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Gazprom Said to Pay Saipem for Vessels at Dropped Black Sea Link
03/06/2015
(Bloomberg) — Russia’s state-run gas exporter, OAO Gazprom, hasn’t stopped spending money on a canceled $45 billion Black Sea gas pipeline.
The company is paying Italy’s biggest oil and gas contractor, Saipem SpA, the costs of two pipe-laying ships hired to build the South Stream project even though they’re standing idle, said two people familiar with the matter, asking not to be identified because the information isn’t public.
Although neither company would comment on the current payments, it shows how South Stream is still a drain on resources three months after President Vladimir Putin announced Gazprom would drop the project. The pipeline was scrapped as the crisis in Ukraine, where the European Union accuses Putin of backing rebel fighters, soured relations between Russia and Europe.
Gazprom said on Monday it’s spending 569 million euros ($633 million) on the defunct project in the six months to the start of April.
All contracts are suspended for now, Gazprom’s press service said in response to questions, declining to comment on payments to contractors. Saipem referred to statements made last month that the South Stream contract was still under suspension, pending a decision from the client.
Saipem, controlled by Italy’s state-run oil producer Eni SpA, was the main contractor at South Stream and had two deals worth 2.4 billion euros.
The Milan-based company was supposed to build the first line of the undersea pipeline, starting last year, and provide support services for construction of the second line in the link.
After canceling South Stream, Putin proposed an alternative route to Turkey. Gazprom will use most of investments already made in South Stream for the new link, according to the company.
Saipem may get a deal similar to the South Stream agreement — to lay the first undersea line of the Turkish pipeline, Russia’s Vedomosti newspaper reported last month, citing two people it didn’t identify. The company declined to comment.
Gazprom is paying Saipem hundreds of thousands of euros per day as the vessels are docked in a Bulgarian port, waiting for the planned start in building the Turkish link, Interfax news service reported last month, without identifying the source of information.
South Stream Transport BV, a Gazprom unit which would operate the 931-kilometer (579-mile) undersea part of the project, reckoned to cost as much as 14 billion euros, signed contracts with more than a dozen companies from Germany to Japan. Those included deals for construction and services, as well as contracts with pipemakers and Bulgarian ports to store the pipes, some of which were already delivered.
Russia’s announcement to scrap the South Stream came as Saipem Chief Executive Officer Umberto Vergine was trying to restore profit and clean up the company’s backlog from lower-margin contracts, that led to several cuts in financial targets since 2013.
The cancellation of South Stream would cut revenue by about 1 billion euros in the first quarter, Vergine said on a Feb. 16 conference call.
Saipem would receive early termination fees if the South Stream operator tears up the contract, according to Vergine. For now, the contract is suspended, he said.
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