;

Nord Stream 2 – completion is so near and yet so far

The Nord Stream 2 gas pipeline project between Russia and Germany has only 150 kilometres of pipeline left to lay, but increased sanctions from the US and now calls to halt the project from the EU Parliament itself put the whole project at much bigger risk. Jonathan Bell examines the current situation.
3 min
( WORDS)

Faced with a weekend of heavy snow and well-entrenched in the latest Covid lockdown last weekend here in middle England I decided to settle down and do some well overdue reading. I chose to re-read The King of Oil – The Secret Lives of Marc Rich; the wonderfully written biography by Daniel Ammann published in 2009. For those into commodity trading or for that matter trade in general, the book is a fascinating insight into the creation of one of the biggest commodity trading companies – Marc Rich International - of our times. 

Marc Rich was certainly a most controversial businessman and the book is a compelling read as a biography and as an insight into commodity trading through the 1980s and 1990s. Rich sold his last shares in the remainder of the company in 1994 and so began Glencore – but that’s another story.

For our purposes here, I wanted to pinpoint how Rich made so much money so quickly during those years – and much of this comes down to his oil trading with the apartheid regime of South Africa. Through his Zug-based subsidiary Minoil also based in Zug, Rich signed a long-term oil delivery contract with South Africa in 1979 – and the oil was initially sold at $8 higher than the spot price. It is claimed that Rich made $2 billion profit through these sales. To be brief, much of the oil on these sales came from Iran (sanctioned by the US because of the famous hostage crisis in Tehran) through the 1980s. Rich was a US citizen and was later charged with Trading with the Enemy because of the US laws on Iran and Cuba. Has was also convicted in the US of tax evasion.

Rich always believed the old adage ‘business is business’ and that it transcended politics. In the US Rich was branded a traitor primarily because of his dealings with Iran and Cuba (but he was later pardoned by President Clinton). Interestingly, the South Africa government continued to do business with him even after the end of apartheid, and despite some strong opposition from within the ANC.

The Marc Rich story is a real insight into trading and sanctions in that era 30-40 years ago. Today, and certainly over the last four years during the Trump administration, we have seen the long arm of the US increasingly impose unilateral sanctions on regimes, companies, individuals and assets that it has ‘issues’ with. One such project which has been firmly in the sights of the US for the past few years on a bipartisan basis is the €9.5 billion $11.6 billion North Stream 2 (NS 2) gas pipeline project.

Nord Stream 2 wrapped in politics

NS 2 is a 1,230-kilometre pipeline carrying natural gas from Russia to Germany. It is being developed by Nord Stream 2 AG owned by Russia’s state-owned Gazprom. Western partners in the project are private companies Germany’s Uniper, Wintershall Dea, Anglo-Dutch oil major Shell, Austria’s OMV and Engie of France. 

In April 2017 the five European companies signed financing agreements whereby they committed €950 million each relating to 50% of the project costs. Gazprom is funding the   remainder and will remain the sole shareholder.

Currently the overall project is said to be 90% complete, with approximately 120 klms in Danish waters and 30 klms in German waters to be laid. When completed NS 2 will have a capacity of 55 billion cubic metres (bcm) of natural gas a year.

NS 2 would complement the NS 1 project commissioned in 2011. NS 1 was a $3.47 billion project backed by ECAs Euler Hermes and Sace. In 2020, Nord Stream AG transported 59.2 bcm of natural gas to consumers in Europe through the NS 1 pipeline. 

Germany and others see Nord Stream gas supplies as a crucial element in security of energy supply to Europe. On the other hand the US maintains that completion of NS 2 would give Russia too much political and economic leverage over Europe and that US liquefied natural gas supplies would be a better alternative. The US is naturally keen to sell much more LNG gas to European countries. Germany and Russia argue that Russian gas supplies work out cheaper than gas shipped from the US. Even Joe Biden, back in 2016, described NS 2 as a “bad deal for Europe”, at the same time as criticising Moscow for its alleged role in a cyber attack on US government agencies.

Opposition to the project also comes with strong US support for Ukraine and Poland which will miss out on much needed revenues from transit fees across their territory. In late 2018 Poland signed a 20-year gas supply deal with the US, rather than renew contracts with Russia. Full detail of some of these developments can be found in my article of February 2019: Nord Stream 2 leaves politics in its wake

US and EU opposition to Russian also stems from the annexation of Crimea by Russia in early 2014, and the shooting down of the Malaysian Airlines MH-17 passenger plane in eastern Ukraine en route from Amsterdam to Kuala Lumpur in July 2014. In 2019 Dutch investigators determined that act was carried out by three Russians and one Ukrainian with a surface to air missile. Russia has always claimed that it was Ukrainian jets that shot MH-17 down. EU and US sanctions were placed on Russia following the Crimea annexation. 

There is no doubt at all that European business with Russia has suffered significantly since this date, and with German companies being so active in Russia they have suffered more than most. The NS 2 project, one of the largest in the world, has faced numerous hurdles every step of the way – largely commercial, territorial, environmental and increasingly political - to reach the stage it is at today. Opposition from the US – on a bipartisan basis - has been steadily ramped up over the past three years.

In December 2019, construction on NS 2 ground to a halt after the Swiss-Dutch contractor Allseas suspended pipe-laying following intense US pressure and threats of sanctions. Reports also suggest that a further 120 companies in 12 European countries were affected by this action from the US which stopped much of the work on the project when there was only around 6% of the offshore section left to complete. Those sanctions known as Protecting Europe Energy Security Act (PEESA), which were attached to the National Defense Authorisation Act (NDAA) were initially put forward in August 2019 by Senators Ted Cruz (Texas-Rep) and Jeanne Shaheen (New Hampshire-Dem). Besides NS 2 they were also levelled at the Turkstream 2 pipeline carrying gas from Russia to Turkey across the Black Sea. Those measures were largely linked to sub-sea activities on the projects.

Through 2020 the pressure, particularly from the US, certainly increased culminating in proposed new sanctions put forward in December known as the PEESA Clarification Act. These expanded sanctions aim to prevent the completion of NS 2 and Turkstream 2 by threatening to impose sanctions on companies providing pipe-laying, insurance, inspection, and other services necessary for the final stages of construction. Detail on these measures can be found in two excellent client alerts released by international law firm Reed Smith over the last two weeks.

The long arm of US sanctions, or even threat of sanctions can have significant impact on such mega projects. In late November 2020, Norway’s risk management and quality assurance company Det Norske Veritas (DNV GL) suspended work on NS 2. In a statement, the company said: “Under these new guidelines, we find DNV GL’s verification activities linked to vessels with equipment serving the Nord Stream 2 project to be sanctionable. DNV GL has therefore ceased delivery of services that may fall under the scope of PEESA.” And it has also been reported that Zurich Insurance Group and Danish engineering company Ramboll have also withdrawn from the project. 

These developments have taken place just after the NS 2 project had restarted after the one-year hiatus following the sanctions of December 2019. So where does this leave the project? On something of a knife-edge it would seem. It is understood that the US is also set to impose sanctions on the current pipe-laying vessel, the Fortuna owned by Russian company KVT-RUS. It is currently unclear what impact this will have on the project’s completion.

Critics of the US actions against the project have voiced objections to a regime of opposition levelled at a project that Germany and certain other European countries want to see finished. Some believe that an act passed in the US entitled Protecting Europe Energy Security Act is a challenge to European sovereignty and has little to do with ‘protection’. They may well have a point, because where do US politicians and law makers stop in their actions against commercial activity taking place on European territory conforming to international laws? However, the German government and the EU as a group have not openly protested against US sanctions on NS 2 as such action would be seen as indirectly defending Gazprom and the Russian state. There is a careful political balancing act to maintain, particularly now Joe Biden has started as the new US president.

The major backers of the NS 2 project have so far pledged their determination to finish the project and have the full backing of the German government. However, one big changing factor for Europe itself is likely to be what happens within Russia. The spotlight was turned up in September 2020 when Kremlin critic and opposition leader Alexei Navalny was poisoned in a nerve agent attack in Russia – allegedly by Russian agents. At the time, German Chancellor Angela Merkel opposed the idea of including NS 2 among the Russian companies targeted by EU sanctions adopted in the wake of the Navalny affair. 

Following Navalny’s recovery in a German hospital he returned to Russia earlier this month, only to be immediately arrested by Russian authorities. Recent massive demonstrations in Moscow for his release have been brutally broken up by the authorities.

These events have put further European pressure on Germany to punish Russia by stopping the completion of NS 2. Of course such a measure would be massively detrimental to Germany itself, not to mention the companies that have so much at stake. On 21 January, EU lawmakers passed a resolution calling on the EU to block the completion of NS 2 in response to the arrest of Alexei Navalny.

One MEP Sergey Lagodinsky (Greens), who helped draft the resolution, is reported to have said: “Sanctions are there to induce a government to behave in a certain way. So, it’s about leverage and our possibilities of influencing the government in Moscow, regardless of the content.”

However, the German government is resolute the project will be completed.  In comments to Redaktionsnetzwerk Deutschland Germany’s environment minister Svenja Schulze said: “The decision on the pipeline construction was made many years ago. It is close to completion and received permits in accordance with principles of the rule of law. If we stop the project now, we will inflict a great deal of harm, casting a doubt on reliability of decisions made on the basis of principles of the rule of law and would probably face court proceedings.”

There is much to play out over the coming months for this important project. It is so close to completion but there is inevitably a long and difficult stretch still to finish. Business may still be ‘just business’ in many peoples’ book, but the NS 2 saga proves that we left that adage way back in the past.

Picture Credit: Nord Stream AG

Become a TXF subscriber for unrestricted access to TXFnews.com 365 days a year

Contact us for individual and team rates by emailing [email protected]

Take a look below at a selection of exclusive subscriber articles published last week

LNG: Are long-term contracts here to stay as spot market pricing balloons?
The volatility in LNG spot prices between mid-2020 and early 2021 has shifted the dynamics of how LNG is traded. And the recent rally in LNG prices has undermined buyers’ enthusiasm for relying solely on the spot market while reversing favourability back towards long-term LNG contracts.

Shop talk: Athena Intelligence on the value of third-party due diligence
TXF spoke to Jonas Rey, founder of third-party risk management consultancy Athena Intelligence, on what could have been done differently to decrease the risk of high-profile fraud cases in the commodities space last year.

More details emerge on Al Dhafra financing
Further information has surfaced about the project financing of the 2GW Al Dhafra PV2 solar project in Abu Dhabi, UAE, which reached financial close in December 2020.

Bruc's Jerez solar deal goes long tenor
The recent project financing by Bruc Energy – which is ultimately owned by Ontario Pension Trust and Juan Bejar – of its 110MW solar PV project in Jerez de la Frontera, Spain, has closed with a tenor significantly longer than the 10-year power purchase agreement with Royal Dutch Shell that backs the deal.

Philippines hydropower projects refinance debt
The 10-year P18 billion ($375 million) of debt to refinance two DFI-backed hydropower rehabilitation projects in the Philippines signed this month.

Tanzania invites EoIs for hydropower plant
Tanzania has invited expressions of interest (EoIs) from prospective bidders for the construction of the $144 million 50MW Malagarasi hydropower plant. Bidding documents are expected to be issued in June this year.

ONGC Videsh drops general syndication for $700m loan
The overseas arm of India’s state-owned Oil and Natural Gas Corp, ONGC Videsh, has decided against going ahead with general syndication for its five-year $700 million loan, due to the six leading banks having raised enough debt beforehand.

sPower closes on Luna storage project
sPower has closed on the debt to finance its 100MW/400 MWh Luna storage project in the City of Lancaster, California. The project is backed by a 15-year energy storage agreement (ESA) with Clean Power Alliance (CPA) and will allow CPA to cost-effectively integrate intermittent renewable energy resources into the grid.

Invenergy reaches financial close on Maverick Wind
Invenergy has closed on a $367.4 million one-year construction financing to back its $402 million 288MW Maverick Wind Energy Center project in Oklahoma.

Markus Wohlgeschaffen joins SCF platform Traxpay
Markus Wohlgeschaffen has joined Traxpay, an emerging supply chain finance (SCF) platform,  as product manager based in Frankfurt.

Corine Troncy to head global trade credit at AIG
Corine Troncy is joining AIG as global head of trade credit after 30 years with Coface Group. Most recently, Troncy was Coface group executive committee special advisor.

}

Sign in to post a comment. If you don't have an account register here.

You Might also like