Russia’s Gazprom secures €4.75bn financing for Nord Stream 2 pipeline

Russia’s Gazprom secures €4.75bn financing for Nord Stream 2 pipeline
Gazprom closed a €4.75bn financing deal to build the Nord Stream 2 pipeline with five European companies.
By bne IntelliNews April 25, 2017

Russia’s largest natural gas producer Gazprom closed a €4.75bn financing deal for the construction of the Nord Stream 2 pipeline with five European companies, the state-controlled pipeline export monopolist said in a statement on April 24.

The €4.75bn deal that secures 50% of the project’s cost was closed with the UK’s Shell and Engie, Germany’s Uniper and Wintershall, and OMV of Austria each providing €0.95bn. The deal can deliver much-needed relief on Gazprom’s massive investment programme, one of the main strains on the company.

Gazprom, which still has to self-finance the remaining €4.75bn for Nord Stream 2, will in 2017 alone have to invest RUB111bn (€1.8bn) in the project, while foreign co-investors will provide €285mn.

Notably, Gazprom will remain the only shareholder of the Nord Stream 2 project, a second thread of the existing Nord Stream pipeline connecting Russia with Western Europe via the Baltic Sea, as the five companies involved could not secure equity shares “for political reasons”, according to the Kommersant daily.

It was initially planned to replicate the scheme of financing of the original Nord Stream pipeline by providing 10% of equity through a joint venture. However the participation in an established joint venture for Nord Stream 2 was blocked by Polish regulators.

The certainty of the Nord Stream 2 project remains under question, however, as approvals from Finland, Sweden, Denmark, the Baltic States and Germany are still pending. Apart from Poland, Denmark also recently suggested blocking the pipeline out of “political considerations”, Kommersant added.

As analysed by bne IntelliNews on March 2, Nord Stream 2 is also creating divisions within the Visegrad Four – the Central European club that groups the Czech Republic, Hungary, Poland and Slovakia. 

While the Czechs stand to benefit in similar fashion to Germany, Poland is leading objections, and has been infuriated by recent moves by Brussels to open the way for Gazprom to raise shipments from Nord Stream 1 via Opal – the overland pipeline which meets the route to carry gas to German hubs.

Nevertheless, the interest of the main recipients on Nord Stream 2 gas remains strong. According to the first quarter of 2017 gas exports data provided by Gazprom, countries primarily targeted by the pipeline have considerably increased their demand for Russian gas. 

In particular, exports to Austria went up by 68%, to Germany by 20%, to France by 15% and to Hungary by 32% in the reporting quarter. Overall, Gazprom's supplies to foreign countries tat were not part of the former Soviet Union grew by 15% to 51bn cubic metres in the first quarter of 2017 compared with the same period in 2016.

Meanwhile, in terms of easing pressure on Gazprom’s capex, the relief from the Nord Stream 2 financing deal seems to be more mid- to long term in nature. In February, Gazprombank analysts said the size and sources of financing of the capex are the main uncertainty in the company’s development.

According to the bank, assuming that Gazprom attracts project financing (70%) for construction of the Amur gas processing plant, and the Turkish Stream and Nord Stream 2 pipelines, cash capex would stand in the range of around $22bn-24bn (€20.7bn-22.6bn) per year in the medium term. “We believe that participation of international partners and attraction of project financing for these projects would ease the pressure on Gazprom’s cash flows,” Gazprombank added.

“The possibility to split costs with the partners is positive for Gazprom's FCF [Free Cash Flow],” BCS Equity commented on April 25. However, the analysts do not expect significant effects on Gazprom’s valuation, as “the project [Nord Stream 2] with the negative NPV [Net Present Value] makes up for less than 5% of market capitalisation of the company”.

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