Gazprom Achieves Breakthrough in New Funding Scheme with European Partners on Nord Stream 2

Gazprom has reached a new deal with European partners to move forward with the Nord Stream 2 project under a financing framework that appears to avoid the legal obstacles that took down its earlier bid to identify willing partners (following a legal challenge by Polish regulator OUKiK).  On April 25, Gazprom signed a financing package with Royal Dutch Shell, OMV, Engie, Uniper and Wintershall that will see each company pay just over a $1 billion to fund Nord Stream 2.  This $5 billion accounts for 50% of the needed financing, with Gazprom covering the remainder.  The five companies are also to provide a $310 million long-term funding facility and a $724 million second tranche of funding to cover both short and long-term financing needs.

Because this deal is not technically an equity financing package, it appears to present a challenge to those within Europe’s governing bodies that were seeking a basis to scuttle this due to its detrimental effect on energy security, elevated Russian geopolitical leverage and damage to allied cohesiveness.  Under the previous agreement Shell, OMV, and Wintershall were each to get a 10% stake in the project, while Engie was to receive 9%.

Despite this apparent success for Moscow, Nord Stream 2 still faces legal challenges.  Three littoral states along the Baltic Sea, whose territory the pipeline will transit (Denmark, Sweden and Finland) have yet to sign formal approvals for the project.  Denmark, in particular, is looking to change its own laws so that it can oppose the pipeline “on foreign and security policy considerations” (a basis for challenging the deal that the country apparently presently lacks).  Presently, the government could only officially oppose the project for environmental reasons.

Nord Stream 2 does not have consensus support within the European Union (or NATO), with the project’s detractors arguing that the pipeline will materially increase European dependency on Russian energy and undermine the security interests of Ukraine and other present transit countries that Nord Stream 2 would circumvent.  Supporters of the pipeline champion the project for economic reasons.  Jochen Homann, president of the German infrastructure regulator Bundesnetzagentur, said the imposition of Third Energy Package rules on the project would be “discriminatory,” since Nord Stream 1 does not have to abide by the regulation (having received a waiver).

Progress on Nord Stream 2 will effect the implementation of other pipeline projects across Europe, specifically the Czech-Polish gas interconnector Stork II.  Polish officials already delayed the project over concerns that, if Nord Stream 2 were completed, Stork II would result in higher levels of Russian gas imports into their country — an outcome the interconnector was designed to avoid.  After the original Nord Stream financing agreement was stymied last August, Poland and the Czech Republic restarted this alternative project.