The permitting and environmental approvals process for Nord Stream, the twin 1,220km gas pipelines under the Baltic Sea between Russia and Germany, was at least as tough as the negotiations for their financings. But the two phases of the Nord Stream financing, which required a total of Eu6.4 billion ($8.8 billion) in debt, attracted the participation of 31 lenders. If any­thing, the financing benefited from the length of time it took to prepare the way for the pipeline.

Nord Stream runs through the ex­clu­sive economic zones of five countries, and close to those of another four. Making Polish fishermen comfortable with the project was as important as dealing with the concerns of London bankers. It also maintains lead sponsor Gazprom’s cen­tral role in supplying Europe with natural gas, throughout a period of change in relations between Europe and Russia.

The key participants in the financing were the export credit agencies of Ger­many and Italy, Sace and Hermes. Ger­many was also a source of funding through its UFK facility, which it uses to fund the supply of strategic raw materials, and the participation of KfW-IPEX in the lead arranger group. Both phases, however, featured substantial uncovered tranches. Structured Gazprom risk is still in demand, despite, or perhaps because of, Gazprom’s long corporate borrowing record.

Still, coordinating two ECAs, the UFK facility, and such large lending groups re­quired the sponsor to take on no less than three financial advisers – Commerzbank, Societe Generale and RBS, a clear indication of the deal’s complexity, notwithstanding its popularity. Phase 2, at Eu2.5 billion in debt, is much smaller than the Eu3.9 million phase 1, but has a roughly similar-sized lending group. Five new banks joined for the second phase, though several – so far unidentified – also dropped out, possibly because of the reduction in pricing on the second phase.

Each pipeline will have a capacity of 27.5 billion cubic metres per year, and runs along the bottom of the bust Baltic Sea. The project benefits from top-level support from the German and Russian governments, and the forbearance of transit nations. It will supply a quarter of the EU’s gas supply shortfall for the coming decade.

In one respect at least – its shipping agreements – the two phases are more straightforward than many oil and gas pipeline projects. Nord Stream’s shareholders are Gazprom (51%), BASF (15.5%), EON (15.5%), Nederlandse (9%) and GDF Suez (9%). But all of the two pipelines’ capacity is contracted under 22-year ship-or-pay transportation agreements with Gazprom Export.

Despite the fact that Gazprom is majority shareholder and sole customer, lenders received a promise that shipping tariffs would be raised in the event that coverages dipped below 1.275%. Lenders receive a pledge of project company shares but, bearing in mind the project’s location, do not receive security over physical assets, and thus lenders on each phase do need to work out how to carve up interests in shared facilities.

The financings for each phase were meant to be much further apart. As the financing for phase one was pushed past the credit crunch and development of the pipeline continued apace, lenders’ minds were very focused on the possibility of a second phase, and the first phase was documented accordingly. For instance, the debt service reserve must be sufficient for 12 months’ debt service, but drops to six once the second phase is operational.

The financing documentation for each phase was remarkably similar. The sponsors and their advisers distributed documents for the second phase with changes highlighted in red, to allow lenders and their credit committees to see what the main changes from phase 1 were. The biggest change, according to observers, is pricing that is roughly 75bp lower than the second phase, though the borrower has not confirmed the exact decrease.

Phase 1’s uncovered tranche was priced at 275bp over Euribor before completion – thanks to a completion guarantee from Gazprom – but increased to 430bp there­after, reflecting the first phase’s roots in the crunch’s aftermath, as well as a spike in lender perceptions of Russian risk, a spike that has since receded.

The trans-boundary environmental im­pact assessment, governed by the Espoo Convention, was the largest of its type ever, and likely to influence the way other complex cross-border pipeline pro­jects are examined. Despite its size, Nord Stream is likely to have its successors, as European states look to line up diverse and secure sources of hydrocarbons from points further east. South Stream, another Gazprom venture, is the most obvious successor, but its notional competitor, Nabucco, will benefit from Nord Stream’s precedent, at least in terms of its financing process.

Nord Stream will eventually be a strong candidate for a bond refinancing, if it comes online as planned and starts throwing off cash. Construction of phase one continues to be on schedule, with 70% of pipeline laid, completion set for the second quarter of 2011, and first gas set for October. Phase 2 is set to come online in November 2012. To minimise the environmental impact, much of the onshore infrastructure for phase 2 was installed at the same time as phase 1. 

Nord Stream AG
Status: Phase 1 signed 16 March 2010 commitments on phase 2 signed December 2010
Size: Eu7.4 billion
Location: Baltic Sea
Description: 1,220km twin gas pipeline with 55 billion cubic metres per year capacity
Sponsors: Gazprom (51%), BASF/ Wintershall (20%), E.ON Ruhrgas, (20%) and NV Nederlandse Gasunie (9%)
Debt: Eu6.4 billion
Financial advisers: Commerzbank, Royal Bank of Scotland and Societe Generale
Official agencies: Hermes, Sace and UFK
Mandated lead arrangers: Bank of Tokyo-Mitsubishi UFJ, Barclays, BayernLB, BBVA, BNP Paribas, Caja Madrid, Citibank, Commerzbank, Credit Agricole, Credit Suisse, DekaBank, Deutsche Bank, Dexia, DZ Bank, Espirito Santo Investment, Fortis Bank, ING Bank, Intesa Sanpaolo, KfW-IPEX, Mediobanca, Mizuho, Natixis, Nordea, Royal Bank of Scotland, RZB, SEB, SMBC, Societe Generale, Standard Bank, UniCredit, WestLB
German government UFK advisers: PwC, Unicredit
Borrower legal counsel: White & Case
Lender legal counsel: Clifford Chance
Gazprom Export counsel: Linklaters