Nord Stream Wraps Up Successful Year by Securing German Environmental Permit

Nord Stream AG, the consortium behind the Nord Stream natural gas pipeline, announced yesterday that it received the first of the two permits required to construct the stretch of the pipeline that passes through Germany. According to a press statement issued by the company, the project obtained a permit from the Stralsund Mining Authority to construct the 50-km section that will pass through German territorial waters with landfall in Lubmin near Greifswald. The project would have to receive another German permit for the construction of a 31-km stretch of the pipeline, which will traverse Germany’s exclusive economic zone (EEZ). Additionally, Nord Stream is also expecting a separate construction permit from Finland, but both of these permits are seen as mere formalities and are expected to be received within the next few weeks.

A Good Year

This development marks the end of a fairly successful year for the project, especially when compared to 2008, which was marked by a number of delays that raised questions over the ability of Nord Stream AG—which is led by the Russian natural gas giant Gazprom with a 51% stake, but also includes Germany's BASF/Wintershall, E.ON Ruhrgas, and Dutch company Gasunie—to meet its operational deadline of 2011. Nord Stream is designed to carry 55 bcm/y and to run from the Russian port of Vyborg to Greifswald on the German coast, passing through the territorial waters or EEZ of Russia, Finland, Sweden, Denmark, and Germany and indirectly affecting those of Lithuania, Latvia, and Estonia. The 7.4-billion-euro (US$10.6 billion) project will consist of two parallel pipelines. The first one will have transmission capacity of around 27.5 bcm/y and is due for completion in 2011. The route of the pipeline was perceived as an alternative solution to the prolonged stand-off between Russia and Ukraine over the transit of Russian gas to Europe. However, the decision to circumvent some traditional gas transit states, such as Poland and the Baltic States, as well as the intention of laying down the pipe on the Baltic Sea, which is a very fragile eco system, triggered great resentment towards the project both on a political and environmental basis. This made receiving all necessary permits for Nord Stream’s passage via the Baltic Sea very difficult at first, and a number of applications were rejected back in 2008.

However, following an in-depth environmental impact assessment (EIA) and a lengthy consultation process carried out by Nord Stream AG, the consortium’s efforts paid off and 2009 proved to be a much more successful year. To date, the project has gained the necessary permits from Denmark and Sweden as well as the environmental permit from Finland, whose readiness to issue a construction permit for the project is widely perceived as a virtual certainty (see Russia-Europe: 6 November 2009: Sweden, Finland Give Approval for Nord Stream). At the end of last week, the project also secured a permit from Russia (see Russia: Europe: 21 December 2009: Russia Grants Construction Permit to Nord Stream Gas Pipeline Consortium). Although the permits from Russia and Germany, the two most determined proponents of the project, were always seen as a formality, these two developments are still important as they mark the end of the Nord Stream’s long struggle to build up the international support it needed.

What Lies Ahead?

Having obtained the support of the countries through whose territorial waters and/or EEZs the project is designed to pass, it appears that everything is in place and the project will be able to start construction on schedule in early 2010. There are, however, some further technical problems ahead of the construction phase that the consortium might face, and which may delay the issuance of the second German permit. The most considerable of these potential difficulties is related to Poland’s insistence that the pipeline be buried under the bed of the Baltic Sea so that it does not block access for larger ships looking to enter the Polish ports of Szczecin and Swinoujscie. The latter of these ports is of particular importance to Poland as it plans to build an LNG import facility there, partially in response to the development of Nord Stream.

According to reports in the Polish press yesterday, cited by Dow Jones International, Germany’s foreign minister Guido Westerwelle has given reassurance to his Polish counterpart Radoslaw Sikorski that the second German permit will stipulate that the pipe would have to buried, which may make the realisation of the project more time consuming and more expensive.

Another issue that Nord Stream AG will have to check on its "to do" list before it moves ahead with the construction of the project is the finalisation of its financial structure. Earlier reports indicated that Nord Stream AG is in advanced talks to sign a 3.9-billion-euro loan deal with a syndicate including some 27 financial institutions and that the agreement may be finalised by the year’s end. The agreement under consideration includes a 3.1-billion-euro, 16-year facility that will be covered by export credit agencies Hermes and Sace, respectively of Germany and Italy, as well as by the German government under its untied loan guarantee programme "UFK", which covers political and commercial risk, similar to Hermes. The fact that Nord Stream AG will rely on export credit agencies to secure favourable financing terms is also confirmed by Nord Stream spokesman Jens Mueller, who said on Friday (18 December) in front of the Speigel daily that the consortium has applied to the German government for export credit guarantees in the region of 1.6 billion euro and for "untied financial credit" to the tune of 1 billion euro.

Outlook and Implications