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Russia: Gazprom Secures Pipeline Financing

Gazprom has won financing and support for its Blue Stream gas pipeline to Turkey. But difficult problems may still lie ahead. RFE/RL correspondent Michael Lelyveld reports.

Boston, 18 April 2000 (RFE/RL) -- Russia's Gazprom appears to have taken the lead in its race to build a new gas pipeline to Turkey by securing financing for the project known as Blue Stream.

Gazprom and its Italian partner ENI said last week that the 370-kilometer line across the Black Sea has won $1.1 billion in loans from a group of Italian and German state-owned banks. The lending for the Blue Stream project will be guaranteed by Italy's export finance agency SACE, giving it the official backing of the Italian government.

In addition, Japanese government agencies are expected to grant another $600 million in loan guarantees to complete the financing for the $1.7 billion cost of the underwater pipe.

Even more loans will be needed to finance the overall cost of $2.9 billion for the entire 1,200-kilometer project. But these are also starting to look more likely with support in some form from the governments of Russia, Turkey, Italy, Japan, Germany, and Britain.

The financing is a vote of confidence not only in the Italian-Russian partnership but in the strength of Gazprom's 25-year contract to supply Turkey with gas. When it was signed in 1997, the huge gas deal was valued at $13.5 billion.

It is not yet clear whether Gazprom's success in securing loans will end the skepticism that has been voiced by many analysts about Blue Stream. The ambitious project relies on building the deepest underwater pipeline in the world. Despite the enormous engineering challenge, Italy's ENI said that gas will start to flow to Turkey sometime next year.

If the project stays on schedule, it could have a big advantage over the proposed trans-Caspian gas pipeline from Turkmenistan. That project has been delayed by feuding between Turkmenistan and Azerbaijan. A third competing gas line from Iran has been completed to the Turkish border. But the United States has reportedly blocked delivery of a U.S.-made compressor needed for Turkey's side of the line.

In spite of hopeful signs for Blue Stream, the progress on the project may come at a difficult time. Gazprom has been embroiled in a dispute with UES, the Russian electricity company, about gas deliveries to the nation's power plants. Last week, President-elect Vladimir Putin ordered the matter settled between the two monopolies, but the outcome may be less than satisfactory.

UES had accused Gazprom of cutting gas deliveries since April 1. Gazprom complained that UES owed over $1.5 billion because it collects only a portion of its electricity bills. The generating giant warned that it would have to cut power by 25 percent unless its needs were fulfilled. Under last week's compromise, Gazprom will supply more gas, but not as much as UES wanted. The electricity system will instead use more coal, a fuel that is bound to make Russia's poor environment worse.

The problem is that Russia has suffered from declining investment in gas production at a time when its export commitments have soared. Domestic shortages have resulted because Gazprom charges its domestic gas customers only about one-fortieth of the amount that it can get from export markets like Turkey. Domestic prices are too low to support new investment.

Without rational energy pricing, the troubles are likely to go on. But energy is already difficult for many Russians to afford. The problem may not be solved even if Gazprom agrees to buy more gas from Turkmenistan under a proposed 30-year deal. So far, Russia has offered to pay much less for the gas than it would charge to Turkey, but the price would still be much more than it can get from its own citizens.

Meanwhile questions persist about Turkey's forecasts of its future gas demand. Earlier this month, the Financial Times reported that the country has sharply reduced its forecasts of electricity use in 2005, but the lower figures have apparently not been translated into lower projections for Turkey's gas needs.

Recently, Turkey announced that its economy fell 6.4 percent last year as a result of its earthquake. The drop was far greater than the 2.1 percent decline predicted by the International Monetary Fund last December. It was also larger than the 4.3 percent loss estimated by the IMF's newly-released World Economic Outlook.

While the IMF believes that Turkey's economy will bounce back by 4.5 percent this year, last year's setback can only add to doubts about the country's gas consumption forecasts. This year, gas use is likely to be 40 percent below the 27 billion cubic meters that Turkey predicted when it signed the supply deal with Gazprom in 1997.

As a result, the Blue Stream project may still face a series of questions, despite its financing. Aside from the technological challenge, Russia could find that gas supplies are a greater problem than when the deal with Turkey was agreed. There may also be doubts about how much gas Turkey will need in 2001.

But the governments that are backing the project now seem determined to go ahead. Their participation may reduce the risk for Gazprom, even if the projections are wrong.