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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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Is This The Last Bottleneck For Nord Stream 2?

Large energy projects tend to be controversial due to environmental and political reasons. Nord Stream 2 (NS2) is not an exception as it is, arguably, the most contentious energy pipeline currently under construction in Europe. According to the critics of NS2, Europe is increasing its dependence on Russian gas, which would give Moscow unwanted influence in European capitals.

Opposition has been growing since the laying of pipes started. The U.S. has found allies in several Eastern European countries who fear Moscow's intentions due to historical reasons. Regardless of the efforts to thwart the construction of NS2, contractors have continued their work to complete the pipeline before the end of this year. Nord Stream AG, the company responsible for the project, has received permits from all littoral states of the Baltic Sea except for Denmark. Recently, the company made an important decision to end the political stalemate and prevent delays.

Bypassing Danish politics

According to former German Chancellor Gerhard Schroeder, Denmark is the biggest threat for delays concerning the construction of NS2 due to American pressure.

Nord Stream AG intended to construct the pipeline along the route of the original Nord Stream pipeline to reduce costs. The first application for construction activities in Denmark’s territorial waters was submitted in April 2017 and was based on the Danish authority’s guidance. In January 2018 the amended ‘Danish Continental Shelf Act’ went into force which gives the Minister of Foreign Affairs the right to veto infrastructure projects on political grounds when passing through its territorial waters.

Nord Stream AG, therefore, applied for an alternative route in August 2018 through Denmark’s EEZ but outside the country’s territorial waters. Furthermore, two years after applying for the first route, the Danish authorities requested a proposal for a third, south eastern option, which raised multiple eyebrows in Moscow and with investors in Europe. Denmark is blamed for deliberately delaying construction in favour of NS2's opponents. 

Related: Iran’s Best Bet To Avoid U.S. Sanctions

Nord Stream AG, however, radically changed tracks to reduce the political risk by withdrawing its application through Denmark’s territorial waters. Currently, only two proposals in Denmark’s EEZ are pending with the authorities: one in the northwest and a second in the southeast of Bornholm Island. It means that a decision is only subject to the United Nations Convention on the Law of the Seas (UNCLOS), whereby only the environment and ship trafficking is taken into consideration. 

According to Matthias Warnig, Nord Stream AG’s CEO, "we felt obliged to take this step because, in more than two years since we filed this application, the former Danish government has not given any indication of coming to a decision."

Keep calm, and continue construction

An unlikely beneficiary of this decision is arguably Denmark itself. Regardless of the Foreign Ministry’s decision, the small European country would have angered a critical ally. If Denmark had agreed with construction, the U.S. and several Eastern European countries would have objected. However, if the project were vetoed, Germany would have been upset. 

The Danish government was in a predicament because it couldn’t have said ‘yes’ to the project due to the deteriorated relations with Russia. On the other hand, there wasn't a reason to say ‘no’ outside of the political realm.

According to Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies, “the Danish Energy Agency does not really have a reason to say ‘no’ to either of the remaining routes. I do not doubt that if it does say ‘no’ to them, there would be protracted litigation in which Denmark would not be in a position of strength.”

Ukraine’s bargaining position

The original completion date for the NS2 pipeline was the end of 2019, which is right before the transit contract through Ukraine ends on January 1st 2020. Gazprom has been accused of trying to circumvent its neighbour to reduce income from transit fees and increase political pressure. However, if NS2's completion is delayed, the need for Ukraine as a transit country would remain for at least the short term, which would strengthen Kyiv’s bargaining position

Currently, the talks for a future contract are in a stalemate with neither party budging first to strike a deal. Ukraine prefers an agreement in which Gazprom books 60 bcm transit capacity for about ten years and increased diversification, meaning access to Russia’s gas infrastructure by Central Asian countries. Moscow, however, proposes ending all remaining legal disputes between the parties before resuming talks and a more flexible transit contract.

Yafimava, nevertheless, believes the delaying of NS2 would worsen instead of improve the chances of a long-term transit agreement with Ukraine. Supply cuts would increase prices in Europe, thus strengthening the case for diversifying routes. Moscow has already invested significantly in NS2, and it will seek to finish the pipeline sooner or later, regardless of the costs and delays.

By Vanand Meliksetian for Oilprice.com

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  • Mamdouh Salameh on July 06 2019 said:
    Despite delaying tactics from Denmark under pressure from the United States and despite efforts by the United States, Ukraine and a few Baltic states to prevent it coming into existence, Nord Stream 2 is a fait accompli. It is unstoppable and by the end of this year it will be operational. Russia which has already invested heavily in Nord Stream is determined to finish it sooner or later regardless of the costs and delays.

    Nord Stream project is first and foremost a viable economic project which will ensure security of the EU and the provision of cheap and reliable Russian gas supplies without interruption and also without interference by Ukraine.

    In imposing new sanctions on Russia, the US Congress aimed to punish Russia for its alleged meddling in the US elections in 2016. Still, these sanctions were mostly motivated by US self-interests and geopolitics.

    The sanctions ban improvements including repair of Russian-owned pipelines into the European Union (EU).

    That provision was intended to curb investment in the jointly European and Russian-financed Nord Stream 2 gas pipeline that would enable Russian gas supplies to bypass the Ukraine altogether and reach Germany and the EU.

    The EU nations are well aware that the United States’ opposition to the Nord Stream 2 has less to do with geopolitics and far more to do with US desire to replace most of Russian gas supplies with US LNG.

    Russia’s position in the European Union’s (EU) gas market is already unassailable with almost 40% market share and growing.

    Moreover, Russia’s share will be enhanced further to 45%-50% in the next decade with the completion of both the Nord Stream 2 and the Turk Stream gas pipeline which will bring Russian gas supplies under the Black Sea the Black Sea to the EU by the end of this year.

    Russian gas supplies to the EU are projected to continue rising at a time when the EU demand for gas and LNG is growing by leaps and bounds whilst European gas production is projected to decline significantly particularly with the planned shutdown of the Groningen gas field in the Netherlands by 2030.

    And while the EU will eventually import US LNG in increasing volumes as part of its energy diversification strategy, US LNG supplies will hardly make a dent on Russia’s market share and dominance in the EU gas market because US LNG prices can never compete with the price of Russian piped gas now or for the foreseeable future.

    Still, significant volumes of LNG from the United States, Qatar and Russia will still be needed to meet growing demand in the fast-growing EU gas market.

    The Ukraine could be the biggest loser with the completion of Nord Stream 2. Therefore, Ukraine is well advised to drop all its legal proceedings against Gazprom and try to negotiate a new deal with Russia if it is to continue benefiting from the transport of some Russian gas through its territory.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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