When construction began on the second Nord Stream pipeline that was going to double the volume of natural gas ships to Europe—most of it to Germany—the European Union wasted no time in voicing its opposition to more Russian gas.
Led by Ukraine, which fears the transit fee losses that Nord Stream 2 would bring, and the Baltic States and Poland, which are too reliant on Russian gas supplies already, this opposition led to legal battles and threats of sanctions if Russia “tries to use the pipeline as a weapon against other countries,” according to German Chancellor Angela Merkel.
The project also attracted the attention of the new global gas export giant, the United States, for which the European market is a most lucrative one thanks to its repetitively stated desire to diversify gas supply sources.
The U.S. slapped sanctions on the Russian participants in Nord Stream 2 and threatened their Western European partners with sanctions, too. Germany opposed this, for which reason Nord Stream 2 has proceeded and is now nearing completion. And yet, Europe is facing a gas crunch this winter and is eager to see Nord Stream 2 go live.
Earlier this year, when Gazprom fulfilled its gas deliveries to Europe per long-term contracts, it was not enough to fill Europe’s empty storage and prepare it for winter. Ukraine immediately took the opportunity to accuse Moscow of “blackmail,” but the EU, in an unusual move, disagreed.
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There were “no indications of specific behaviour by any of our suppliers to drive up prices,” one EC official told the Financial Times in July. “The current situation is a reflection of global market dynamics. All EU regions now have access to more than one source of gas, so are less vulnerable to supply squeezes coming from an individual supplier,” he added.
It’s a love-hate relationship of the purest kind. Europe has been desperate to diversify its gas suppliers, but the only diversification it has achieved is via liquefied natural gas and the Trans-Adriatic Pipeline, which at the time it was put into operation—last year—it was years behind schedule.
Yet the TAP, which carries Azeri gas, has only a fifth of the capacity that either Nord Stream pipe has: it can move 10 billion cubic meters annually, which equals 2 percent of Europe’s gas consumption. Also, most of the gas TAP brings into Europe goes to Italy. The pipeline could be expanded, but this is in the future.
Meanwhile, Europe is facing a gas shortage that prompted an executive from the UK’s Centrica, the utility that owns British Gas, to warn that Britons are facing higher electricity bills this winter and some businesses might be forced to curb activity, not only in the UK but in Europe, too.
“We haven’t seen a price situation like this before. If you can’t attract supply the only alternative is to cut demand to balance the market,” Cassim Mangerah told the FT earlier this month. “If we do see a supply crunch this winter the other way to balance the market is through economic activity. If prices are really high then some gas-dependent businesses in the UK and Europe may simply decide not to produce.”
Meanwhile, Ukraine is still calling on Europe to stop Nord Stream 2 despite assurances from Chancellor Merkel personally that she would not allow Gazprom to deprive Ukraine of the transit fees it receives now for the Russian gas it ships via other pipelines to Europe.
So, Europe resents Russian gas for the influence it gives a country that the EU considers unfriendly, to put it mildly, but at the same time, it is increasingly thirsty for gas because of a prolonged winter last year that drained its reserves. That winter was unfortunately followed by a busy Asian summer that saw LNG cargoes getting diverted from Europe to Asia because Asian buyers were ready to pay higher prices. And here comes the twist: even if the attempts to stop Nord Stream 2 fail, the new pipe will not lead to an increase in European gas deliveries from Russia.
The reason is simple: whenever the pipeline starts, Gazprom’s planned deliveries to Europe for full-2021 are set at 183 billion cubic meters. And with or without Nord Stream 2, this figure will remain unchanged, the state company said at the end of August. The new pipe could ship an additional 5.6 billion cubic meters, the head of Gazprom’s finance department said during an earnings call. But this won’t make a big difference.
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So, is Russia already wielding the gas weapon that the EU and Ukraine have feared for years? That may well be the case, according to some observers, per a recent article by Energy Intelligence’ Vitaly Sokolov. On the other hand, Gazprom is sticking to its long-term contract commitments to Europe, so it would be difficult to accuse the company of deliberately cutting supplies. There are no cuts.
Chancellor Merkel said recently that in twenty-five years, Europe will no longer need Russian gas. That would certainly make the continent a lot more energy independent and remove a major headache that is keeping officials in Brussels awake at night. As long as it happens.
By Irina Slav for Oilprice.com
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Let us therefore review the myths that have been promulgated about Nord Stream 2 since its inception and the truths that have emerged since the construction of this most controversial gas pipeline started 12 years ago.
The first myth was that it will strengthen Russia’s grip on the EU’s gas supplies. This myth was promulgated by the United States and its allies inside the EU like Poland and the Baltic States. However, the truth is that the United States’ opposition to Nord Stream has far less to do with the EU’s energy security and overwhelmingly to do with selling its LNG to the EU. The truth of the matter is that Russian piped gas supplies to the EU will always be cheaper than American LNG.
The second myth is that Russia would weaponize Nord Stream 2 and use it for political pressure on the EU. Nothing is further from the truth. If Russia has wanted to use gas supplies as a political weapon against the EU, it didn’t need Nord Stream 2 to exert that pressure since it already has almost 40% of the EU’s gas market. Gazprom could easily reduce gas supplies to the EU and shift the balance to China. Yet, Russia has proven a reliable and trustworthy supplier of gas to the EU for more than 15 years.
The third myth is that with the completion of the gas pipeline, it was claimed that Russia will stop its gas supplies to the EU via Ukraine. The truth is that Russia signed in December 2020 a new 5-year agreement with Ukraine to ship an agreed volume of gas supplies to the EU via its territory with the promise that it can be extended provided Ukraine doesn’t cross two Russian redlines, namely joining the EU and NATO.
From the start, Russia and Germany supported Nord Stream 2 on the basis that it is first and foremost a viable economic project that will ensure the EU’s energy security and supplies.
With the EU now facing a gas shortage because of a prolonged winter last year that drained its reserves, how beneficial is having Nord Stream adding 50 billion cubic metres of gas supplies to the EU.
Russia wields great power in the global gas market. It dominates the EU’s gas market and it is also the largest supplier of gas to the world’s largest gas market, China. Any pressure or new sanctions by the EU on Russia will prompt President Putin to reduce gas supplies to the EU and shift the balance to China.
The EU needs Russia and Nord Stream 2 far more than Russia needs the EU. Moreover, all attempts by the United States since the 1960s to block Russian oil and gas pipelines to the EU under the former Soviet Union failed miserably. Why did the Americans think they can succeed with Nord Stream 2? It baffles me and also baffles the world.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London