Under this project, Gazprom, Russia’s natural gas monopoly, and Snam S.p.A., Italy’s public gas utility company will construct a pipeline totaling about 760km in length–including about 370km running overland in Russian territory and approximately 390km under the Black Sea–to supply natural gas from Russia to Turkey. Of the total US$2.8 billion cost of the project, about US$1.8 billion will be supplied by a syndicate of Japanese and European banks. A syndicate of Japanese banks, led by the Japan Bank for International Cooperation and the Fuji Bank, Ltd., will supply a total of US$620 million (about ¥74.4 billion @ ¥120=US$1) with insurance on the funds provided by Nippon Export and Investment Insurance. This project will be the first since the Japanese government recommenced financing for projects in Russia after a temporary suspension following the 1998 Russian financial crisis. Moreover, these financing arrangements will not receive any repayment guarantees from the Russian government and therefore differ from previous projects, since they will be secured by the proceeds from Gazprom’s sales of natural gas currently being supplied to Italy. Russia has substantial external liabilities and is restraining the issuance of guarantees for new projects. The implementation of these project finance arrangements is therefore expected to open the way for future non-LG undertakings (projects without government guarantees).

Nevertheless, since there are no precedents for this type of financing arrangement, and since Russian domestic law is not yet adequate to cover the relevant provisions, the implementation of the arrangements, since the signing of the contracts in April 2000, has required a full year. This is because the project was temporarily stalled when a dispute arose regarding whether the Russian government’s Ordinance Regarding Compulsory Conversion of Foreign Currency (an ordinance requiring Russian companies to convert 75% of foreign currency transactions into rubles) should be applied to foreign currency payments into escrow accounts out of Russia from Italy, which will be used as collateral to secure the project financing arrangements. Finally, this issue was resolved when the Legal Bureau of the Russian President’s Office announced an official interpretation of the ordinance indicating that it did not apply to foreign currency paid into an escrow account out of Russia which was opened under the approval of Central Bank of Russia.

The portion of the project commissioned to the Japanese sogo shosha consortium, led by Mitsui, is the part under the Black Sea. This section of the pipeline will be the deepest in the world, running to 2,200 meters below the surface, and, in view of the high pressure at those depths, manufacturing the wide-gauged pipes will require extremely advanced technology. There are only a few companies in the world that can manufacture steel pipe of this kind. Approximately 310,000 tons of this pipe will be needed, and it will be manufactured by four companies: NIPPON STEEL CORPORATION, NKK Corporation, Kawasaki Steel Corporation, and Sumitomo Metal Industries, Ltd. After manufacture, the pipe will be given an anticorrosion coating in Malaysia. This volume of pipe will represent more than one-third of the annual exports of this kind of pipe (Submerged Arc Welded steel pipe) from these four companies. The first shipment of pipe left Malaysia on May 2 and arrived at its final destination, the port of Samsun in Turkey on 23 May.

The completion of the project is scheduled in spring 2003, and supply of natural gas to Turkey will begin thereafter. The maximum annual volume of gas transported through the pipeline will be 1.6 billion cubic meters.

The demand for energy in Turkey is forecast to expand, and the construction of a number of new electric power generating facilities is planned. The coal-burning thermal power plants now in use in Turkey are creating major environmental problems, and, for this reason, the government of Turkey plans to make a gradual transition to thermal plants powered by natural gas as new facilities are built.