German BASF and Russian LetterOne announced the completion of negotiations on the exchange of assets. If they receive the green light from Oslo, they will challenge the Baltic Pipe in Norway, the development of the gas market in Europe, and perhaps the security of NATO – writes Wojciech Jakóbik, editor-in-chief of BiznesAlert.pl.
The merger is waiting for the green light
Wintershall and DEA are to join forces. BASF will receive 67 percent of DEA shares, and its shares will increase to 72,7 percent thanks to the connection of Wintershall’s transmission assets. The transaction is to end in the first half of 2019.
LetterOne is a fund controlled by Alfa Group, whose shareholders are Mikhail Fridman and Herman Khan. They are on the list of people who may be subject to US sanctions under the CAATSA law. They are associated with the President of Russia Vladimir Putin.
Wintershall’s assets are to be included up to 36 months after the merger. It is, among others, a joint venture between Gazprom and Wintershall called Gascade, which is the operator of the EUGAL gas pipeline (the planned Nord Stream 2 branch). In addition, Wintershall is the financial partner of Nord Stream 2 and holds 15,5 percent of Nord Stream 1 shares.
The newly formed Wintershall DEA will have reserves of up to 2,2 billion barrels of oil equivalent. The output will reach 575 thousand barrels a day with a plan to increase to 750-800 thousand at the beginning of the next decade. The company will be managed by the chairman of the board, Mario Mehren, currently at the head of Wintershall.
DEA has assets in the waters of Norway and the North Sea. Wintershall has a share in the Yuzhno-Russkoye field and blocks of 1,4 and 5 Urengoy field in Siberia. The Russians allow the possibility of admitting Germans for further concessions. The merger is to be finalized in the first half of 2019 provided that all regulatory approvals are received. Until then, the companies have to act independently. In August, the merger participants reported that obtaining the approval of the Norwegian government would take six months to decide on the merger.
Threat to the Baltic Pipe and the gas market?
Despite fears signaled by Oslo, the Russian-German team has ambitious plans to become a concession operator in Norway. If it gets the allowance, Wintershall DEA will compete with PGNiG in Norway, which has 22 licenses on the Norwegian shelf and intends to use them to supply the Baltic Pipe gas pipeline. The Danish operator Energinet.dk invites those who want to reserve the capacity of the gas pipeline. Baltic Pipe may compete for customers from Nord Stream 2 and Wintershall DEA in the future.
It is worth noting that in 2017 I wrote about the possible layout of the “gas pipeline”, thanks to which Gazprom can obtain funding for the contested Nord Stream 2 thanks to the admission of western capital into the Siberian field. In the case of Wintershall DEA, this arrangement seems to materialize.
Thanks to the merger, the Russians may have an impact on the transmission infrastructure in the European Union and another element of the supply chain across the Baltic Sea, which, according to critics of Nord Stream 2, will threaten the development of the market in Central and Eastern Europe. The case is controversial since Russia lost the dispute with the European Union for the third energy package introducing ownership separation between suppliers and infrastructure. The Russians appealed against the ruling of the World Trade Organization in favor of the EU, which confirmed the legitimacy of actions blocking the South Stream gas pipeline, in which the operator and supplier was to be Russian Gazprom.
In the case of the contested Nord Stream 2 it may be similar. Linking GASCADE with Gazprom and re-linking them with Wintershall DEA means that potential suppliers – Gazprom and Wintershall (with deposits in Siberia) can influence gas transmission not only via the Baltic Sea, but also the OPAL and EUGAL branches. It should be determined whether this would be consistent with the third energy package. For this reason, the Russian-German merger should be looked at by the Commission. It is not known whether she could push Russian influence from OPAL and EUGAL on a similar basis to the one used in the case of South Stream. If not, Russia may have an impact on another element of the gas supply chain to Central and Eastern Europe, threatening the market. An analogous symbiosis is planned by the Austrian OMV, which is also financially involved in Nord Stream 2 and the Urengas field. In December 2016, OMV and Gazprom signed a binding asset exchange agreement. Gazprom was to obtain 38,5 percent of shares in the Norwegian company OMV Norge. In return, the Austrians were to receive a 24,98 percent stake in the Achimov field (block 4 and 5) in the Urengoy field in Siberia.
A threat to NATO?
The case is even more interesting as it contains the theme of special services and security interests in the seas surrounding NATO countries – Poland and Norway. It is worth recalling that the security of raw materials supply in the Baltic Sea and in the Arctic was a theme pushed by these countries at the summit of the Alliance in Warsaw. For good reason. Behind the influence of German-Russian businesses creating a business and political symbiosis can be threats to NATO security, such as “green men” in the Baltic Sea or Norwegian waters. The growing symbiosis is visible, for example, on the protection umbrella around Nord Stream 2. This is a problem embarrassing for Germany, who postpones these problems signaled by Poland, Norway, but also the United States. The Polish state may seek rescue from such threats in the European Commission and NATO, provided that it will not be blocked by Germany’s involvement in business with Russia.