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Monday, February 19, 2018

Nord stream – 2″ will help Russia save considerably

Financial project Director Nord stream – 2″ revealed some of the financial parameters of the pipeline. Thus, he responded to accusations that the pipeline is allegedly a purely political undertaking. When you enter a project into operation, Russia will be able to save. Although there are a number of factors that will lengthen the payback of the pipeline, and some of them created by Europe.

The tariff for transporting gas by pipeline “Nord stream – 2 will be half cheaper than through the territory of Ukraine, said the financial Director of Nord Stream 2 Paul Corcoran.

“Prices on the “Nord stream” is much lower about 50% than in Ukraine. And this is even before Ukraine declared a unilateral Declaration of tariff hike”

“This project is economically justified… as for the tariff for transporting gas: by comparing these rates with Ukrainian tariffs, tariffs on “Nord stream” is much lower about 50% than in Ukraine. And this is even before Ukraine declared unilaterally on the tariff increase”, – quotes Corcoran, RIA “Novosti”.

In addition, he said that the budget for the construction of “Nord stream – 2” is 8 billion euros, and expressed confidence that “we will keep in this budget.”

Thus, the Corcoran how would meet US in opposing the construction of the Nord stream – 2″. Literally in mid-may, the special envoy and coordinator of the US state Department on international energy Amos Hochstein tried to convince that this project is not commercial alleged that Russia is building a pipe solely for political purposes, for “pressure on Ukraine”.

However, the fact that Gazprom will not have to pay Ukraine for transit with the advent of the Nord stream – 2″ – this is a direct benefit to Russia. In 2015, Ukraine has received $ 2 billion for transit of Russian gas to Europe. This means that only the supply of gas to Europe via Nord stream – 2″ is transit through Ukraine, Gazprom will be able to save annually at least $ 1 billion, or € 900 million. In other words, Gazprom will save the same 8 billion euros that are now going to invest in Nord stream – 2″, already for nine years.

And given the constant demands of Kiev, Gazprom was paying him more for the transit, then the potential benefits to Russia from the redirection of gas supply to the “Nord stream” becomes even more significant.

First Kiev from January 1, 2016 unilaterally raised the tariff for gas transit through its territory. Prior to that, Naftogaz has repeatedly said that he wants to not 2.7 per dollar (in 2015) for the transportation of thousand cubic meters per 100 kilometers, and 5 dollars. Even called the desired rate of 7.9 per dollar. Then Kiev say the figure is 4.5 per dollar, citing a new method of calculation which he invented himself. While the transit tariff prescribed in the contract of 2009. But for Kiev, as always, the contract means nothing. He wants to change the rules of the game in their favor at any moment. However, this provocation came to naught, and, most likely, not without participation of the European Union, who in this debate have lost the most due to possible stoppage of gas transit through Ukraine this year.

Later Naftogaz tried to pull more money from Gazprom under a different pretext. In February, Director, business development at Naftogaz Yury Vitrenko said that if in 2015, Gazprom paid $ 2 billion for transportation 67 billion cubic meters through Ukrainian territory, then in 2016 for the same amount of transit Gazprom has to pay three times more than 6.1 billion dollars. Your calculation Vitrenko built on the basis of the transport 110 billion cubic meters of reserved capacity. Here are just a contract again not a word about the fact that Gazprom is obliged to pump through Ukraine such amounts, or penalties for reprocheck this volume.

In fact, the Ukraine enjoys a monopoly, and the tariff mechanism is absolutely not the market, said Georgy Vashchenko, head of operations on the Russian stock market IR “freedom Finance”.

“Actually, the construction of corridors through the Baltic sea and the Black sea was conceived in order to reduce dependence on Ukraine and to bring its tariff policy in a market framework. Why, for example, the Ukrainian side sets the tariffs are not in local currency, because no foreign exchange costs and risks on the organization of transit, in addition to specially devised, it will not be? Or why Kyiv raises tariffs by 20-50% just on the occasion of the 1st of January? The rate in Europe starts from 2 euros per 1,000 cubic meters per 100 km, so why Ukraine should pay Gazprom 7.9 per?” says Vashchenko.

Another thing is that there are a number of factors that will lengthen the payback of the project “Nord stream – 2”. The need to keep rates low, which, probably, was agreed between the shareholders of the project. Low gas prices, and now is about $ 166 per thousand cubic meters, also reduce revenues and return on investment.

“I still believe that during the year will pay off no more than 3-5% of project cost, otherwise low rates don’t provide. But 1.25 euros for the whole period – an incredible case. Then the investor accepts the project unprofitable and will be abandoned in favor of alternative investments. Therefore, most likely, the average over the 25 years the rate will be not less than 3,5–4 euros. Accordingly, this will give a payback horizon of the order of 22-30 years,” considered Vashchenko. Assuming the cost of construction of 8-10 billion euros and the rate on borrowed funds is 6%. Under the project will be to take out a loan.

However, for such large projects payback period in two decades – quite traditional. For example, the average payback period of nuclear power plants in the world is 15 years. The payback period of the NPP “Belene”, for example, were estimated at almost 19 years when the price of 6.4 billion euros. But the tunnel under the English channel, 22 years ago, connecting continental Europe with Britain still has not paid off.

There is another point that complicates the commercial advantage of Russia as the first “Nord stream”, and the second. And behind it Europe itself. We are talking about the Third energy package of the EU, which reduces the Economics of pipeline projects, and, characteristically, solely the Russian. According to the norms of the Third energy package in the EU to the pipeline should be available to any gas supplier. Nord stream goes to Germany, and from there through a gas pipeline Opal (on European territory) gas is supplied to other buyers. Because of the rules of the Third energy package, Gazprom is allowed to pump gas at the OPAL only 50% of the capacity of the pipe. The remaining half was left for some “other vendor”, which, however, did not. It is just idle. But for Transaktionscode of TAP gas pipeline, which passes through European territory and which will receive Azerbaijani gas, the EC has issued an exception to the rules of the Third energy package. Azerbaijan will be able to pump gas into this tube under 100%. Gazprom, no matter how asked, such concessions are not received.

In fact, the same fate threatens the Nord stream – 2″. On German territory would have to be a withdrawal from it, conditionally Opal 2. And if that pipe too, will not give exceptions to the rule, like TAP, then Gazprom will have to swing through the new pipe is again less than allow power. Such double standards of the EU, of course, reduce the commercial component of Gazprom’s projects.

Why did Gazprom do it? The fact is that when Europe needs more gas, it easily resolves after Gazprom to pump more. Germany and then provides a temporary exception for Opal, that is, in fact Gazprom fills half of the capacity of the pipe and where more then 70% then 100%. For example, at the present time, says Paul Corcoran, the workload of the pipeline “Nord stream” is 84%.

Not give a permanent exception to the rule, like TAP, is this in fact allow Gazprom to pump through the Opal more, that is, to circumvent the legal constraints when it is necessary the Europe – is not the way to keep Gazprom on a short leash?

Despite all these risks, the construction of the pipe more than necessary. Especially in the context of termination of the transit agreement with Ukraine in 2019. If Moscow has to this moment not an alternative method of delivery of gas to Europe, Ukraine will be able to twist the rope of Gazprom. He would have to agree on the most unprofitable conditions for themselves Kiev, as Gazprom has obligations to European consumers far beyond 2020.

Despite all the difficulties, Europe more than a decade will be happy to buy Russian gas. “Russian gas in Europe in the foreseeable future always will be a cheaper alternative supplies (except for a little while LNG volumes from the USA), so the construction of alternative routes to have much” – I agree Vashchenko.

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