Dear Madam President,
Ladies and Gentlemen Members of Parliament,
The Bulgarian government has not changed its position regarding South Stream - we
support the project’s implementation, but only if European rules are complied with.
Last Monday, President Putin announced the suspension of the project and we were
notified of this by the media. So far, we do not have the official position of the Russian
In the government’s program declaration, we clearly stated that a necessary condition
for the future of strategic infrastructure projects in the energy sector is the clarification
of their economic parameters. After I ordered the collection of all documents and
correspondence on the project, today I will inform you, MPs, of the results of the
inspection. Much has been said in recent days about what our country would lose if the
South Stream gas pipeline is not realized or if its route is changed.
Experts informed that there is no long term gas transportation contract and that
such has not been signed. At present, there is no complete financial model of the
project. Both documents are directly related to clarifying the benefits for our
country from building the gas pipeline on Bulgarian territory.
By Decision of the Council of Ministers taken on Protocol 42 of June 11 2012, the
Minister of Economy, Energy and Tourism is authorized to allow BEH to adopt a final
investment decision. At the General Meeting of South Stream Bulgaria AD on
November 15 2012, a protocol was signed with which shareholders BEH and OAO
Gazprom adopt a positive final investment decision on the following technical and
economic parameters:
Technical capacity - a total of 63 bn. cu. m. of gas per year; length of pipeline approximately 540 km. The target payback period of the investment should be no
longer than 15 years from the start of commercial operation of the pipeline on
Bulgarian territory. This is the period within which all capital costs on the project
should be recovered. The internal rate of return is 8% of shareholders’ own funds
invested in the project. The base period to reach the required level of internal rate of
return on own funds is 25 years, from the date of the operation permit.
Subsequently, the Russian company OOO Gazprom Export has developed and
proposed to BEH a draft a long-term gas transportation agreement (GTA), which
has not been signed. I will read the text given to me by experts, verbatim:
“The project presented by Gazprom Export does not meet the requirements of the
European Union established by Directive 2009/73 / EC. The significant discrepancies
relate to the requirements for third party access, tariff and operator of the pipeline. In
this sense, the relevant clauses can be considered by BEH only if an exemption is
made to Directive 2009/73 / EC. Furthermore, the draft contains significantly biased
clauses, placing the project company (in its capacity as operator of the pipeline) in a
significant disadvantage to the other party.
The long-term gas transportation contract also contains clauses, which are extremely
unfavorable for BEH as a shareholder in the project company:
• intermediate internal rate of return of 4.25% (at an internal rate of return set at
8% under a Protocol of August 27, 2012);
• a tariff profile with an excessively low tariff during the first 15 years (the period
when BEH needs incoming funds to pay the loan to Gazprom). The low tariff rate in
the first years of operation of the pipeline would lead to a small dividend, which in
turn would render BEH unable to make large installments to repay the loan to
Gazprom EP International B.V. In this sense, the repayment period would be extended
substantially, which will generate significant interest for BEH;
• provides for a zero profit after the 25th year of operation of the pipeline. It is
envisaged that, once the investment is paid off, South Stream Bulgaria generates an
income in the amount of operating costs + 2%, which would not only deprive the
project company of profit (and BEH of dividends, respectively), but would create the
possibility for the project company to operate at a loss after this period (for instance,
unforeseen expenses that exceed the 2% threshold of operating costs).
The draft long-term gas transportation agreement, proposed by OOO Gazprom Export,
actually provides a structure, according to which the project company will generate
profits only for the purpose of the investment and its payment period, after which
the profit (and the dividend for BEH, respectively) will be zero”.
With regard to the financial model, experts informed that there is currently no
complete final financial model of the project, as the current version should be updated.
The data in the current version of the Financial Model is as follows:
A. Assumptions (according to the draft GTA):
1. Internal rate of return on equity - 8%
2. Internal rate of return on equity for the first 15 years - 4.25%
3. 100% capacity for Gazprom Export (subject to an exception made for
third party access in Directive 2009/73 /EC)
4. Reduction of tariff after 2040 to cover only the costs of the project company
5. The tariff shall be considered in proportion to the capacity reserved by
1. Average size of the annual dividend, received by BEH EAD for the period
2023- 2040 – EUR 65 million per year (total of EUR 1.252 billion) Until 2023
BEH will not receive dividends.
2. Average amount of annual tax profit for the period 2016 - 2040 - EUR 31
million (a total of EUR 831 million).
B. Assumptions (at 50% capacity of the entire gas pipeline):
1. Internal rate of return on equity - 8%
2. Internal rate of return on equity for the first 15 years - 4.25%
3. 50% capacity for Gazprom
4. Reduction of tariff after 2040 to cover only the costs of the project company
These parameters render it practically impossible to find external financing due
1. Inability to repay the debt in the first years of the project
2. Inability to distribute dividends during the life of the project
I think these facts speak for themselves and are enough to stop speculations about the
so-called “profits” of the project, which our country has lost.
I will clearly say once again that since there is an open procedure by the European
Commission of June 2, 2014 in connection with the selection of a contractor on
the project, the Bulgarian government cannot take any action for the realization
of the South Stream project on Bulgarian territory.
In a letter, the European Commission warned Bulgarian authorities back on
August 14, 2013, that there could be discrepancies between the Intergovernmental
Agreement between Bulgaria and Russia of 2008 on the building of a pipeline for
transit of natural gas and EU legislation governing the internal energy market.
I am confident that the data I presented provides a clear answer to questions relating to
profits for the country from the South Stream project.
Thank you