Italian energy company, Eni SpA (NYSE:E), in association of Electricite de France SA (EDF) and Wintershall AG, signed a shareholder agreement with Russian state run gas firm OAO Gazprom to win a 50% share in the South Stream gas pipeline project.
The agreement, signed by representatives of the four companies in the presence of Russian Prime Minister Vladimir Putin, confers Eni a 20% interest in the offshore section of the pipeline, while other associates –– France’s EDF and Germany’s Wintershall –– will each get a 15% stake. On the other hand, Gazprom is entitled to the remaining 50% stake. For the onshore section of the pipeline, Gazprom has several contracts with companies in Austria, Bulgaria, Croatia, Greece, Hungary, Serbia and Slovenia. The trio was initially known as Gazprom’s partners. Now, the three have entered into a legally binding agreement for the first time.
The South Stream project is expected to commence in 2015 and is aimed at diversifying the Russian natural gas supply routes. Post completion, the offshore South Stream pipeline will run under the Black Sea from the Russkaya compressor station on the Russian coast to the Bulgarian coast. From Bulgaria, the offshore section –– spanning around 900 kilometers or 559.2 miles –– will then transport up to 63 billion cubic meters of natural gas annually to south and central Europe.
Eni also stated that the associates of the project will set up an investment plan for potential creditors in the first half of 2012. Notably, the company highlighted that construction of the underwater section alone is likely to involve $10 billion.
The latest pact is part of the strategic partnership between Eni and Gazprom in 2006, to jointly develop projects in the entire gas chain. Eni first entered Russia’s upstream segment through this partnership.
Eni, along with its consolidated subsidiaries, is engaged in oil and gas, electricity generation, petrochemicals, oilfield services and engineering industries. Although Eni has been experiencing declining production volumes over the last few quarters, management is confident about its long-term upstream delivery potential as new fields are continuously coming online. We believe that this could offset the challenges around the Gas and Power segment. However, we expect the company to perform in line with its peers and the industry as a whole, and rate the stock Neutral.