Nord Stream 2 Partners Rework Funding After Joint Venture Collapses

 

Poland's rejection was based on concerns that Gazprom and its partners could bolster their market power, for example by dictating flows and prices to Poland once the Siberian gas reaches Germany via the Baltic Sea.

 

Gazprom's five Western joint venture partners withdrew to avoid a drawn-out battle, but vowed to help keep the project alive saying Europe's gas production was declining and they wanted to secure a share of future business.

 

"We haven't closed the door on Nord Stream 2," said Klaus Schaefer, chief executive of Uniper, one of the five, this week.

 

"We'll think of something intelligent."

 

Gazprom's partners are Uniper, Wintershall , Shell, OMV and Engie.

 

While details are under wraps, sources within the group say that most likely options now could be to dilute current rights as equity participants to put the joint venture out of the Polish agency's reach, raising bank debt, or issuing loans to Gazprom with higher interest, reflecting the higher risk.

 

"They (the five companies) will focus on providing equity or other shareholder finance to the project in a way that does not trigger a requirement for Polish competition approval," said Charles Bankes, partner at law firm Simmons & Simmons.

 

"Changing the rights attached to their shares may help achieve this. They may look at providing subordinated loan finance rather than equity."

 

The Western firms would have had 10 percent each and Gazprom 50 percent of the 8 billion euro ($9 billion) venture for the 55 billion cubic metre pipeline to start operations in 2019.

 

While Gazprom now carries the full burden of financing and carrying the project through, it can still look to the utilities for help in exploration, transport and marketing.

 

To help with cash, partners could commit to volumes and pay upfront when the gas is put into the pipeline, possibly already securing buyers at that stage at the other end.

 

Thierry Bros, analyst at French bank Societe Generale (SGE.SG), said equity ownership might be split between two Russian companies such as Gazprom and oil company Rosneft.

 

The 1,225 km (760 mile) pipeline will run alongside the existing Nord Stream 1 of the same volume that began in 2011 and ties four Western parties to Gazprom. It will run from near St. Petersburg and enter Germany near Nord Stream 1's landing point.

 

Opponents say Nord Stream 2 could tie Europe indefinitely to Gazprom at a time when gas sources are plentiful and more choice would help cut prices for consumers. U.S. Vice President Joe Biden on Thursday called it a "bad deal" for Europe.

 

Peter Hughes, an adviser at Global Gas Partners, said Gazprom had wanted to use the original Western participation to show consumer interests were on board, which now "is clearly far more difficult."

 

Nord Stream 2 could also cause geopolitical problems due to Russia's tensions with Ukraine.

 

Pursuing the project alone comes with a high price tag.

 

The joint company would have sought external capital for 70 percent of the costs and provided 30 percent, or 2.4 billion euros, of equity on a 50/50 percent basis.

 

Without the 1.2 billion from the Western firms, Gazprom may struggle as it is also looking to revive a Turkish pipeline plan and work on another to China.

 

A Gazprom spokesman declined to comment.