Political Doubts Hang over NS2 Gasline (Update)

(Adds Uniper statement in para 11)

The Nord Stream 2 (NS2) partners are continuing to fund the project this year, but further political and financial obstacles are emerging, with one of the strongest supporters hitherto, Germany, now taking a harder line against the Russian project. 

Two weeks after giving NS2 the approvals needed for it to build the pipeline on German territory, the chancellor, Angela Merkel, announced April 10 during a news conference with Ukraine's president, Petro Poroshenko that the project cannot go ahead without clarity on Ukraine’s role as a transit route for gas.

A day after Merkel’s statement, Russian local Vedomosti cited unnamed sources saying that Gazprom has begun negotiations with Ukraine's Naftogaz on a new transit contract, to replace the document that was to have expired at the end of next year. After the arbitration settlement between Gazprom and Neftogaz, the Russian company said that it was cancelling all gas contracts with Ukraine. Naftogaz said March 27 that it would resume talks with Gazprom in April but also criticised Gazprom's recent behaviour  in a meeting with European Union commissioner for competition, urging it take a hard line on the export monopoly.

The cost of NS2 from Russia to Germany along the bottom of the Baltic Sea is estimated at €9.5bn ($11.7bn) and according to Gazprom, all the contracts for materials, equipment and services needed have already been signed. The company itself has a 50% share in the project's financing and it has allocated $2.01bn to NS2 in 2018, based on the January ruble exchange rate, which is 11.2% more than last year.

The project operator Nord Stream 2 AG signed a financing deal with its European partners Anglo-Dutch Shell, French Engie, Austrian OMV, and Germany's Uniper and Wintershall April 24, 2017, each responsible for 10%, leaving Gazprom with half the financing – and all the shares – of NS2. Switzerland-based NS2 is responsible for the planning, construction and future operation of the pipeline.

It is not clear how serious is Merkel’s precondition for NS2 as the 55bn m³/yr project will naturally cut gas flows from Ukraine; but the tightening of US sanctions on Russia could affect the project's ability to raise finance. 

About a half of Gazprom’s 194bn Russian m³ exports to EU passed through Ukraine last year; for this year, Kiev is hoping for $3bn fees from gas transit. Last year CEO Alexei Miller – who is now on the list of US individuals sanctioned – said that Russia plans to decommission compressor stations and send no more than 10-15bn m³/yr gas flow through Ukraine after 2020, and he has since repeated this.

For Gazprom, NS2 makes commercial sense because the centres of gas production now are moving into the Yamal Peninsula: so far north that the new, northerly export route is a lot shorter.

Wintershall told NGW that it is contributing to the financing of NS2 as a co-creditor. “Its implementation will strengthen infrastructure and security of supply in Europe, which is particularly important given the decline in production there. The five European energy companies committed to long-term financing of 50% of the entire project costs, which are currently estimated at €9.5bn. Wintershall will provide up to €950mn. As of December 31, 2017, €324mn of this amount had already been called up.”

Uniper also said it was a "financial lender of the Nord Stream 2 project, but not a part of the project consortium itself. This is important to know because it makes a difference to Nord Stream 1, where E.ON was part of the project group." So far NS2 has spent about €400mn of its money. Uniper provided Nord Stream 2 with a long-term line of financing for 30% of its (Uniper's) share of the financing, amounting to around €280mn, but this is not affected by the expanded provisions of US sanctions, since the sanctions do not apply retroactively, Uniper said.

Austrian OMV also told NGW that the five European energy companies have committed to provide long-term financing the project. “In 2017, the first drawdowns under the financing agreements for project took place and resulted in a cash outflow of €324 mn. Further funding of Nord Stream 2 depends on project progress. The new sanctions do not directly affect Gazprom or OMV”.

Before, OMV Rainer Seele said that it is expected a change in the financing scheme for the construction of the NS2 gas pipeline, owing to new US sanctions. Project financing for the other 70% of project may not succeed, but the project participants will either seek funds in Russian and Asian banks or invest more in it.

Gazprom itself has planned 1,278.83 bn rubles ($20.29bn) investments in 2018 for all projects, including NS2 and it eyes external financial borrowing for fully covering its liabilities. Before, Italian bank Intesa Sanpaolo in February 2018 and Russian Sberbank in July 2017 have said they can part in the project financing of NS2, but they declined to comment NGW about their current willingness.

Also April 3, the Russian daily Kommersant, citing sources, reported that UK financiers Glas Trust had advanced Gazprom the equivalent of rubles 90bn ($1.6bn) to NS2, in exchange for shares in NS2 until 2038. Glas Trust, the paper said, would act as co-ordinator for a loan, which lenders might see as safe even if the US decided to impose sanctions on NS2. Sanctions could prohibit long-term lending to Russian projects but sources told the paper that lenders under this scheme would be anonymous. Neither Gazprom, Nord Stream 2 AG or Glas Trust commentedon the report.