Nord Stream is a pipeline that will transport natural gas from the vast gas fields of northern Russia to the EU. A project familiar to regular readers of World Finance, Nord Stream is a project of four major companies, OAO Gazprom, BASF, Wintershall AG and E.ON Ruhrgas. Once completed, Nord Stream will consist of two parallel lines that run for 1,220km 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.
2010 will be a pivotal year in the history of the project with construction of the first line due to commence in early Q2. Transport capacity of the first line will reach around 27.5bn cubic metres a year (bcm) 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 26m European households. World Finance takes a close look at the recent progress of the project as Nord Stream gets set to build a new gas supply route for Europe.
A successful end to 2009
The final few months of 2009 saw Nord Stream achieve significant success with permits for construction being awarded to the project by Denmark, Sweden, Finland, Russia and Germany. There is currently only one permit remaining – the water permit, which is issued by the Western Finland Environmental Permit Authority. 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 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. In fact, detailed surveys and research of the potential environmental and socioeconomic impacts of the Nord Stream pipeline started back in the 1990s. In total, Nord Stream has invested more than Ä100m 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 have been granted well within schedule. The Russian and German permits were granted in the final weeks of 2009 meaning that all the basics are in place to allow for the start of construction in April 2010 according to plan. The second and final German permit granted on December 28, 2009 leaves only the second Finnish permit outstanding. The consortium has already received the Finnish EEZ permit and the permit for the 50km section of the pipeline in German territorial waters and landfall in Lubmin near Greifswald.
As far as the water permit is concerned the Western Finland Environmental Permit Authority will take into account the Uusimaa Regional Environment Centre’s evaluation of the Environmental Impact Assessment, along with the additional information provided by Nord Stream. According to the Western Finland Environmental Permit Authority, the decision for the water permit will be granted by the end of January 2010. The Munitions II permit application for the anchoring corridor will be submitted in time to ensure the permit will be received well before related activities start.
It is important to note that construction will only begin once all necessary permits have been issued. Nord Stream assumes it will receive the final outstanding permit to allow for construction to begin as planned in spring 2010. Renowned and experienced technical sub-contractors, who have already been commissioned, will continue the intensive preparation of construction activities as scheduled to enable construction to begin as planned.
Financing
Financing for the project comes from Nord Stream’s shareholders who are investing 30 percent of the Ä7.4bn (£6.7bn) required for the pipeline through equity contributions proportionate to their shares in the joint venture. The budget figure is calculated on the basis of the contracts for pipe production, logistics and pipe laying.
Some 70 percent will be financed externally by means of project financing from banks with substantial export credit agency support. Phase 1 of project financing is coming to an end – to date 27 banks have confirmed participation in the financing for about Ä3.9bn meaning that contracts should be finalised within a short time.
The timetable for the Nord Stream project is consistent with a project of this magnitude, with a Request for Proposals (RFPs) being issued to interested banks back in August 2009. It is clear from the response to Phase One funding that investors see Nord Stream as an excellent 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 seek additional funding for Phase 2 in 2010. Yet, it is important to note that the construction contracts and the contracts with Saipem (for pipe-laying) and EUPEC (for the pipe-coating) are for both pipelines. The coating yards (covering both phases) are already built and operating and the steel order for the second pipeline (Phase Two) is planned for Q1 2010. Nord Stream foresees that the work done to develop documentation for Phase One will greatly shorten the financing process for Phase Two meaning that all the financing will be wrapped up by the end of 2010 at the latest.
Challenges ahead
The main challenges for 2010 lie in the construction phase, which will be the project’s primary focus this year. In preparation, Nord Stream has hired an experienced Deputy Director of Construction to oversee pipeline installation in close cooperation with the relevant authorities and in accordance with permitting requirements. In fact, preparations for construction began back in August when the first transshipment of pipes from Mukran to Karlskrona took place. Now the majority of the pipes needed for the first line of the pipeline are already in storage at strategically located marshalling yards.
Importantly, Saipem will start pipelaying activities in April 2010 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 for 2011 and 2012.
Munitions clearance operations began at the end of November in Finnish waters and take the project another step closer to construction. Approximately 70 munitions in Finnish, Swedish and Russian waters were identified within the security and anchor corridors of the pipeline route. To mitigate any potential risk to the pipeline, Nord Stream together with BACTEC (a leading UK-based explosive ordnance and mine action company) and international and relevant authorities, has developed an environmental and safety management plan that establishes monitoring and mitigation measures related to munitions clearance in Finland and Sweden. In Russian waters, it will be the responsibility of the Russian navy to clear the munitions following their standard procedures for clearance. Mine clearance in the Baltic Sea is nothing new – since 1996 around 1,000 munitions have been cleared by navies of the countries bordering the sea.
Energy contribution
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. For example, additional gas supplies are particularly welcomed in the UK as gas reserves in the North Sea have dwindled changing the country’s status as a net producer of natural gas to become a net consumer. Significantly, the UK remains Europe’s largest gas market, a result of its heavy use of gas in electricity generation and it is estimated that the UK will need to import three quarters of its gas supply by 2015. By the time that both lines are operational in 2012 the UK will be piping gas directly from Russia for the first time. Already more than 4bcm of gas per annum has been booked for the UK market through Nord Stream equivalent to more than four percent of total UK gas demand of about 94 bcm per annum. The gas would be piped to Britain through the Netherlands and Belgium across the North Sea to a gas storage centre in Norfolk. 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.
With all permits bar one received and crucial Phase One financing coming to a close in the next few weeks, 2010 will mark a crucial year for Nord Stream. With construction of the first line due to start in April, Nord Stream is on time and on track to supply Europe with gas from 2011.
For more information email: press@nord-stream.com; tel: Jens D Müller +41 79 295 96 08
