go with it — this would once again be the case.

    (Trivia: for several years in the 1990s there was so much smuggling through Albania that they actually built a pipeline across the border. A little one, but still.)

    Doug M.

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  12. NIS €2 bill. Maybe in an alternative universe – don’t make me laugh.
    This is actually a good piece of business by the Serbian government – much better than this srticle is trying to make.

  13. @Alex:

    In 2007 NIS had a profit of approximately 9 billion RSD (US$ 170 million) and 262 billion RSD (US$ 5 billion) of revenues.

    It has 13900 employees, 500 gas stations across Serbia, Bosnia and Herzegovina and Montenegro. 1600 internally serviced gas stations, 8 large terminals, 44 warehouses and air fuel pumping facility at Belgrade Nikola Tesla Airport, more then 20 hotels 3-4-5 stars, more then 50 buildings all over the country.

    Pančevo Oil Refinery (yearly refines of 4.8m tones of crude oil) and Novi Sad Oil Refinery (yearly refines of 2.6m tones of crude oil) are owned by NIS and gas Refinery in Elemir, near Novi Sad.

    In 2007 NIS contributed to Serbian budget with approximately US$1.2 billion.

    This year revenue is 3,7 billion USD?

    2 billon makes you laugh? Ok, whatever…

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