NETHERLANDS JOINS RUSSO-GERMAN GAS PIPELINE PROJECT

On November 6 Gazprom chairman Alexei Miller and Nederlandse Gasunie CEO Marcel Kramer signed a framework agreement on Gasunie joining Nord Stream, the project to build a gas pipeline from Russia directly to Germany on the Baltic seabed. Russian President Vladimir Putin and Dutch Prime Minister Jan Peter Balkenende witnessed the signing ceremony in Moscow.

Russian gas should reach the Netherlands via German pipelines overland, after reaching Germany through the Baltic seabed pipeline. From the Netherlands, Gazprom plans to target the British market for the first time.

The Groningen-based Gasunie operates the grid of gas transmission pipelines in the Netherlands, which recorded a throughput of almost 100 billion cubic meters in 2006. With diminishing proven reserves and declining output in its North Sea offshore gas fields, the Netherlands seeks new sources of supply. Gasunie has been negotiating since mid-2006 about the possibility of joining the Nord Stream project as the fourth member of the consortium, alongside Gazprom and two German companies.

Moscow’s decision to broaden the Nord Stream consortium is in part political. According to Putin, this decision “makes the project indeed a multilateral one” — an indirect admission that it had not been such. Moscow seeks, first, to counter the perception that this project is purely a Russo-German one (and with a certain personal dimension to it), rather than a European project. By the same token it seeks to enlist European Union support for Nord Stream, particularly in view of investor skepticism about the project’s viability.

A more multilateral outlook, and the corresponding risk-spreading, might help Gazprom to line up the credits it has sought in vain from European banks for Nord Stream. Finally, Moscow reckons that a more broadly based project could persuade the EU in Brussels to weigh in politically against Baltic Sea riparian countries’ mounting resistance to this project.

On the strategic-economic side, Moscow’s choice of Gasunie opens a wide avenue for Gazprom to enter core European consumer markets directly, first in the Netherlands and then Britain. Moreover, Gazprom’s use of Gasunie pipelines to reach Britain on a preferential basis seems to be part of the agreement.

Under this agreement, Gasunie acquires a 9% stake in the Nord Stream project. The two German companies, E.ON Ruhrgas and BASF/Wintershall, reduce their respective stakes from 24.5% to 20% each, so as to accommodate Gasunie in the consortium. Gazprom retains its 51% stake and the operating rights in the project. The whole procedure shows Gazprom in full control of negotiations and decisions about reapportioning the stakes in the consortium.

Kramer declined to name the price for the 9% stake and predicted that Gasunie’s investment in the project would not exceed €750 million. Gasunie is paying €450 million to Gazprom as well as giving Gazprom the right to a 9% stake in the gas pipeline that connects the Netherlands with Britain on the seabed of the North Sea. The handover shall reduce Gasunie’s stake in that pipeline from 60% to 51%. At the signing ceremony, Kramer referenced this cross-ownership transaction but denied that it constituted an “exchange of assets” or “swap.”

The undersea pipeline, Balgzand-Bacton Line (BBL), runs for 235 kilometers on the seabed from the Netherlands to Britain. Linked with Gasunie’s land-based grid, BBL was commissioned in December 2006, with a throughput capacity of 16 billion cubic meters annually. Gazprom apparently intends to use this link for delivering gas to the British company Centrica, in return for shared ownership in Centrica’s gas distribution network and/or electrical power plants. Last year and this, Gazprom approached Centrica and the latter’s German partner E.ON Ruhrgas (which is also a Nord Stream partner) seeking to acquire gas and electricity assets in Britain, as part of a long-term deal for Russian gas supplies.

However, Gasunie edged out Centrica and also BP in the negotiations to join the North Stream consortium. Gazprom evidently chose Gasunie in order to gain access to the Netherlands-Britain pipeline. It also evidently prefers to separate as much as possible the production interests, transit interests, and consumer interests in the partner countries. However, Gazprom retains the privilege of unifying those interests in its own hands, in projects under its control.

The Gazprom-Gasunie agreement was signed amid multiplying question marks about Nord Stream’s viability. Estonia has refused the go-ahead through its waters; Finland is taking time pondering its reply; Latvia poses certain conditions; Lithuania and Poland oppose the project or key features of it; Sweden is evidencing serious reservations; and Denmark has not yet taken a position, other than hoping to leave the problem to Poland on the opposite side of Bornholm Island.

Due to these factors, the start of construction work is almost one year behind schedule. And amid growing doubts about the availability of the projected gas volumes, the consortium has not yet lined up the investment funds. According to Nord Stream general manager Matthias Warnig, the consortium will only approach the financial markets by the second quarter of 2008 — a timing that not only lags behind schedule but also seems to presage further delays to the start of construction.

(Interfax, Kommersant, BNS, Financial Times Deutschland, Dow Jones, November 6, 7)