Nord Stream: Europe’s Largest Infrastructure Project is Underway

Nord Stream moves from the drawing board to reality

Paul Corcoran, Financial Director, Nord Stream AG

Introduction
Nord Stream is a pipeline that will transport natural gas from the vast gas fields of northern Russia to the European Union. A project with four major companies, OAO Gazprom, BASF SE/Wintershall Holding AG, E.ON Ruhrgas AG and N.V.Nederlandse Gasunie, Nord Stream will consist of two parallel lines that run for 1,220 km on the seabed of the Baltic Sea, making it Europe’s longest underwater pipeline and one of the continent’s most important infrastructure projects of recent decades.

This year is a pivotal one in the evolution of the project, with the first phase of funding secured in March, paving the way for construction of the first line which began earlier this month. Transport capacity of the first line will reach around 27.5 billion cubic metres (bcm) per year  with completion due in 2011. The second line will double annual capacity to around 55 bcm per year providing enough energy to meet the demand of more than 26 million European households. Paul Corcoran, Financial Director, Nord Stream AG provides an update on the project as Nord Stream begins construction of a new gas supply route from Russia to Europe.

Permitting
Autumn 2009 and early 2010 saw Nord Stream receive all the permits required for construction, from Denmark, Sweden, Finland, Russia and Germany. The permits obtained were the result of many years of hard work invested in planning the pipeline and mean that the national authorities are satisfied that the project fulfils the stringent environmental and economic conditions of the five countries through whose waters the pipeline will pass. Estonia, Latvia, Lithuania and Poland were also involved in the international consultation process, setting a new benchmark for international cooperation for such projects. In fact, detailed surveys and research on the potential environmental and socioeconomic impacts of the Nord Stream pipeline started back in the 1990s. In total, Nord Stream has invested more than € 100 million into environmental impact studies to ensure that the routing of the pipeline is environmentally safe and sound.

Whilst permitting processes are time-consuming and demanding, all the permits were granted well within schedule, enabling an April start to construction as planned.

Financing
Financing for the project comes from Nord Stream’s shareholders who are investing 30% of the funds required for the pipeline through equity contributions proportionate to their shares in the joint venture.

Some 70% will be financed externally by means of project financing from banks and export credit agencies. Formal Requests for Proposal (RFPs) for Phase I financing were issued to interested banks in August 2009. By the end of October 2009, 29 international banks had submitted proposals for over € 6.4 billion; from these, 26 banks were chosen. The financing for Phase I closed in March 2010 with the required amount of € 3.9 billion raised.

The positive response from lenders has meant that Nord Stream was approximately 60 percent oversubscribed. It is clear from the response to Phase I funding that investors see Nord Stream as a significant investment opportunity in spite of tough economic conditions. Indeed, there is genuine enthusiasm in the investment community about a truly pan-European project that will provide jobs and supply Europe with a reliable and secure supply of energy for many years to come.

Nord Stream will shortly approach the financial markets for Phase II funding for approximately € 2.5 billion. Nord Stream has short-listed two main ECA partners – Germany’s Hermes and Italy’s SACE. This reflects the fact that the company has very substantial contracts with Germany’s EUROPIPE and Italy’s Saipem, as well as contracts with other Italian suppliers, including PetroValves, Saipem Energy Services S.p.A., and Metec.

It is important to note at this stage that the contracts with Saipem and EUPEC are for both pipelines. The coating yards (covering both phases) are already built and operating, and steel orders for both pipelines have been placed. Furthermore, Nord Stream foresees that the work done to develop documentation for Phase I will greatly shorten the financing process for Phase II, meaning that all the financing will be wrapped up by the end of 2010 at the latest.

Construction
The most immediate challenges lie in the construction phase, which will be the project’s primary focus this year. Nord Stream handles pipeline installation in close cooperation with the relevant authorities and in accordance with permitting requirements. In fact, preparations for construction began back in August last year when the
first transshipment of pipes from Mukran to Karlskrona took place.

Saipem began pipelaying activities in early April with the Castoro Sei pipelay vessel; the Solitaire pipelay vessel will start working in September 2010. It is foreseen that the laying of the first line will be completed in 2011 – the laying of the second line is scheduled to start in 2011 and will be finished in 2012.

A major energy contribution to Europe
The prospect of additional and secure gas supplies through the Nord Stream pipeline comes at a good time for Europe. Currently, Europe is facing an acute energy shortfall as indigenous energy supplies run short and renewables are yet to be fully exploited. The Nord Stream pipeline is designed to meet 25% of Europe’s additional gas demand by the year 2025 increasing Russia’s total proportion of deliveries to Europe to 28% by 2020. As far as the European market is concerned, natural gas delivery contracts have been signed between European and Russian companies through to the year 2035. This strengthens the long-standing relationship between the two parties and brings deeper cooperation for decades to come. Importantly, both the European Parliament and European Council regard Nord Stream as a ‘Project of European Interest’ with high priority for EU energy supplies. This underscores that the pipeline meets three main objectives of EU energy policy: sustainability, competitiveness and security of supply.

With construction of the first line underway, Nord Stream is on time and on track to supply Europe with Russian gas from 2011.