Gassled investors face 90 percent tariff cut

Allianz, ADIA, CPPIB and the Public Sector Pension Investment Board expect dividends to be safe ‘until at least 2017’ if the Norwegian government’s proposals – which will only affect future gas transportation contracts – are fully implemented.

Norway’s Ministry of Petroleum and Energy (MPE) has given a rude awakening to the private sector investors that own more than 30 percent of Norwegian gas transportation network Gassled with this week’s proposal to reduce tariffs for future transportation contracts by a whopping 90 percent.

“Sound resource management also requires correct pricing of gas transport for new projects. The proposal to reduce transport costs for new gas volumes will facilitate more exploration, development of more discoveries and further measures on existing fields. It also helps in selecting the best gas transport solutions,” Minister of Petroleum and Energy Ola Borten Moe commented in a statement.

The MEP’s proposals intend to stimulate new investments in exploration and development on the Norwegian Continental Shelf, which should boost gas transport volumes through Gassled’s network. It is those new contracts which will be affected by the proposed cuts; existing contracts will continue to be regulated by historical tariffs. The proposals will be in public consultation until March.

Gassled – which is worth around $12.5 billion, according to a winter 2011 Deloitte report – became the darling of institutional direct investors during the summer/fall of 2011.

 In June of that year, a consortium of Allianz Capital Partners, the Canada Pension Plan Investment Board and the Abu Dhabi Investment Authority spent some €2.2 billion acquiring a 24.1 percent stake in Gassled from Norwegian oil company Statoil. A few days later, Allianz announced it had acquired an extra 6.4 percent in Gassled from French oil and gas group Total for approximately €580 million.

The institutional investor consortium – known as Solveig Gas Norway – has already reacted to the MEP’s proposals:

“As significant parts of the Gassled system are booked at full capacity for several years into the future, and as future tariff reductions will be significantly offset by lower income taxes payable, Solveig Gas’ initial calculations indicate the concession live coverage ratio and the debt service coverage ratio remain above 1.2:1 until at least 2017. As a result, these ratios remain above the level which would otherwise prevent distributions to shareholders.”

Njord Gas Infrastructure – a consortium of UBS Infrastructure Fund and CDC Infrastructure, which bought into Gassled in 2010 and currently holds 8 percent of the network – said it “is concerned about the implications of the proposal for the Gassled owners”. It added that “potential implications for the company are not substantial in the short to medium term, but will increase over time. However, the company forecasts that it will generate sufficient cash to service its debt obligations.”

According to Bloomberg, Njord has outstanding bonds in pounds, Norwegian kroner and dollars amounting to $684 million. Solveig Gas last year sold a NOK1 billion (€135 million; $180 million) bond maturing in 2027.

In its 2011 report, Deloitte estimated the private sector had spent around $5 billion buying into Gassled over the last few years. Canada’s Public Sector Pension Investment Board also owns 5 percent of Gassled.