NORD STREAM 2 PROJECT: WHAT IS IT AND WHAT IS NOT?

A threat and a source of problems and tensions or part of the solution to European Union’s need for security of gas supply? Closer to commence, Nord Stream 2 stirs not only more and more heated controversies, but also the doubts become increasingly larger. That is, regardless of the perspective - seen from the supporters camp or from that of those who combat it - the project leads to changes within the European energy system with numerous and complex subsequent implications that will put the EU to the test. This comes in a context where the Brexit has already raised a number of issues to the common European project.

Launched as an idea by the end of 2015, shortly after the start of Nord Stream 1 pipeline, the Nord Stream 2 project was a generator of disputes from the very beginning; but with each step made forward is has turned into a generator of tensions. Tensions between the Member States having companies involved in the project and the EU officials on the one hand; between these countries (Member States - part of the project!) and some of the other Member States (those that see their interests threatened!) on the other hand; and, not least, between the Member States (involved or not in the project) and other non-Member States - but strongly interested in the current status quo in Europe (such as Ukraine and/or the US).

Both through the highly politicized nature of the debate and through its economic component, the success or failure of the Nord Stream project and/or the way in which it will eventually be implemented, may give a hint about the direction and the path that the EU will follow. This project can be a test paper showing whether or how much European solidarity still matters, which is the balance of power between companies and states, as well as the type of relations between small states (i.e. new members of the Union), and its ‘hard core’; however, more than anything, Nord Stream 2 may be an indicator for the direction the EU will embark on. It is an indicator the more important as the nearness between Germany and Austria to Russia (visible amongst others, but especially in the results and official statements subsequent to the economic forum in St. Petersburg), is likely to amplify the gap between the great powers of the Old Continent and the United States (a traditional ally of Europe... yet); it is a phenomenon whose importance for the countries in Central and Eastern Europe region is amplified by the fact that this nearness takes place in a European context complicated by the vote of the UK on leaving the EU. This is because the Union’s energy policy is one of the European Commission’s spearheads - ever more questioned by the day, the European market being still dominated/determined by the existing national regulations. Brexit is an element that will increase the centrifugal tendency in this field!

ABOUT THE PROJECT

Nord Stream 2 is a completion of the Nord Stream 1- a project consisting of two gas pipeline connecting Russia to Germany via the Baltic Sea. These first two pipelines already operational since November 2011 and October 2012 respectively, with a capacity of about 55 billion cubic meters per year (bcm/year), are owned by a consortium registered in Switzerland consisting of Gazprom (51%), German companies Wintershall and E.ON Ruhrgas (15.5% each), Gasunie (Netherlands) and GDF Suez (9% each). The agreement for the construction of Nord Stream 2 project, which also provides two pipelines, and will double the current transport capacity of Nord Stream 1 (up to 110 bcm/year), was signed on September 4, 2015 by the Russian company Gazprom with two German companies - BASF and E.ON, along with the British-Dutch company Royal Dutch Shell, the Austrian company OMV and the French company ENGIE.

Russia and numerous western European publications presented this agreement as a major success of Gazprom, whose operations were regarded an operational model in a general adverse framework... the project is also considered an example of ineffectiveness of the sanctions imposed against Russia (which failed to prevent the largest European companies from doing business with this country). Finally, there are some who admire Russia’s determination in its efforts to achieve long-term objectives (given by the need to maintain and/or expand its presence as a supplier of gas to the European market after 2019 - the year when the agreements with Ukraine cease, through whose transport system the Russian gas passes to Europe).

THE EU ENERGY POLICY

Altogether, regardless of how it comes, it is clear that Nord Stream 2 comes in serious contradiction with the set of principles contained in the EU energy strategy; a strategy which aims (amongst other things - but with stress on) the diversification of energy supply (natural gas is the priority in this context). This need is given by a reality not at all reassuring for the EU, which imports about 70% of its gas, 30% of imports having Russia as supplier; moreover, a significant number of the Member States are completely dependent on imported gas from Russia. To them add some non-member countries in the middle of Europe, with gas networks and economies closely integrated with their neighbours - several actual members of the Energy Community (an association between the EU and the European Southeast, which aims to create a common market for electricity and gas of the EU and other countries).

In short, almost all states bordering eastern Germany (except Romania) depend for more than 50% on Russian gas, which means that their increasing dependence will limit economic policies and EU foreign policy; shutting down the tap - as it happened in 2006 and 2009, would have a major impact in this region, with serious economic, social and politic consequences for the entire European Union.
Thus, the current European Commission, starting from its investiture (2014) has continued the idea of creating a single energy market in Europe and the adoption of a policy in which the EU should jointly negotiate contracts with foreign partners. Obviously both ideas/proposals are still far from being implemented, but it is equally obvious that the two premises of the ‘European project’ in regard to the energy policy are violated by the agreement on Nord Stream 2.

The fact that the project is led by a consortium with its headquarters in Switzerland shows, if needed, it was aimed to carry it out as far away from any possible influence (political or legal) from the EU. This was expressed as clearly as possible by the German Economy Minister, Sigmar Gabriel, who said during one of his visits to Moscow that for Nord Stream “the most important thing is that the regulating authority is in the hands of German authorities” so that “foreign interference” and “political involvement” should be limited. These statements have drawn criticism from some other Member States and from MEPs and some of the European Commissioners... who challenged the compliance of the project with the European norms, meaning in particular the issue of non-compliance with the separating of gas supply operations from the transport operations.nel opal nord stream

The discussions have resulted, in early June, in a European Council decision saying that any intergovernmental agreement linked to the supply and transport of natural gas between the Member States and third parties should be subject to approval by the European Commission before being signed.
The decision was made, according to Euractiv, during a meeting of energy ministers of the Member States in Luxembourg, which have decided to green light a more than one year old proposal from the European Commission, drawn up following the conclusions on a project already abandoned: the construction of South Stream, which should have been funded mostly by the Russian giant Gazprom. This came after the conclusion drawn in December 2013 by the European Commission that the bilateral agreements signed to build the South Stream between Russia, Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia and Austria violates the European legal framework.

The Commission will therefore have a priori veto right on the agreements signed by the Member States, which will be obliged to inform the EU executive on the projects that could be subject to an accord with non-member states before the signing of such agreements. In addition, the commission will be informed about the evolution of each negotiation stage of projects regarding natural gas.

EU-RUSSIA RELATIONS

However, fears regarding the EU-Russia relationship seem not necessarily justified if we think that this relationship is one of interdependence - as the export of gas and oil bring about half of Russian public budget revenues; so that Moscow is fully interested in building and maintaining an economic relationship with the EU market, built on trust and on long-term, especially in the context of the falling prices and the sanctions against Russia. It is the more needed since its projects in the East - with China, are either delayed or are encumbered by a number of political issues, or simply are not economically justified.

Nonetheless it is true that the Russian economic interest cannot be a strong enough guarantee, not now and, in any case, not in the future. Paradoxically, however, precisely the Nord Stream (the existing 1 and the future 2) can provide additional guarantees to Europeans! That’s because the increasing EU dependency on Russia means a proportional increase of Russia’s dependence on the European market. Additional certitudes are offered by the fact that this commercial relationship has the European end of the line in Germany - the largest political and economic power in Continental Europe - a country having the ability to request and get the observance of the contractual terms by Russia; at the same time, as part of the project are the largest European companies in the field, which also have a greater capacity to influence the Russian energy giant to meet the agreement.

Therefore are removed a large part of the risks arising from the existence on the flow of intermediary third-parties that complicate the relations between the two parties (as happened, for example, when disagreements between Ukraine and Russia on the amount of transmission tariffs and the amounts of gas resulted in the discontinuation of gas supply through the pipelines transiting the country). So, from the perspective of the project’s supporters for a direct partnership between Russia and Germany - as there is Nord Stream (1 and 2)... Germany directly (as the Union’s main consumer of gas) and the EU as a whole, eliminates a significant part of the risks in terms of consistency and sustainability of gas supply at competitive prices; which means that Nord Stream adds stability and constancy to gas flows towards Europe, and thus more ‘stability’ to the European energy system. This takes place at more competitive prices than any other type of current potential supplier. Given that energy costs play a decisive role in the European economy’s competitiveness at a global level (where it competes with the US, China, Japan and/or other economic blocks), this element is extremely important for the EU.

COMPETITION

It is certain that in an equation in which it ‘wins’ in terms of security of supply, Europe has recorded a series of ‘losses’. Thus, through the proposed energy strategy, as response to Gazprom holding already a 40% share of the European market (the largest supplier), the EU has tried to develop the import and deliquefaction of natural gas (LNG). More expensive than the gas supplied by pipeline, the LNG is however very flexible and can be brought effectively from anywhere, thus contributing effectively to the diversification of supply sources; Nord Stream 2 makes this version a totally uneconomic one and deters any potential new investments in this field. Anyway the LNG import and deliquefaction facilities are under-utilized at present (on average, only half of the installed capacity). According to European Commission calculations, this solution could provide up to 43% of the EU gas demand.

Therefore, the Nord Stream 2 project discourages any efforts/investments that could bring the Union an advantage in regard to the diversity of supply and flexibility in the natural gas supply; this makes the increasing dependence on Russia, which through Gazprom is gradually expanding its control over other components of Europe’s gas supply (meaning more than just having control over the pipelines), to be even more dangerous for Europe. The latest move in this regard is produced by the exchange of assets late last year between BASF and Gazprom; an exchange in which Gazprom gained control on the marketing and storage of natural gas divisions of Wintershall, part of the German group BASF. In turn it received 25% of the Achimov fields in Siberia (two fields with estimated resources of about 274 bcm of gas, with the possibility of extraction of about 8 million cubic meters per year as of 2018). In order to have an insight into the market size undertaken by Gazprom through this exchange, it should be noted that the BASF operations ceded to Gazprom have brought to the German group in 2014 sales of EUR 12.2 billion and earnings before taxes, amortization and depreciation ( EBITDA) of about EUR 260 million. Gazprom has practically taken over 20% of Germany’s storage capacity - the capacity of gas supply for about 2.2 million households in one year.

A TROJAN HORSE IN THE EU

We are talking about a company far from being a classic supplier - because it has direct connections with the Russian government (which owns 50% plus one of Gazprom’s shares), there is no longer a secret that this company is a means of projecting Moscow’s interests regionally and/or globally. Evidences are not at all few. Thus, on the one hand, this evidence is given by the people who have led Gazprom, people from Kremlin’s power structure. Among them, Dmitry Medvedev - Prime Minister and ex-president of Russia, and successor at the helm of the company, Alexey Miller - a subordinate loyal to Vladimir Putin, during a second term at the head of Gazprom.

On the other hand, there are lots of events which clearly show that Gazprom is a political tool. The events in Ukraine in 2006 and 2009 and what happened in 2006, when Lithuania sold to a Polish company a refinery courted also by Russia, and the pipeline carrying Russian oil (owned obviously by Gazprom) suddenly became dysfunctional - are just a few examples. Even more evident were the events in Belarus (2006) - the conflict born during talks on fees for oil transit received by that country and on Russian natural gas price was resolved only after Minsk gave up the control of pipelines to Gazprom; also, Russia’s intervention in Georgia when, due to the country’s intent to join the EU and NATO, Gazprom doubled the price of the supplied gas.

Viewed from this perspective, Nord Stream (1, but especially 2, as they significantly increase the flows of Russian gas to the EU) has obviously a very significant political component, at least from the Russian perspective. Given that in 2019 the agreements concluded by Russia with Ukraine for gas transit to Europe cease, it is already clear that Russia will divert the gas for Europe through the Nord Stream (1+2).

Therefore, Nord Stream leads to changes of the direction of gas flows! Specifically, currently the natural gas is flowing to the European Union from east to west through Ukraine and Poland; by doubling the capacity of the pipelines in the Baltic Sea will make EU eastern countries and the ones in Central and Eastern Europe (CEE) receive Russian gas from Germany and/or from Austria. This change produces a series of consequential effects that should not be neglected! On the one hand, countries like Ukraine, Poland and/or Romania will lack the revenues generated by fees levied on the transit of Russian gas on their way to Europe.

If for Romania or Poland it wouldn’t be a tragedy, for Ukraine it is an extremely powerful blow to the public budget, which will be deprived of about USD 2 billion annually. But perhaps even more important than the deprivation of the EU peripheral countries of such revenues is that the countries that need gas (Russian) will actually pay the cost of transmission to the companies owning the pipelines, actually the large companies in the field in western Europe (along with Gazprom).

Consequently, countries like Ukraine and/or Poland would not only cease to collect transit fees, but will generate revenues for Western European companies and for Gazprom (companies that hold the ownership of the pipelines) and, through this company, the EU peripheral countries end up by paying transit fees to the Russian government. This means neither more nor less than the shift of substantial amounts of money from state budgets of the EU peripheral states to the budgets of the hardcore states, feeding at the same time, paradoxically, the Russian federal budget and also significantly contributing to the financing of the ambitious military programmes that Russia has in progress.

Germany - the terminus of the Nord Stream pipelines and Austria are the main winners (in Europe!) of this change of flows, as confirmed even by Gazprom officials, who, in a subsequent declaration of the economic forum in St. Petersburg, had clearly stated that Nord Stream 2 will strengthen the position of the gas hub in Baumgarten (Austria) within the gas transmission system in Europe. Moreover, the amount of Russian gas entering Austria is on an upward trend anyway, it grew by 19% in H1 2016 (from 1.6 to 1.9 bcm) against the same period last year. In fact, Austria’s earnings in this project are even more substantial when you consider that, during the forum in St. Petersburg, the Austrian company Voestalpine signed the contract for the supply of pipes for the construction of lines 3 and 4 of the Nord Stream project. Voestalpine had also provided the pipes for Nord Stream 1, more specifically no less than 170,000 tonnes of materials being sold to the consortium during 2008-2010.

CONSTRUCTION COSTS

The consortium estimates the construction costs of Nord Stream 2 to about EUR 8 billion, a 30% share of this amount will be covered from the group’s equity and the remaining 70% borrowed money, without using public money. This is also one argument of the project’s supporters, saying it is just a business project and nothing else.nel opal nord stream max capacity

It is not mentioned that Nord Stream 2 will stop at Lubmin, on the Baltic Sea coast, and that for the transport and distribution of this gas surplus the existing networks should be used, which, unfortunately, are currently designed to transport only the gas for Nord Stream 1 (see the map “NEL and OPAL are already close to their maximum transmission capacity”). In this context, it is not yet clear who and how would take over the task to increase the transmission capacity of the two routes of natural gas (NEL - Northern European Natural Gas Pipeline and OPAL - Baltic Sea pipeline link)... and if the works in this regard would be publicly funded and/or funded by European money.

OPAL is operated by OPAL NEL TRANSPORT GmbH, a subsidiary of Wingas, owned 50% less one share by Gazprom, and the rest - by Wintershall GmbH; E.ON Ruhrgas holds 20% of OPAL NEL TRANSPORT GmbH. This transmission route is subject to penalties from the European Commission. According to EU’s third energy package, Gazprom has to allocate up to 50% of OPAL’s capacity to independent suppliers. However, the only supplier of the gas pipeline, with an annual capacity of 36 bcm, is the Nord Stream pipeline. To avoid huge financial losses, Russia and Germany have urged the EC to grant OPAL an exemption from the rules of the Third Energy Package.

INSTEAD OF CONCLUSIONS

Ended on June 19, the economic forum in St. Petersburg organized by Russia can bring Europe into the trap of increased economic dependence on Russian gas. Russia’s close relations with Germany and Austria and projects like Nord Stream 2 (or the newly announced LNG terminal on the Baltic Sea) bring cheap gas (Russian!) to Europe, but lay the basis of a series of systemic shifts at regional level, with potential harmful effects hard to anticipate and to offset: a more consistent Russian presence on the EU market and would eliminate the potential competing projects and turns the peripheral European states from transit fee collectors into fee paying states, thus weakening their budgets and their economic and political positioning.

By further opening the European market to Russia, some Member States such as Germany and Austria are - at least at first glance - the best possible choices in economic terms: they bring to Europe the cheapest gas, they securitize the energy needs and the continuity of supply and create the premises for building an infrastructure generating surplus value (profits and returns on investments) for a number of leading European companies in the field.

Subsequently however, such decisions generate a series of geostrategic political tensions between the EU Member States, by leading to a series of radical changes in the structure of the regional energy system, by reversing the flow of gas (which will go from west to east) and of financial flows from transit tax collection and distribution (which will go from the east to western Europe). These changes will further weaken the economic and political situation of some peripheral EU countries on the border with Russia.

Therefore, if for some the project is just ‘business’ (the argument being that involved in the building are private companies without any public financial support) - analyzed in connection with the fact that Gazprom is ultimately a tool for Moscow’s power, Nord Stream 2 acquires the characteristics of a Trojan horse brought from Russia to the gates of Europe, with the entire potential problems and complications that comes together.

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