The Slovenia-Russia South Stream gas pipeline agreement

On November 14, 2009 the Slovenian and Russian governments signed the Agreement on Cooperation in Construction and Operation of the Gas Pipeline on the Territory of the Republic of Slovenia. Among other things, the agreement will aid developments in the energy field and ensure a stable supply of natural gas from Russia to Slovenia and other European countries.
This natural gas supply is known as the South Stream gas pipeline, which is a proposed gas pipeline project between the Russian energy company Gazprom and the Italian energy company ENI. To date, similar agreements have also been signed with Italy, Greece, Bulgaria, Serbia and Hungary. Although the final route of the South Stream gas pipeline is still undecided, Slovenia was designated as the last in line to connect Russian natural gas with Italy via the Black Sea.

Pursuant to the agreement, Russian company Gazprom and Slovenian company Geoplin Plinovodi will form a joint company which will own the pipeline, together with other assets and facilities constructed or acquired by the company in the process of its business activity, and conduct all the pipeline's activities. Slovenia and Russia have explicitly agreed not to expropriate or nationalize the joint company's property (thus it shall be a private company), except in cases where the land is needed for the construction of public infrastructure.
Gazprom and Geoplin will each hold 50 % of the joint company. Subject to corporate governance rules, new shareholders may accede to the joint company.

In order to achieve the agreed annual transmission capacity of approximately 8 bn cm of natural gas, several phases are foreseen. First, Slovenia must adopt a decision on the route of the gas pipeline on its territory. Then a feasibility study must be prepared by June 30 2011.
The feasibility study will determine the technical, environmental, economic and financial feasibility of the construction of the gas pipeline and address the viability of using the existing gas pipeline to implement the project. No later than 27 months after the results of the feasibility study are published, Gazprom and Geoplin must adopt a decision on constructing the gas pipeline based on the feasibility study. A further prerequisite is a long-term contract on transmission of the above-cited volume of natural gas.

A crucial question in the negotiations related to the special tax treatment negotiated by the Russian government. The Slovenian government refused to agree that European rules would not apply to the joint company. The outcome was that Slovenia will grant the joint company the most favoured customs and tax treatment under Slovenian law.
In addition, Slovenia has committed to provide compensation if changes in the taxation field result in a higher tax obligation on the joint company. The compensation will cover the difference between the amount of the after-tax profit which would have been obtained before the changes in the tax law in Slovenia or the amount of the reasonable after-tax profit in this sector (whichever is lower) and the amount of the reduced after-tax profit actually obtained after changes in the law. Such compensation must be in accordance with state aid rules, in particular with the EU rules on state aid that are applicable in Slovenia.

The agreement will enter into force after completion of the respective Slovenian and Russian internal procedures. In Slovenia, the internal procedure consists of ratification of the agreement by Parliament.
Once the internal procedures for both contractual parties are completed, the agreement will remain in force for 30 years. After expiration of this period, an automatic five-year extension is stipulated unless otherwise decided by the contractual parties. In the event that the contractual parties do not reach a positive decision on constructing the gas pipeline by October 1, 2013, the agreement will cease to exist unless agreed otherwise.