Big Blue
Construction is underway on Gazprom's Russian onshore section of
the Blue Stream pipeline. Total cost of the project is $3 billion
and the pipeline is to run at a depth of 2100m along the bed of the
Black Sea, transporting natural gas from Russia to Turkey.
The deal, a joint venture between Gazprom and Snam, a subsidiary of Italian gas giant Eni, has been obstructed by political and administrative complications at every step of the way. Having finally overcome these, and backed by an unprecedented number of guarantees, the project is set to go and has been welcomed by the market with open arms.
Syndication for the two European tranches, totaling approximately $2 billion, closed last week roughly 35% oversubscribed, having attracted some 30 banks. A further Japanese facility had already syndicated successfully in the summer. According to Cristof Enders of West LB, one of the lead arrangers, the whole deal should be signed and sealed by the end of the year.
The special purpose vehicle set up by Snam and Gazprom, Blue Stream Pipeline Co. (BSPC), is contracting out construction of the offshore section, due to commence in August 2001, while the Russian onshore section is the sole responsibility of Gazprom. 470km of pipeline is required onshore at the Turkish end but this is being independently financed and constructed by Turkish company BOTAS and therefore not part of this deal.
Financing for Blue Stream is fragmented, with three facilities separately guaranteed and allocated. A $1.1 billion tranche has been backed by Italian export credit agency Sace and will be used by both Gazprom and BSPC. This facility has a tenor of 13 years and a tailored repayment structure. Snam has fully guaranteed a $866 million tranche, which will solely fund construction of the deep-sea section. West LB, Banca Commerciale Italiana and Mediocredito lead arranged both tranches, with banks joining in syndication coming in pro rata on each tranche.
Finally, a $626 million tranche was arranged by Fuji Bank and guaranteed by the Ministry of International Trade & Industry (MITI) and Japan Bank for International Co-operation (JBIC). Gazprom and BSPC are both to be beneficiaries of this.
This is not the end of the securities story. Particularly remarkable was the reinsurance of $120 million of the Sace backed loan by ECGD. This transaction was secured in the summer of 2000 when it set a precedent as the first of its kind and has subsequently been followed in similar instances. In addition, investors are sheltered by a security on the loan deriving from a 1986 gas supply contract between Eni and Gazprom.
Having persuaded the ECAs to come on board, an administrative stumbling block emerged concerning legal issues over rouble convertibility, further holding up the project in its final hour.
According to Russian law, 75% of export earnings must return to the country. The deal tried to structure around rouble convertibility problems by storing funds in offshore accounts. However, legal advisors to the ECAs pointed to the fact that in the event of loan default legal problems could arise, based on the grounds that the Blue Stream structure was not bound by Russian law. A signed letter from the Russian President closed that chapter of the story, clarifying the discrepencies to an extent that served to reassure the ECAs.
The Blue Stream go-ahead represents a potentially significant blow to the Transcaspian deal backed by Shell. Also conceived with a view to feeding gas through Turkey, the Transcaspian has an alternative route planned, from Turkmenistan and Azerbaijan, but has been held up by indecisiveness on the part of Turkmenistan. It is believed that the cause of this is that preliminary discussions have evolved into a gas purchase agreement between Turkmenistan and Gazprom, with the latter channeling Turkmen gas into Blue Stream. If this is the case, it may well signal the final nail in the coffin for the Transcaspian pipe. Certainly, if it continues at its current pace, Blue Stream will win the race and reach the Turkish market first.
This is not to say that Blue Stream has not had its own critics ? primarily on environmental and technical problems that some claim have not been properly addressed. There have also been accusations from the Transcaspian camp that the price of Blue Stream has been seriously underestimated and could in reality be in the region of $4.3 billion. These voices of unease, however, have not been loud enough to detract investors. As Massimo Pecarori at Sace comments: ?This deal benefits from a very particular and secure security structure, with minimal true project risk. The Transcaspian deal, on the other hand, is exposed to both market and credit risk.?
An additional advantage of Blue Stream is that the pipe does not cross any other international boundaries, thereby eliminating the possibility of further political negotiations and risk. In particular, Russia has recently accused Ukraine of stealing large quantities of its gas in transit and is subsequently planning to skirt the country in a possible pipe running to Western Europe. Snam has joined Gazprom in drawing up these embryonic plans, an alliance that has been one of the keys to getting the Blue Stream project off the ground. With Eni having recently opened an office in Moscow, further close co-operation looks certain.
The deal, a joint venture between Gazprom and Snam, a subsidiary of Italian gas giant Eni, has been obstructed by political and administrative complications at every step of the way. Having finally overcome these, and backed by an unprecedented number of guarantees, the project is set to go and has been welcomed by the market with open arms.
Syndication for the two European tranches, totaling approximately $2 billion, closed last week roughly 35% oversubscribed, having attracted some 30 banks. A further Japanese facility had already syndicated successfully in the summer. According to Cristof Enders of West LB, one of the lead arrangers, the whole deal should be signed and sealed by the end of the year.
The special purpose vehicle set up by Snam and Gazprom, Blue Stream Pipeline Co. (BSPC), is contracting out construction of the offshore section, due to commence in August 2001, while the Russian onshore section is the sole responsibility of Gazprom. 470km of pipeline is required onshore at the Turkish end but this is being independently financed and constructed by Turkish company BOTAS and therefore not part of this deal.
Financing for Blue Stream is fragmented, with three facilities separately guaranteed and allocated. A $1.1 billion tranche has been backed by Italian export credit agency Sace and will be used by both Gazprom and BSPC. This facility has a tenor of 13 years and a tailored repayment structure. Snam has fully guaranteed a $866 million tranche, which will solely fund construction of the deep-sea section. West LB, Banca Commerciale Italiana and Mediocredito lead arranged both tranches, with banks joining in syndication coming in pro rata on each tranche.
Finally, a $626 million tranche was arranged by Fuji Bank and guaranteed by the Ministry of International Trade & Industry (MITI) and Japan Bank for International Co-operation (JBIC). Gazprom and BSPC are both to be beneficiaries of this.
This is not the end of the securities story. Particularly remarkable was the reinsurance of $120 million of the Sace backed loan by ECGD. This transaction was secured in the summer of 2000 when it set a precedent as the first of its kind and has subsequently been followed in similar instances. In addition, investors are sheltered by a security on the loan deriving from a 1986 gas supply contract between Eni and Gazprom.
Having persuaded the ECAs to come on board, an administrative stumbling block emerged concerning legal issues over rouble convertibility, further holding up the project in its final hour.
According to Russian law, 75% of export earnings must return to the country. The deal tried to structure around rouble convertibility problems by storing funds in offshore accounts. However, legal advisors to the ECAs pointed to the fact that in the event of loan default legal problems could arise, based on the grounds that the Blue Stream structure was not bound by Russian law. A signed letter from the Russian President closed that chapter of the story, clarifying the discrepencies to an extent that served to reassure the ECAs.
The Blue Stream go-ahead represents a potentially significant blow to the Transcaspian deal backed by Shell. Also conceived with a view to feeding gas through Turkey, the Transcaspian has an alternative route planned, from Turkmenistan and Azerbaijan, but has been held up by indecisiveness on the part of Turkmenistan. It is believed that the cause of this is that preliminary discussions have evolved into a gas purchase agreement between Turkmenistan and Gazprom, with the latter channeling Turkmen gas into Blue Stream. If this is the case, it may well signal the final nail in the coffin for the Transcaspian pipe. Certainly, if it continues at its current pace, Blue Stream will win the race and reach the Turkish market first.
This is not to say that Blue Stream has not had its own critics ? primarily on environmental and technical problems that some claim have not been properly addressed. There have also been accusations from the Transcaspian camp that the price of Blue Stream has been seriously underestimated and could in reality be in the region of $4.3 billion. These voices of unease, however, have not been loud enough to detract investors. As Massimo Pecarori at Sace comments: ?This deal benefits from a very particular and secure security structure, with minimal true project risk. The Transcaspian deal, on the other hand, is exposed to both market and credit risk.?
An additional advantage of Blue Stream is that the pipe does not cross any other international boundaries, thereby eliminating the possibility of further political negotiations and risk. In particular, Russia has recently accused Ukraine of stealing large quantities of its gas in transit and is subsequently planning to skirt the country in a possible pipe running to Western Europe. Snam has joined Gazprom in drawing up these embryonic plans, an alliance that has been one of the keys to getting the Blue Stream project off the ground. With Eni having recently opened an office in Moscow, further close co-operation looks certain.
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