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Grigory Pasko: Traveling the Nord Stream, Part XIII

Into the Pipe or Down the Drain? Some questions about the promised transparency By Grigory Pasko, journalist [editor’s note – this is Pasko’s final installment of the Nord Stream series – an index of all the articles can be found here] At a recent meeting in Zagreb with the leaders of the Balkan countries, Russia’s president Vladimir Putin, who lobbies the interests of «Gazprom» so aggressively all over the world, once again made what has become his oft-repeated call for everybody to work together as equal partners in the area of energy supply and for transparency. Transparency is a new word for Russia and an even newer one in the circles close to the Kremlin. It literally means clarity, openness, and access to understanding. Even a quick cursory glance at the activities of the company «Gazprom» gives reason to doubt that this company is open or that its activities are “accessible to understanding”. Just as an example, let us take such an aspect as finances during the construction of the Nord Stream gas pipeline (Let me add a caveat right from the start that I am operating on the basis of information from open sources and in so doing am not myself a specialist in the field of finance).

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A poster of the Soviet period with the caption “Here’s our profit!”

But first a necessary digression. The independent company Concord Power, interest in which, according to the data of Die Welt, «Gazprom» has shown in connection with intentions to participate in the construction of a gas-fired power station in the area of Lubmin, has received the approval of the authorities of the federal Länder [German States] of Mecklenburg-Vorpommern and Brandenburg for the construction of a spur gas pipeline with a length of 210 kilometers into the center of Germany. It should be noted that Nord Stream AG did not apply for permission for the construction of this additional spur. But a license for the construction of a gas pipeline along this route has already been given to one of the subsidiaries of Concord Power. Land has already been allotted for this project, and preparation for the laying of the pipe is being conducted. The RBC news agency has reported, citing «MDM-Bank» specialist Andrey Gromadin, that in assessing the cost of the construction of this gas pipeline spur, one ought to proceed from the number 1 – 1.5 million dollars per kilometer. The project as such will carry a price tag of 200-300 million dollars. In such a manner, were we find a starting-point figure: 1 – 1.5 million dollars per kilometer of pipe laid on land. And in such a manner it turns out that the Russian section of the North European Gas Pipeline from Gryazovets to Portovaya Bay with a length of 917 kilometers can’t possibly be valued at either the 4.5 billion dollars that were mentioned earlier, or the 6 billion dollars that appeared later in the capacity of a final figure for the cost of construction. At the very worst, the cost might approach a sum of 1.5 – 2 billion dollars.

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Photo of pipes for Nord Stream in the vicinity of Babayevo of Vologda Oblast by Grigory Pasko

And this in its turn brings up a question: Just who is calculating these expenses for the construction of the Russian section of the Nord Stream pipeline, and how? Deputy Chairman of the «Gazprom» Management Board Alexander Medvedev has declared that $6 billion is going to be spent on the land portion (Gryazovets to Vyborg). 4.5 billion euros will go for the pipe along the bottom of the Baltic Sea. According to the latest data of the operator Nord Stream AG, the undersea portion is valued at a minimum of 5 billion euros. It is known that «Gazprom’s» share of participation in the Nord Stream project will comprise a minimum of 375 million euros. How much does the project itself cost? It seems that nobody knows at this point. Thus, a figure of 10.5 billion dollars is named most often. However, after chairman of the Nord Stream AG shareholders’ committee Gerhard Schroeder declared at a meeting in the European Commission that the cost of the project had jumped from 9 billion to 12 billion euros, a series of analysts expressed bewilderment with respect to the discrepancies in the data. Thus, in a Deutsche UFG review, experts noted that the evaluation of the investment attractiveness of «Gazprom» may need to be re-examined in consideration of the new forecasts of expenses for Nord Stream. “Cost overruns represent the biggest risk from the point of view of our assessment of «Gazprom» and may become the reason for a lowering of our forecasts of the financial indicators of the company”, note the Deutsche UFG analysts («Gazeta» (Moscow), 12 February 2007). And there are other questions as well: Why does «Gazprom» need such huge and clearly overstated sums, if we consider that even the second strand of the Yamal-Europe gas pipeline is valued at a mere $2 billion? And all the more so given that a Gryazovets-Vyborg gas pipeline already exists.

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Photo of gas pipeline under the ground in the vicinity of Gryazovets by Grigory Pasko

«Gazprom» reported that it is “building a gas pipeline in one technical corridor with the current two-strand Gryazovets-Leningrad gas pipeline”. It was likewise reported that as new sections get placed on stream, old ones would be shut down by turns for the conducting of repairs and reconstruction. So maybe the overstated cost estimate for the construction of the land portion of Nord Stream is needed by «Gazprom» for patching up holes in old pipes? It is noteworthy that at the end of 2006 deputy chairman of the «Gazprom» management board Alexander Ananenkov declared («Gazeta» (Moscow), 09 February 2007) that by the year 2020, the company intends to spend 2 trillion rubles (around $77 billion) on the construction of all the trunk gas pipelines in the RF. This means that around $6 billion will go for these purposes per year. An amazing coincidence between this figure and the cost estimate for the construction of the land portion of Nord Stream, don’t you think?