Russian PM’s Visit to France Marks Series of Important Energy Agreements

The Friday (27 November) visit of Russian prime minister Vladimir Putin to France within the framework of the Russian-French Co-operation Commission marked the signing of a staggering 15 agreements, with the topics of discussion ranging from economic co-operation to defence, and most notably, energy.

South Stream in Focus

Among all the deals negotiated, the agreement on the participation of Electrcite de France (EDF) in the Russian-Italian natural gas pipeline project, South Stream, marked the high-mark of Prime Minister Putin’s visit. The possible participation of EDF in the joint Gazprom-Eni project has been rumored for a few months now, but it was not until Friday that the general terms of the agreement were specified. Gazprom and EDF signed a memorandum of understanding (MoU) that will allow the French company to take 10% of the 900-km subsea section of the project, which is expected to run from the Russian town of Novorossiisk to the Bulgarian Black Sea port of Varna. Gazprom and Eni have a parity stake joint venture (JV) established to carry out the planning and construction of the maritime section of the 63-bcm/y pipeline, whose total cost is estimated at 25 billion euro (US$37.2 billion). According to Gazprom CEO Alexei Miller, further details on EDF’s inclusion in the project will become clear after a meeting between Gazprom and Eni later this week. Eni CEO Paolo Scaroni had already revealed ahead of the Friday meeting that his company welcomes the possible participation of EDF. According to reports by Russian media, EDF has also reached an agreement with Gazprom over a long-term contract for the supply of 6 bcm/y of gas. Allegedly, the two companies have also discussed prospects for co-operation in the fields of natural gas storage and electricity generation, but no further details have yet been revealed.

Nord Stream Talks

While one of the major Russian gas infrastructure projects received a boost, the other one, Nord Stream, also left a mark on the Russo-French meeting as Gazprom officials held talks with the other French energy giant, GDF Suez. The two companies revealed that Gazprom will acquire GDF Suez's 5.26% stake in eastern Germany's largest importer of natural gas, VNG Verbundnetz Gas, bringing its total stake in VNG to 10.52%. At present the other shareholders of VNG include EWE, which owns 47.9% of VNG, the VUB group of 12 utilities with 25.7%, and BSF’s subsidiary Wintershall with 15.7%.

Although no official confirmation was given during the bilateral meeting, the expectation is that GDF will relinquish the stake in exchange for a 9% share in the Gazprom-led consortium, Nord Stream AG. GDF’s potential entry into the project, which also includes Germany’s E.ON and BASF, and the Dutch Gasunie, has been on the agenda for a few months now and according to Miller, who was cited by RIA Novosty, the French company may join the consortium as soon as talks over the volumes that the company could book from the 55-bcm/y pipeline are finalised. In 2008 Gazprom supplied GDF with 10.9 bcm of gas and the two companies already have a supply contract for 2.5 bcm/y from Nord Stream.

Upstream and Power

The Franco-Russian summit produced some notable agreements in the upstream and power generation sectors as well. Total was the main actor in these upstream developments as the French supermajor signed a deal with the Russian gas producer Novatek for the purchase of a 49% stake in Terneftegaz, which holds the licence for the Termokarstovoye gas condensate field located in the Yamal-Nenets Autonomous District on the Yamal Peninsula. The field’s reserves are estimated at 47.3 bcm of gas and 10.3 million tonnes of gas condensate. The deal, which the two companies negotiated as early as last June, could see Total invest US$1 billion in the project. Novatek, which will keep a 51% stake in the new JV, previously said that the JV has two years to complete exploration work at the field and prepare a development plan, while a final investment decision (FID) is slated for 2011. The French company also finalised an agreement with the Russian state-owned oil and gas company Zarubezhneft, allowing it to purchase 10% of the Kharyaga production sharing agreement (PSA).  The entry of the Russian company into the Kharyaga project, which is led by Total with a 50% stake, but also includes Norway's Statoil with 40%, and the Nenets regional administration with 10%, was strongly backed by the Russian government earlier this year and it is expected that Statoil will also cede 10% to Zarubezhneft.

The day of intensive deal making was complemented by a number of agreements in the power generation sector. Russian power generator TGC-4 and France's Dalkia International S.A. established a JV to handle the production, transportation, and distribution of thermal energy in Russia, while the Russian power trader Inter RAO and EDF signed a framework agreement under which the two groups will examine the feasibility of assets swaps and cross investments. Inter RAO also agreed on the establishment of a 50%-50% JV with EDF’s Italian subsidiary, Fenice, for the purpose of developing energy efficient projects in Russia.

Outlook and Implications

The greater part of the agreements were anticipated, but the sheer number of deals that the two sides managed to conclude is still notable. Probably the most significant of these developments is EDF’s inclusion in South Stream, as French participation will attach a greater degree of credibility to the project and to its claim that South Stream is truly a pan-European idea. This is particularly important considering that South Stream is engaged in unspoken competition with the Nabucco natural gas pipeline project, which in turn is supported by the European Union (EU). One of the biggest advantages that Nabucco has is that is a European project, designed to improve Europe’s security of supply and to strip it of its excessive dependence on Russian gas. While the latter of these points is certainly not addressed by South Stream, the inclusion of a third major partner in the South Stream consortium certainly improves the marketing appeal of the project.

As for the other agreements, it could be noted that each side manages to obtain certain advantages that carry a large degree of importance. For France, the prospects of a long-term gas supply agreement between EDF and Gazprom, and of the inclusion of the two largest French utility companies in such large-scale projects as Nord Stream and South Stream, means not only that the country takes a large step closer to guaranteeing adequate gas supplies in the long term, but also that its companies will retain their status as major international players. The same holds for Total, whose agreements with Novatek and Zarubezhneft would most certainly guarantee the French company a good standing with the Russian government, and the prospects of further expansion in the Russian upstream market.

Aside from the already noted benefits from the perspective of South Stream, Russia also stands to benefit from increased exposure to downstream markets. The acquisition of the 5.26% stake will enable Gazprom to expand its standing in the German distribution market, and if the co-operation with GDF and/or EDF deepens, the company could hope to seize a greater share of the French market as well. At present, Gazprom markets only 1.5 bcm/y directly on the French market. The same is true for power, where in addition to investments in the French market, Russian companies open up the prospects of benefitting from French technological know-how and experience in the power generation and energy efficiency segments.

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