Gazprom to Buy Serbian Gas Firm

Russian energy ambitions in the Balkans received a shot in the arm Tuesday as Serbia backed Gazprom taking a major stake in its state oil and gas company and approved a branch of the South Stream gas pipeline through the country.

The deal, which comes after President Vladimir Putin last week won agreement to build the pipeline through neighboring Bulgaria, will likely further entrench Gazprom's control over European gas supplies -- and weaken support for the competing Nabucco pipeline project, which is the European Union's favored supply route.

Serbia is under pressure to sign a deal with Gazprom on the South Stream project, as its relies on Russia for 90 percent of its gas and looks to Moscow for support in its dispute with the West over Kosovo independence.

The first round in Serbia's presidential elections on Sunday gave a narrow lead to pro-Russian nationalist Tomislav Nikolic, over the pro-EU incumbent, Boris Tadic. The runoff vote is on Feb. 3.

"The government of Serbia has approved the text of the agreement between the Russian Federation and Serbia on cooperation in the oil and gas sector," the Serbian government said in a statement Tuesday, adding that it had authorized Infrastructure Minister Velimir Ilic to sign the agreement.

Neither side would put a price on the deal Tuesday, and it was not immediately clear whether any financial details had been worked out.

Last month, Gazprom offered to take a 51 percent stake in NIS through its oil arm, Gazprom Neft, paying 400 million euros ($580 million) in cash and pledging $500 million in additional investment over the next five years.

The Serbian government rejected the offer, saying it was too low for a company valued at $2 billion, and called on Gazprom to raise its additional investments to $2 billion.

The agreement could be signed in Moscow on Friday, Independent Belgrade radio station B-92 said, without saying where it got the information.

Gazprom declined to comment Tuesday, but Gazprom Neft said it was still involved in intense negotiations on the agreement.

"As far as we are concerned, no formal agreement has been reached. We are in the process of negotiating the terms," said Natalya Vyalkina, a Gazprom Neft spokeswoman.

Under the deal, the two countries are to jointly reconstruct a Serbian underground gas storage facility and Gazprom Neft will buy a major stake in Naftna Industrija Srbije, or NIS.

NIS controls two oil refineries, an oil pipeline from Croatia, and most of the country's distribution networks for oil products and fuels.

The Serbian government has been looking to sell off NIS in blocks of 25 percent through a competitive bidding process since 2005. Gazprom and LUKoil, Austria's OMV, Poland's PKN Orlen, Hungary's MOL, and Romania's Rompetrol have all been mentioned as contenders.

Analysts said Tuesday that Belgrade had little choice but to accept Russia's terms, because its proposal was packaged with the South Stream gas project, which would guarantee the country's gas supplies.

Konstantin Batunin, an oil and gas analyst at Alfa Bank, said Gazprom would reap no immediate benefits from the deal.

"There are only mid- and long-term benefits for Gazprom, since the initial tasks would be to reconstruct storage facilities and rebuild infrastructure," Batunin said. "Serbia, on the other hand, stands to gain immensely from the South Stream gas project."

Gazprom is understood to have been pressing hard to strike a deal before the second round in Serbia's presidential elections, and analysts said Serbia's need for Russian support over Kosovo had been a factor in clinching the deal.

Mikhail Zak, oil and gas analyst with Veles Capital, said the deal could involve a tradeoff between Russian support over Kosovo and the sale of the NIS stake.

"Politics is always part of the equation in oil and gas supply deals," Zak said. "Russia has always stated its geopolitical interests as far as independence for Kosovo is concerned."

"Besides rivaling Nabucco, South Stream will also enable Gazprom to bypass Ukraine for more of its gas exports to the EU, matching the similar Nord Stream project under the Baltic Sea," Zak said.

The deal represents a victory for Russian economic interests but is unlikely to advance its geopolitical interests in the Balkans, said Fyodor Lukyanov, editor of the journal Russia in Global Affairs.

"For Russia and Gazprom, it was very important to acquire the Serbian national gas company because this will greatly help in solidifying their position in Europe as a whole," Lukyanov said.

Yet while Moscow's stance against independence for Kosovo probably helped Gazprom get the deal, the agreement will not stop Serbia's drift toward Europe, Lukyanov said.

"In the long run, maybe in five to 10 years, Serbia will have no choice but to join the European Union," he said. "So the position of Serbia today is to help Gazprom solidify its position in the EU."

The deal may be frustrating for EU leaders who have tried to avoid dependence on Gazprom, Lukyanov said.

"This will complicate Europe's efforts to free itself from Gazprom, although since South Stream is being built anyway, it doesn't change the situation fundamentally," he said.

Dmitry Rogozin, Russia's new representative to NATO, said Europe should not be frightened by Gazprom's expansion into the Balkans.

"Russia's interests lie in only one thing: having close, cooperative relations with all the countries of Europe," said Rogozin, a former leader of the nationalist Rodina party who has been a trenchant critic of NATO expansion in Eastern Europe.

The timing and announcement of the deal clearly combines both political and economic considerations, said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies.

"One can't ignore the political overtones, especially at this sensitive time of the elections and the decision making over Kosovo," Stern said, but added that the pipeline deal made economic sense for Serbia.

Currently, Serbia pays probably the highest price in Europe for Russian gas, Stern said.

"What they are hoping is that with this direct line coming straight across the Black Sea and across Bulgaria their gas price will drop dramatically," Stern said. "It basically cuts out a lot of the expensive transit costs that the country has to incur."

Although the EU reaction would most likely be very negative, given the prevailing attitudes toward Gazprom and Serbia, Stern said that further diversification of transit routes into Europe should be welcomed.

The office of EU Energy Commissioner Andris Piebalgs did not immediately respond to e-mailed questions about the deal Tuesday.