Nord Stream 2: Commercial Project or Geopolitical Threat?

June 17, 2016

In each installment of “CGI Asks,” a selection of experts respond to a question about developments related to Russia and the region. 

This week, as Russian and German leaders were set to discuss the construction of the controversial Nord Stream 2 pipeline from Russia to Germany, we asked whether the project was mainly a commercial enterprise, or a geopolitical threat to Europe.

Tim Boersma, Fellow in Foreign Policy, Energy Security and Climate Initiative, The Brookings Institution

@TimBoersma4

BoersmaNord Stream 2 is largely a commercial project. Five out of six companies are real companies, with real balance sheets, and shareholders that hold senior management accountable if things go south. European policy makers decided a long time ago that gas markets had to be liberalized, and so we should leave these decisions to the market. The concerns as voiced in Central and Eastern European member states may be embedded in a different historical context, but they are equally economic. Surely if you are an Eastern European transmission system operator, you would like to maintain transit revenues rather than not. But is that a valid argument if the chief EU goal is to enhance secure supplies to the EU as a whole? In my view, the answer is no.

One can label the project ‘geopolitical’ in the sense that the overall aim is to circumvent Ukraine. This ambition has long been voiced, and makes sense given the dubious track record of the country as a transit state. A few days ago European Commissioner Canete wrote that Ukraine is a reliable transit state. With all due respect, I have yet to see one set of data that would lead you to that conclusion. The reality is that Ukraine has not been reliable, and the energy sector in the country continues to be run by a small elite which evidently does not care about the Ukrainian public interest. If we are to help Ukraine, significant reforms of the economy, including the energy sector, are necessary. Personally, I believe that Ukraine (and all others involved) would be better off without gas transit, but EU and US policy makers seem fixated on having another run with an approach that history has already shown does not work.

The EU in general has made major investments in recent years to further complete its internal gas market, by building transport infrastructure, storage capacity, regasification capacity, and a solid regulatory framework that all suppliers have to abide to. None of those achievements would be undone if Nord Stream 2 were built. Concerns about Russian gas are a relic from the past. EU policy makers better worry about carbon pricing in the EU, because despite being in a good position to start fuel switching on a large scale in the power sector, and significantly reducing carbon emissions, without more adequate carbon pricing it looks likely that natural gas continues to be squeezed in the years to come.

Severin Fischer, Senior Researcher, Centre for Security Studies (CSS) at ETH Zurich 

@FischerSeverin

Severin-FischerFrom the perspective of the private European companies involved in the project, Nord Stream 2 is clearly seen as a commercial activity. From the side of Russian state company Gazprom, it certainly has a geopolitical dimension. Whether Nord Stream 2 is a geopolitical threat or not, depends a lot on the perspective one has on the EU: is it one single market or are there 28 national consumers competing against each other?

In my view, the European natural gas market has become more integrated than ever before and with some exemptions qualifies to be seen as a single market. Gas arriving in the market can be traded across Europe. Therefore, a single infrastructure project in the size of no more than 13 percent of the EU’s total yearly consumption in 2015 cannot threaten the EU as a whole. This favorable position rather forces gas suppliers to enter into a price competition that will be for the benefit of European gas consumers. However, it is important to note that an open market can only function if a strong regulator, in this case the European Commission, watches energy security threats, incentivizes additional connectivity in the market, and guarantees the compliance with competition laws as well as network rules.

In this context, it is important to depoliticize natural gas trade in the EU and concentrate on how to make best use of today’s changing landscape of natural gas markets globally. This market is characterized rather by oversupply than by scarcity. Under these circumstances, initiating competition for the European market with additional infrastructures might make sense.

Author of the policy paper “Nord Stream 2: Trust in Europe”  (CSS at ETH Zurich, March 2016).

Douglas Hengel, Senior Resident Fellow, German Marshall Fund of the United States (GMF)

@DougHengel54

Doug HengelWhether one views the proposed Nord Stream 2 pipeline as a brilliant commercial arrangement or a geopolitical menace may depend on where one sits.  To the companies involved in the project, the pipeline may well make sense economically, especially when factoring in the commercial interests some of them have in Russia (in at least one case, vague threats were directed against a partner if the company did not join the consortium).  To the countries of Central and Eastern Europe, Nord Stream 2 is clearly seen as a major threat as evidenced by the letter written by nine leaders from the region to European Commission President Juncker in March arguing that Nord Stream 2 would endanger their energy security.

Wherever one sits in Europe, however, politics cannot be divorced from economics when it comes to natural gas from Russia. Gazprom does not behave like other suppliers (to wit, the EU charges against the company for abuse of its dominant position), and Russia has cut off energy supplies to Europe several times over the years.  Nord Stream 2 is a significant issue for the future of European energy – by concentrating instead of diversifying suppliers and routes for Europe’s energy imports, the pipeline would undermine key principles of Europe’s Energy Union. In particular it would reinforce the preponderant position of Gazprom in Central and Eastern Europe and hinder development of the market for LNG in Europe, which offers a significant opportunity for diversification of supply.  The economics of Nord Stream 2 are also questionable, given the excess transit capacity available on Nord Stream 1 and through Ukraine and Poland.  Furthermore, several experts have argued that if the Nord Stream 2 consortium is forced to submit to the unbundling and third party access rules of the EU’s Third Energy Package (as it should), the business case for the project is highly doubtful.

And what of another core principle of the Energy Union: solidarity?  Germany counts on the solidarity of its neighbors when it comes to its much vaunted Energiewende that is focused on transitioning the country to run on renewable energy. At times Germany cannot absorb all the power generated by its rapidly growing wind and solar capacity and hence needs to export electricity, even when this causes difficulties for its neighbors.  To date, those neighbors have shown marked solidarity with Germany. Nord Stream 2 is yet another Russian effort to “divide and rule” in the European energy space, just what the “solidarity” of the Energy Union was meant to avoid. Hopefully the German government understands the political ramifications.

There are signs the geopolitical threat from Nord Stream 2 is recognized at the most senior levels in Brussels.  Speaking at the Saint Petersburg International Economic Forum on June 16, Commission President Juncker stated: “We need to be sure that all countries of Central and Eastern Europe have non-discriminatory access to energy supplies. I have a strong preference for pipelines that unite rather than for pipelines that divide.” This was an appropriate message to deliver.

Wojciech Jakobik, Energy Analyst and Editor-in-Chief, Biznes Alert

@wjakobik

jakobikNord Stream 2 is a commercial project if you take into account the political goal. 

In terms of economic feasibility, it assumes that building another gas pipeline through the Baltic Sea will allow Gazprom to export up to 110 billion cubic meters (bcm) annually. During the St. Petersburg International Economic Forum, Gazprom announced that it would be possible to decrease its transit through Ukraine from the present annual 50-60 bcm to 10-15 bcm in 2020, and – according to Russian estimates questioned by Ukrainians – save money by using Nord Stream 2. According to my estimates, Gazprom could sell around 77 bcma using Nord Stream 1 and 2 to Central and Eastern Europe. German operators have already agreed to build the EUGAL extension, which will allow an increase of exports without approval from the European Comission, for a full Gazprom monopoly on the OPAL extension. EUGAL is to send 51 bcma to the Czech Republic (and then further East and South) and 11 bcma to Poland. In this manner, Nord Stream 2 is completely feasible, under one circumstance.

Nord Stream 2 needs European political agreement on decreasing gas transit through Ukraine, and that’s what makes it a political project. Decreasing Ukrainian transit will mean serious losses for Ukraine’s budget and stability. Moreover, it goes against the political goals of the European Union, which is spending millions on reforms in this country. It goes against the Energy Union goal of diversification because it will allow Gazprom to saturate Central and Eastern Europe with Russian gas. An active pricing policy could allow the Russians to block any alternative, like the Polish LNG Terminal or Norwegian and Caspian gas deliveries. However, the International Energy Agency predicts that American LNG could be even cheaper. 

That is why Nord Stream 2 is heavily criticized by Poland, the Czech Republic, Slovakia, Hungary, Lithuania, Latvia, Estonia and Romania. The instrument to dissolve this alliance would be to include more countries into Nord Stream 2, for example by adding to the “Northern Corridor” of Nord Stream2 and OPAL/EUGAL additional projects. These could include the BACI (Bidirectional Austria-Czech Republic Interconnector) and/or Eustream pipelines, or contracts like the 1 bln-dollar deal for construction of the sea part by, probably, Italian Saipem, or pipeline delivery from Austrian Voestalpine. That is how the project can become economically attractive to companies other than Western European Shell, OMV, BASF, E.on and Engie included in Nord Stream 2 consortium. But it is still incompatible with goals of the European Commission and the European Union in general.

The European Commission has stated that it can only guarantee the project does not go against European law. The consortium responsible for the new pipeline can adjust the project to fulfill this requirement by allowing other Russian companies and “independent” operators to take part. But it is ultimately up to the member states to decide the fate of Nord Stream 2. Gazprom’s active charm offensive is creating deep divisions inside EU, as the Germans do not want to quit the project despite growing opposition within the EU. Gazprom’s initiative could serve as the perfect economic solution for increasing Russian gas deliveries to Europe. But is it our Community’s real goal?

Jakub Janda, Deputy Director, European Values Think Tank (Prague)

@_JakubJanda

JandaThere are three key arguments for why building Nord Stream 2 would be the wrong move. First, Moscow uses energy as a political weapon, which led the EU to launch its Energy Union project several years ago. One of the key aims of this originally Polish idea was to decrease European energy dependence on the Kremlin’s political interests. The European Commission has even assigned this initiative as the main agenda for one of its vice presidents. Nord Stream 2, on the other hand, would effectively increase German energy dependence on the political moves of Kremlin, which runs and weaponizes its energy companies.

Second, the Russian Federation has attacked Ukraine, stealing part of its territory and orchestrating violence with over 9,000 dead on Ukrainian soil. To step up its aggression, the Kremlin has been running an aggressive disinformation campaign into European domestic affairs, even orchestrating support for European far-right parties or initiating disinformation that has led to demonstrations on the ground. It acts as a hostile regime not only towards Ukraine, but also against European states. This is a very unstable and hostile partner which Germany wants to make profit with.

Third, Germany uses the political argument of solidarity among European allies in other policy areas, while ignoring the consequences of strategic energetic projects such as Nord Stream 2 for its Central and Eastern European allies and partners. That cannot be called solidarity, but rather a selfish, principally wrong and dangerous move.

The German government should cancel Nord Stream 2 immediately – for security, political and geopolitical reasons. Even though German Chancellor Angela Merkel appears to be in favor of ending it, German Social Democrats are strong proponents of appeasing Putin and building the Nord Stream 2. In this context, it is sad to be reminded that former German Chancellor and long-term Chairman of Social Democrats Gerhard Schröder serves as a board member of Gazprom and chairs the Nord Stream 2 project – he is basically working directly for Putin. To sum it up, European history teaches us a lesson – it has never worked to appease and do profit with aggressive dictators.

Juraj Mesik, Climate and Energy Adviser, Slovak Foreign Policy Association

Juraj mesikNord Stream 2 is a planned pipeline with the capacity to transport 55 billion cubic meters of natural gas – to call it a “geopolitical” project is an exaggeration. It is indeed a political project aimed at subverting the EU, further weakening a Ukraine already devastated by Russia´s undeclared war, and sustaining the Kremlin’s current ruler. While from the short-term perspective Nord Stream 2 may appear as a commercially attractive project to the five Western companies involved, from the long-term perspective the prosperity all of these companies is ultimately dependent upon the prosperity of the European Union.  By undermining the EU, German BASF and E.On, Austrian OMV, French ENGIE and British-Dutch Shell jointly undermine their own long-term perspectives. There is only one possible winner of Nord Stream 2: Putin’s Kremlin.

There is no real need for additional gas pipeline capacity from Russia to Europe: the existing capacity is already twice as big as what is needed to transport approximately 100 billion cubic meters of gas bought annually from Russia. If completed, Nord Stream 1 + 2 would have the capacity to transport a volume of gas that is greater than the total European consumption of Russian gas. The existing flow through fully functional pipelines from Russia to Western Europe via Ukraine, Belarus, Poland, Slovakia and the Czech Republic would be eliminated from operation and, without maintenance, would be left to decay.

Nord Stream 2 stands against everything that Germany and France declare to be their highest priorities. The project stands against the EU, as it breeds mistrust, deepens the economic gap between the richer West and poorer East, and neglects the interests of more than 100 million people in Ukraine, Poland, Belarus, the Czech Republic and Slovakia. It is not without grounds that Nord Stream 2 was compared to the infamous Molotov-Ribbentrop pact by former Polish Foreign Minister Radoslaw Sikorski, or with the French and British part in the Munich Agreement that betrayed Czechoslovakia in 1938.

Nord Stream 2 stands against efforts to mitigate climate change by encouraging greater use of natural gas, thus emitting more CO2. What was all that fuss around the Paris agreement for, if Germany, France, and the EU are going to build more infrastructure for burning natural gas instead of investing into significant reduction of its consumption? What is all that buzz around the “green economy” in Germany for? Just PR?

Nord Stream 2 stands against the key purpose of the EU – promoting lasting peace in Europe – by committing to continual financing of Russian militarism. Gas and oil are the two main sources of revenues for Kremlin. By all objective indicators, Russia is among the most militaristic and the least peaceful countries in the world, and is the only real military threat to Europe. The Global Peace Index 2016 puts Russia the 151st out of 163 rated countries, just next to North Korea and before Congo and Pakistan. The Global Militarization Index ranks Russia constantly among the top 5-6 most militarized countries in the world. Military and security expenditures in the first quarter of 2016 were 37% of all Russian government expenditures. Russia represents less than 7 percent of the EU export market: by contrast, EU is by far the largest market for Russia, absorbing 46 percent of Russian exports (followed far behind by China with a 7 percent share).

Let us face it: it is Europe, who through the import of Russian gas and oil, finances Russian militarism. The purpose of Nord Stream 2 is but to prolong and enlarge the flow of European money to Russia  that is, to its military and security forces  the same forces waging war against Ukraine and Georgia, threatening the Baltic States and Poland, or engaging in cyberwars and hybrid wars against the West.

Author of “Germany’s Rash Rush for Russian Gas” (Project Syndicate, June 2016)

Marco Siddi, Senior Research Fellow, Finnish Institute of International Affairs (FIIA)

@MarcoSiddi

Marco siddiA lot has been written and argued about Nord Stream 2, often with an overly emotional approach. The debate would benefit from balanced analysis, and especially from the end of zero-sum thinking. Nord Stream 2 is a commercial project with clear political significance. It is a commercial project because several key European energy companies are involved in it, they are taking a risk by participating in the consortium, and no money of EU taxpayers is at stake. At the same time, the pipeline has political implications because it is the first large-scale infrastructural project involving Gazprom and its European partners since the beginning of the Ukraine crisis (while EU-Russia energy trade has continued throughout the crisis).

All sides involved in the dispute have legitimate arguments. Germany (as well as other Western European countries) wants to have a safe supply route for gas as it phases out its nuclear power plants, a route that is not at the mercy of Russian-Ukrainian conflicts. Russia wants to end its reliance on the Ukrainian transit corridor and have a direct link with its most lucrative Western European markets, while simultaneously strengthening its leverage in the countries of destination. However, the claim that Russia’s pipeline politics constitutes a geopolitical threat for Europe is exaggerated. Western European gas markets are well-integrated, and East-Central European gas markets are becoming increasingly integrated too. Ukraine itself has largely reduced its dependence on Russian gas. The geopolitical power of Russian gas has shrunk in the last years.

For transit countries in East-Central Europe, the main actual risk is the loss of income in the form of transit fees for Russian gas, rather than geopolitics. Nonetheless, political and geopolitical arguments are made because they are the most effective for both domestic and foreign consumption. Domestically, they rely on deep-seated fears of Russia and German-Russian cooperation, which are based on 20th century history and Russia’s recent destabilization of Ukraine. From the standpoint of energy policy, however, the focus on Nord Stream 2 misses the point: the main challenge for East-Central European countries comes from the need to decarbonize their economies and make them more efficient. This would also reduce their dependence on Russian fossil fuels.

Co-author of “Nord Stream 2: Opportunities and Dilemmas of a New Gas Supply Route for the EU” (Jacques Delors Institut, May 2016).

Anke Schmidt-Felzmann, PhD, Researcher, Europe Programme, Swedish Institute of International Affairs (UI/SIIA)

@anke_sf

Anke_Schmidt-FelzmannIn Gazprom we trust? Nord Stream 2 is being promoted as a “purely commercial” project. But is it really? In Berlin this is indeed the conventional wisdom, repeated over and over again by government and business representatives. Even Germany’s ambassadors abroad, including in Stockholm, insist that the discussions about the planned 3rd and 4th Nord Stream pipeline should not be concerned with the political, military and geopolitical dimensions that opponents of the project have raised in the debate. Instead, the European Commission’s opinion on the application of the European Union’s acquis communautaire should determine the fate of the pipeline.

The striking thing is that these speaking points mirror those used by the Kremlin, by Gazprom, and the Nord Stream consortium. If the project was “just commercial” and the stakeholders just private business actors – why would high ranking German politicians be actively promoting and defending the project against a sizeable opposition within the EU? What’s more, why are some of them arguing that these “commercial” pipelines stand to make an important contribution to improving the political relationship with Russia, and that these kinds of pipeline deals are just what is needed to “put the relationship back on track” in the long run?

The trouble is, major energy infrastructure deals, especially those involving Russia, are never just business. It is in fact an insult to any expert’s intelligence to have to listen in the year 2016 to claims that a major Russian gas pipeline project that is expected to cost around €9.9 billion and is designed to circumvent the main traditional transit country, Ukraine – through which 80 percent of Russian gas exports to Europe used to be transported, and which is since February 2014 the victim of Russian military aggression, with parts of Ukraine’s territory remaining under Russian occupation – that this has nothing to do with politics, geopolitics or the European security order.

Nothing to do with EU sanctions? Another popular claim that is being propagated in defense of Nord Stream 2, including by the German government, is that the gas pipelines have nothing to do with the EU’s sanctions against Russia’s violations of Ukraine’s territorial integrity. Indeed, as vocal supporters of the project rightly point out, neither gas imports nor gas infrastructure are included on the EU’s sanctions list. So, should the five European energy companies that are participating in Nord Stream 2 not be free to pursue their legitimate business interests?

Not quite. Although Nord Stream 2 is in compliance with the letter of the EU sanctions, it runs completely counter to their formally declared intentions, and contradicts the spirit of the sanctions policy. We cannot disregard the fact that Gazprom is under the majority control of the Russian state and that it is an important taxpayer. As a significant contributor to the Russian state budget, Gazprom enables, in no small part, the rapid expansion and modernization of Russia’s military capacity, while Ukraine’s territorial integrity is still being violated. From the day the two new pipelines start their deliveries, Gazprom, and the Russian state, will increase their revenues, which in turn will feed into Russia’s military expenditure. While long-term financial loans to Russian companies have been banned as a result of the EU’s sanctions, Gazprom, and the Russian state, are effectively obtaining another life-line with the Nord Stream 2 project that will enable the Kremlin to continue its aggression against Ukraine. It is outright indecent to claim that Nord Stream 2 does not have anything to do with the EU sanctions, or with Ukraine’s territorial integrity. As a €9.9 billion project, to which European energy companies contribute at least 50% of the financing, Nord Stream 2 runs counter to the political objectives on which the EU’s sanctions policy is based.

Just about transit losses? The claim is often made that the debate about Nord Stream 2 just boils down to a question about which of the EU governments can cash in on the transit revenues. In this case, Germany would turn into a real gas hub and receive the bulk of the transit fees that currently go to Ukraine, Poland and Slovakia. Not quite. It seems the German government has been lured into standing up for the right of the Kremlin to continue making good business from the annexation of Crimea and from the invasion of parts of the Donbas basin. That there are large shale gas reserves located in Ukraine’s Donbas basin, and that the war put a stop to the exploitation of these shale gas reserves, is not just a minor detail, but also necessary to consider in the debate about whether issues related to European energy companies doing business with Gazprom should be treated just as commercial questions.

Furthermore, the Kremlin’s voice Russia Today wrote on March 18, 2014 (the date of the formal annexation of Crimea): “Crimea has one of the largest oil and gas deposits in the Black Sea region, according to geological surveys,” and also told its readers that Gazprom requested permission to develop these sizeable Crimean oil and gas fields straight after the Russian annexation of the Ukrainian peninsula was formalized. According to estimates, the offshore natural gas resources within Crimea’s Exclusive Economic Zone amount to between 4 and 13 trillion cubic meters.

Since the annexation, both RT and Gazprom and even the Kremlin have been very quiet about the fate of the substantial oil and gas reserves that are located in the Exclusive Economic Zone of Crimea. We can assume, however, that if any company is engaged in the exploitation of the Ukrainian oil and gas reserves in the EEZ of Crimea, that company will be Gazprom. So the very same company that holds a 51-percent share controlling Nord Stream 1, and will hold a 50-percent share in Nord Stream 2, is at the same time engaged in the theft of what, according to international law, is still Ukraine’s property. By lending their vocal support to the “purely commercial” deals that European energy companies have struck with Gazprom since March 2014, the German government, and other supporters of Nord Stream 2, are in fact complicit in the Russian violations of Ukraine’s territorial integrity.

Author of the forthcoming paper The Nord Stream pipelines: Not just business, and not just about gas.”

Madalina Sisu Vicari, PhD Researcher at Center of International Relations Studies (CEFIR) of University of Liège and Editor-in-chief of Vocal Europe

@v_madalina

MadalinaNord Stream 2 is clearly a highly disputed project, which has been continuing to trigger a wide array of controversies not only within the European Union (EU) but within the Energy Community (EnC) as well. Both geopolitical and economic factors have influenced those controversies, and they will continue to affect the arguments revolving around this pipeline project.

The essential geopolitical factors which have led to an unprecedented level of securitisation of EU-Russia energy relations, culminating with the creation of the Energy Union are the annexation of Crimea and the conflict in Eastern Ukraine. These events have had considerable bearing on Russian-Ukrainian gas relations and have led to Russia’s aim to disengage its gas supplies to Europe from the Ukrainian gas transit corridor, on one hand, and to Ukraine’s efforts in reducing its energy dependency on Russia, on the other hand. Maintaining Ukraine as gas transit country has been not only an important issue for the EU’s political agenda since the outbreak of the Ukrainian crisis, but also a contentious issue in EU-Russia energy relations. Thus, the European Commission’s involvement as mediator in the negotiations between Ukraine and Russia resulted not only in securing the gas supply to Ukraine through the 2014 and 2015 winter seasons but also in guaranteeing the transit of gas across Ukraine. Furthermore, the EU has manifestly taken an overall negative position towards Nord Stream 2; in this regard, the arguments expressed mainly by the Commission principally touched upon the issues of security of supply, diversification of energy sources and alteration of EU’s gas market landscape.

Some of the main economic factors shaping the debate over Nord Stream 2 relate to the geopolitical ones. Russia’s disengagement from the Ukrainian transit would significantly decrease the country’s revenues generated by gas transit and would significantly reduce the investment opportunities for the modernization of Ukraine’s gas system. As Ukraine is a member of EnC, it would hinder the further integration of the EU acquis communautaire in the country’s energy sector and the creation of an integrated and liquid gas market within EnC. Secondly, Slovakia may lose important gas transit revenues, but this possibility may be offset by Russia’s plans to increase gas exports in Eastern and Southern Europe; thus, recently Moscow assured  Bratislava that the gas transit contract with Slovakia will run until its end, in 2028, and it presented the possibility of earning more gas transit revenues if the gas from the Nord Stream 2 would go via Austria to Slovakia, and further to Eastern European markets.          

Nevertheless, from the Russian perspective, Nord Stream 2 is driven by sound economic rationale, as the pipeline would allow Gazprom to not only preserve its European market share (158 billion cubic meters of gas exported in 2015, representing 30.9% of the overall European energy consumption) but also to increase its share (for 2016, the company aims at 165 billion cubic meters of exports). Moreover, Nord Stream 2 would expand Gazprom’s domination in Germany (currently, the leading market for Russian gas in Europe); it would increase the Russian company’s presence in the Northern and Western European gas markets (for instance, since the beginning of the year, Italy has become the second leading European market for Russian gas exports), and it would allow Gazprom to maintain, and even increase its dominant position in the Central and Eastern European gas markets. Ultimately, it would allow and facilitate a fast raise of gas exports to Europe from Russia, in the case of increasing EU demand. Finally, Gazprom argues that as its production is moving to the Yamal resource base, the pipeline would enable the company to make cost optimization in the Central corridor ( less than 4,300 km of pipes and 62 compressor stations) and, by shortening its supply route to Europe, it would allow the company to save money and to reduce carbon emissions.

Katja Yafimava, PhD, Senior Research Fellow, Natural Gas Research Programme at the Oxford Institute for Energy Studies (OIES)

@katyafimava

KatjaNord Stream 2 – just as Nord Stream 1, Yamal-Europe, and Blue Stream before it – is part of long-running transit-diversification strategy, adopted by Gazprom in the late 1990s-early 2000s, in response to the equally long-running history of transit insecurity, associated with former post-Soviet countries (above all Ukraine, but also others) in the 1990s and the 2000s. This insecurity manifested itself in non-payment, debt accumulation, and unauthorized offtakes of gas from transit pipelines. Gazprom’s resolve to diversify transit has only strengthened after the 2006 and 2009 Ukrainian gas crises and the sharp deterioration of relations following the 2014 Ukrainian political and security crisis.

At present, around half of Gazprom’s exports to Europe are transited across Ukraine, which gives the latter a significant leverage in respect to terms of transit. The Gazprom rationale for building Nord Stream 2 is to establish an additional transit-free export route, which would allow it to reduce its transit dependence. However even if it builds Nord Stream 2, Gazprom would still need to transit gas across Ukraine, at least in respect to gas exports to Southeastern European countries and western Turkey.

Nord Stream 2 has raised political concerns in Central European and the Baltic states that might make it easier for Russia to use its so-called ‘gas weapon’ – understood as cutting off gas supplies to Central European states in order to force compliance with Russian political and strategic aims, while no longer depending on them for transiting gas to Gazprom’s major markets in the Northern and Western European states.

But such concerns are hardly justified, as Gazprom has never in its history cut off supplies to any European country that was paying in line with a contract. The commercial concerns of central European states – especially Ukraine – are real and significant, as they would be losing significant sums of money in transit revenues, but these concerns should not be dressed up as political. Similar comments apply to allegations of ‘political’ pricing of Russian gas for Central European states: although price differentials may exist, this does not necessarily mean that the pricing is ‘political’ and might simply reflect the fact that market (competitive) conditions differ. (In this respect EU competition law serves as a major constraint to any potential abuse of a dominant position.) It might also reflect the fact that, during most of the post-Soviet period, Central European and the Baltic states failed to make a sufficient effort to invest in infrastructure that would have allowed them access to alternative gas supplies. This only began to change in the 2010s when such infrastructure began to be built, financed in large part by EU taxpayers. By contrast, not a single euro of taxpayers’ money is to be spent on Nord Stream 2.

The fundamental principle on the basis of which the EU was brought into existence is a treaty-based foundation of legislative competences, and law and regulation are the EU’s main policy tools. EU legal and regulatory acquis, governing the internal energy market (IEM) within the EU, do not apply to Nord Stream 2 pipelines bringing gas to the EU. From this point of view the EU has no power based on law and regulation to stop the construction of Nord Stream 2. The EU legal and regulatory rules would apply to any onshore extensions of Nord Stream 2, and should these extensions be in line with these rules, there would also be no legal and regulatory justification for stopping their construction.

If there were to be political rules for Nord Stream 2 (dressed up as complying with the newly created Energy Union’s policy objectives) – and the establishment of such rules would suggest adding a new layer of confrontation between the EU and Russia – and if the EU makes a political decision to stop Nord Stream 2 on the (poorly substantiated) premise that the ‘gas weapon’ threat is genuine, whereas in reality it might only be perceived as such by Central European and the Baltic states (but not by others), this decision might undermine the overall European energy security. This is because realistically there is limited scope for reducing overall European dependence on Russian gas at least until the mid-2020s and probably beyond, whereas security of transit across Ukraine cannot be guaranteed.

Co-author of  Russian Gas Transit Across Ukraine Post-2019 – pipeline scenarios, gas flow consequences, and regulatory constraints” (OIES, February 2016).


 

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