OJSC Gazprom is getting closer to the implementation of the desired roundabout route omitting Ukraine to transport gas to European markets – the Nord Stream-2 gas pipeline. It would seem that this is an ordinary economic project or the usual private initiative of a number of Russian, Austrian, German and other foreign companies that did not have to touch upon the basic foundations of European and Euro-Atlantic security. Instead, we are witnessing the restructuring of modern energy architecture, a deep political split, a diplomatic crisis, and the like. The purpose of this article is to make an overview of the stakeholders, who are promoting this project and to show possible directions for the development of events.
Ukraine has one of the most powerful gas transmission systems in the world. The length of the gas pipelines is 38,55 thousand km, including the trunk gas pipelines – 22,16 thousand km. The throughput at the inlet is 287,700,000,000 cubic meters / year, at the outlet is 178,500,000,000 cubic meters / year. The system is combined with powerful underground gas storage facilities with a total capacity of 31 billion cubic meters. Daily the system is serviced by 28 thousand people. This is a very stable system, as well as in case of emergency situations. In particular accidents, it is possible to maintain the continuity of supply by switching the flow in combination with alternative strings of gas pipelines. The system is built on land, and from the point of view of maintainability it is much simpler than marine infrastructure projects, and therefore, the elimination of any emergency situations will occur many times faster. However, the system with a high probability will be partially canned and liquidated, and workers would be dismissed. The main reason is the implementation of the second string of the Nord Stream-2 export gas pipeline (“Severny Potok-2”, NS2 – the editor’s note). It would seem, why build a new route, if Ukraine is already 100% fulfilling its obligations. And, in fact, the main thing here is not to answer the questions “why”, but “who”. Understanding the key players, who are interested in implementing the NS2, one can better understand their intentions and motivation.
If we look at the processes, taking place in the M&A market in the energy sector, then we see a flourishing jointure Russian-German and Russian-Austrian projects etc.. Now there are processes of enlargement of enterprises along the East-West line. Moreover, the operation of uniting assets is the actual expression of the political system of checks and balances, which is laid at the corporate level. It should be understood that the NS2 project is, rather, the final act of creating powerful Russian-German-Austrian structures than its beginning. And to be convinced, it is necessary to look at the business structure of the participants of NS2.
The project company, which was established to implement the NS2, is the Nord Stream-2 AG enterprise, registered by Gazprom in Switzerland. According to the signed project financing agreements, the partners are Engie, OMV, Shell, Uniper, and Wintershall, which generally indicates the international status of the project. If you look closely, it becomes clear that this is not quite true. First, Wintershall (the subsidiary of the German corporation BASF, engaged in exploration and production of hydrocarbons) has strong ties with Gazprom, in particular, joint projects for the extraction of oil and gas in the Baltic Sea. In addition, since the second half of the 2000s, Wintershall has powerful assets in the territory of the Russian Federation. In particular, we are talking about the development of the South-Russian gas condensate field with a production of 25 billion cubic meters of gas per year. The operator of the project is OJSC Severneftegazprom, whose shareholders are OJSC Gazprom (40% stake), as well as subsidiaries of BASF SE (Wintershall Holding GmbH – 35%) and E.ON SE (Uniper Exploration & Production GmbH – 25 %). In addition, in 2006, Wintershall launched the Achimgaz JV to develop the Urengoy field (reserves of more than 10 trillion cubic meters of gas), becoming the first German company to produce gas in Siberia. In 2015, an exchange of assets took place between Wintershall and Gazprom, as a result of which, Gazprom increased its stake in Wingas (one of Germany’s largest energy distribution companies with a domestic market share of about 20%) to 100%, and Wintershall increased by 25.01% stake in Achimgaz, thus, acting as a parity partner with Gazprom. Of course, it is worth noting that Wintershall has 15.5% in the company Nord Stream AG, which is the operator of the same gas pipeline.
But this did not stop the Russian-German economic cooperation, and the parties decided to move on and to unite their assets even more powerfully. So, in December 2017, the company of Russian businessman Mikhail Fridman LetterOne (manages the foreign assets of Alfa Group’s shareholders) and German BASF agreed on the establishment of Wintershall DEA. According to the co-owner of Alfa and LetterOne, Herman Kahn, the partners retain plans to complete the merger in the second half of 2018, and to hold an IPO in a few years. The approximate cost of the enlarged company is 20 billion euros. The agreement provides for the merger of the two largest oil and gas companies in Germany, which also operate in Norway, Denmark, South America, North Africa and Russia, namely, the incorporation of DEA assets owned by LetterOne, to the subsidiary of BASF Wintershall. BASF will receive 67%, and LetterOne – 33% in the merged company. The NS2 project is also a renaissance of Austrian-Russian cooperation in the field of hydrocarbon production and supply. Despite the fact that OMV sold 74.9% in 2010 to Ring Oil Holding & Trading, which owned 10 licenses in Saratov region, Russia and the Republic of Komi, the company has plans to return to the Russian market. First of all, it is participation in financing the construction of the NS2 gas pipeline, and also though inhibited, but the plan for implementing the basic agreement on the exchange of assets is still relevant. So, OMV planned to get a 24.98% stake in the project for the development of sites 4A and 5A of the Achimov deposits of the already mentioned Urengoy field in exchange for 38.5% in OMV AS, which is engaged in geological exploration and production in Norway.
It should be noted that on June 1, 2018, 50 years have passed since the beginning of deliveries of Russian gas to the Republic of Austria. The Soviet Union Soyuznefteksport and the company Österreichische Mineralölverwaltung (ÖMV) signed the corresponding agreement on June 1, 1968. Austria became the first country in Western Europe to sign a gas contract with the Soviet Union. On the anniversary date, the heads of the companies signed an agreement on the delivery of Russian natural gas to Austria till 2040. Previously, the contract operated until 2028. That is, in Austria, with the implementation of the new gas pipeline NS2, in which the company will have a stake, it will be beneficial to continue increasing production assets in Russia.
Another interesting example of M&A transactions is demonstrated by another participant of the NS2 project – the German company UNIPER. Now we are witnessing the finalization of the deal for the buyout of Fortum, a Finnish state-owned concern, with a 47% stake in UNIPER, a member of the German E.ON structure. German media, in particular DW, writes that in relation to this transaction, there are different ambiguous opinions. In fact, the Finnish company buys a powerful share of one of the largest buyers of Russian gas in Germany and concentrates a large number of electricity-generating assets in Russia itself. UNIPER owns five power plants in Russia, the two most powerful of which are located in Siberia. Fortum controls eight power plants in the Urals and Western Siberia and, as a result of the current deal, will become the largest foreign player in the Russian electric power industry. However, there are versions that this agreement for Fortum is only a transitional step.
So, there is an opinion that the Finns, after gaining control over UNIPER, will divide it into separate parts, after which they will allocate the most interesting electricity assets and try to get rid of coal power stations and the gas business of UNIPER, which can lead to the closure of individual enterprises, especially in Germany. That’s why UNIPER chairman Klaus Schäfer in an interview to Reuters calls Fortum “a wolf in sheep’s clothing”. If this scenario is implemented, we can witness further resale of the UNIPER gas assets. In this case, the question of the potential buyer remains open.
The French energy corporation Engie also supports the NS2 project. Engie (former GdF Suez) is a partner of Gazprom since 1975, when it signed the first two gas supply contracts to the Slovak-Austrian border. Now Engie owns 9% of Nord Stream AG.
In contrast to German and Austrian companies, Engie has much weaker ties with Russia and a very diversified portfolio of assets. The company operates in 70 countries. The company has one of the largest gas transmission networks in Europe, the most gas distribution network and gas storage facilities with a capacity of 12 billion cubic meters of gas. The company is also the largest importer of LNG in Europe and the second largest operator of LNG-terminals.
The Anglo-Dutch oil company Royal Dutch Shell also finances the NS2. The company is also global and takes a sufficiently close look at the risks that may arise in the event of a tightening of sanctions against the Russian Federation. Thus, commenting on the decision to support the implementation of the new gas pipeline, Shell noted: “We are a business structure, we make decisions, based on the best commercial interests, while respecting effective trade control measures and international sanctions”, – was said in Shell. The company stressed that the decision to provide financing for Nord Stream-2 is commercial, and is based, among the other things, on the expected return on investment.
It is not known at this time whether the European Commission will be able to make amendments to the EU directive on gas, which could potentially complicate the construction of the gas pipeline. Polish officials point out that consideration and adoption of amendments are significantly delayed, which is not surprising, given the commitment of Austria and Germany to the project. In addition, it is unknown whether Denmark will issue a permit for the construction of a gas pipeline in its exclusive economic zone. Currently, these issues are considered at the level of the Ministry of Foreign Affairs. It is known that even in the case of a negative decision for Gazprom, construction will only be delayed, which will entail an increase in the cost of the project.
The main instrument of influence on the project’s share is now in the hands of the Presidential Administration of the USA. So, the authoritative edition Foreign Policy wrote on June 1 that the administration of Donald Trump could soon impose sanctions against European companies, participating in the NS2. Officials are studying other ways of blocking the project, but key figures in the White House consider sanctions as the most likely option. The Foreign Policy source noted that the Trump administration “will stop at nothing” to block NS2. It is noted that Trump’s National Security Advisor John Bolton and other high-ranking officials consider the project as a threat to the security of the United States and Europe and intend to stop it.
Given the NS2 project participants, the most likely outcome is that Shell and Engie will be the first companies to come out of the project in the case of new sanctions. The second step is the Austrian company OMV and the German Wintershall and UNIPER.
However, the sanctions have not yet been imposed, and new complex formations, resulting from mergers and acquisitions between Russian and European corporations provide a fairly broad field for possible reactions to potential US sanctions.
It should be noted that in the case of the NS2 project and the absence of US reactions, a super powerful and influential energy union will first be created in Europe, primarily of Germany, Austria and Russia, which will include the entire supply chain of energy from the well to the gas cooker. And this will become a real triumph of the East-West corporate sector, which is a very, very bad news for Ukraine.
Text: Volodymyr Dolnyk