Nord Stream 2 Increases Financial Risks for Gazprom, Fitch Says

Russian gas giant OAO Gazprom's Nord Stream 2 may hurt the company's commercial and financial performance. According to a report from credit ratings agency Fitch, Gazprom may face difficulties in financing the Nord Stream 2 pipeline. 

"The original Nord Stream was funded by project finance. We believe raising multi-billion dollar project financing for Nord Stream 2 in the capital markets would probably be much harder now. This is because Western sanctions have significantly hindered international funding to Russian corporates, even those not directly sanctioned," Fitch said.

The Nord Stream 2 project foresees the construction of the third and fourth lines to ship Russian gas across the Baltics by the end of 2019, doubling the current pipeline's capacity to 110 Bcm per year. The project will be developed by joint venture company New European Pipeline, in which Gazprom will have a 51% stake, with E.ON, Shell, OMV and BASF/Wintershall each having 10%, and Engie 9%.

Funding difficulities

"Weak gas prices and demand, plus high capex mean Gazprom would not be able to fund its capex share (51% of an estimated EUR 10 bn) from internally generated funds. If project financing were not available it could therefore have to try and borrow directly to fund its share of pipeline projects' costs, but this too would be difficult and potentially expensive in the current funding environment," said Maxim Edelson, senior director of corporates at Fitch Ratings said.

Over the last couple of years Nord Stream I has been operating at only around 55% capacity because European authorities have restricted Gazprom's usage of the OPAL pipeline, which carries Nord Stream's gas on into Germany. "A solution to this limitation, imposed to ease third-party access to the pipeline, would be necessary if the Nord Stream II's 55bcm capacity is to be fully used," Edelson said.

Separately, Gazprom is negotiating the 63bcm capacity Turkish Stream pipeline with the Turkish authorities, but the negotiations are stalled due to political uncertainity in Turkey after June 7 elections, which toppled the 13-year ruling AKP from government. Turkey will hold early general elections in November 1, while the recent opinion polls gave AKP a narrow lead approx 40%.

Gas prices will fall further 15%

Fitch has forecasted that OAO Gazprom's natural gas prices will fall another 15% from current levels. Fitch also expected that Gazprom's European gas sales volumes will grow steady. Gazprom's European gas sales fell 7% yoy in 1H15 to 80bcm, while its average European gas prices declined by 26%, hitting multi-year lows.

Gazprom said it has raised its forecast for natural gas exports to Europe and Turkey to 158 Bcm in 2015 as daily nominations by consumers exceed last year's, with the average price of Gazprom's gas estimated at EUR 195.9/1,000 cu m ($221.7/cu m) for the coming winter.

In June, Gazprom CEO Alexander Medvedev estimated the average price for European consumers at $240-$242/1,000 cu m for the year.