Russia's Nornickel asked to pay $2.1 billion for May diesel spill in Arctic

London — Russia's environmental regulator has asked Nornickel to pay Rb148 billion ($2.1 billion) compensation for the damage caused by the May 29 diesel spill at an Arctic power plant.

Russian Federal Service for Supervision of Natural Resources (Rosprirodnadzor) has sent Norilsk-Taimyr Energy Company -- part of Nornickel -- the request for compensation -- including Rb147 billion for damage to the water system and Rb739 million for damage to land -- as a result of 21,163 mt of diesel being spilled, the company said July 7 in a London Stock Exchange announcement.

Nornickel said the sudden subsidence on May 29 of supports, which had served for more than 30 years without problems, led to damage to the diesel fuel storage tank at Norilsk's combined heat and power plant No. 3, resulting in the fuel leak.

Nornickel said it will comment on Rosprirodnadzor's demand when its subsidiary has formally receive the request to pay compensation.

The amount is not a fine or an order but a call for voluntary payment, Moscow-based BCS Investment Group said.

"There remains the technical possibility that a fine may come on top of the $2.1 billion," BCS analysts said in a note, adding that the final amount Nornickel will have to pay may be less if it cleans everything at its own expense.

The analysts noted that, historically and globally, total expenses for such accidents are generally 42%-57% of the actual damage.

"In our view, such expenses would not be a game changer, even if the company had to pay for the total damages as a lump sum," they said.

In their estimates, paying the full $2.1 billion would theoretically raise the company's net debt and its net debt to EBITDA ratio, but the latter will still remain below the 1.8 level where dividends start to fall.

The BCS analysts said they have not accounted for any reputational risks for the company, saying the ESG story is likely to remain, to some extent, in the background.

Yet, they said, investors have already demonstrated low sensitivity to changes in ESG. That low sensitivity was expressed in, for example, NLMK (which has a BBB ESG rating by MSCI) and Severstal (CCC rating, due to a deadly coal mine blast in 2016) trade at similar multiples.