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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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The Pros And Cons Of Nord Stream 2

There are few issues as divisive in the EU as the planned construction of Nord Stream 2, another direct gas infrastructure connection between Germany and the Russian Federation.

With the climate of relations between Russia and the West just above the point of freezing, the agreement between Gazprom (MCX:GAZP) and its Western counterparts Shell (NYSE:RDS-A), OMV (VIE:OMV), ENGIE (EPA:ENGI), Uniper (ETR:UN01), and Wintershall has caused critics of closer relations with Russia to mobilize.

While supporters of the project insist that it isn’t more than a commercial deal (mostly Western European countries and companies), opponents (Central and Eastern Europe) are convinced that the deal will give Moscow more unwanted influence.

Here, we’ll discuss the arguments of opponents and proponents of the proposed gas infrastructure in order to make a modest recommendation regarding Europe’s common interest.

Currently, over almost 40 percent of the gas consumed in the EU originates from Russia, making Moscow the biggest supplier, followed closely by Norway and Algeria. Even though many policy declarations were made to diversify and several serious crises involved Russia, the export of Siberian gas to Europe increased spectacularlyfrom 8 percent in 2017 to a record 195 bcm.

The most important reasons behind this growth are the expanding economy of the Eurozone and domestic gas fields that are producing less. Although Europe currently possesses 208 bcm of LNG capacity, of that just 51 bcm was used in 2016. Most of the capacity was idle due to much cheaper pipeline gas, especially from Russia.

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Proponents, therefore, argue that Nord Stream 2’s importance will increase over the years as demand for imported gas will do the same. Furthermore, several crises over the years between Russia and Ukraine have severely damaged Europe’s energy security (and Russia’s, opponents argue). According to supporters, Nord Stream 2 will improve Europe’s position, as transit through Ukraine can be avoided and risks decreased.

Opponents, however, argue that it is exactly these crises that have shown Russia’s real intention and the necessity to import less from Moscow. Gas is not a commodity but a tool or weapon in the eyes of the Kremlin, they argue. Increased import will provide Russia with more means to pressure Europe in case of a crisis. Furthermore, this would withhold Ukraine from approximately 3 billion euros in yearly transit fees, thus weakening the country financially and its position to negotiate new contracts with Moscow.

While some Eastern and Central European countries have made strides in reducing their dependence on Siberian gas, the financial backing of Shell, OMV, ENGIE, Uniper and Wintershall for Nord Stream 2 is important in terms of resources and reputational improvement. This also supports the argument (primarily made by Germany) that it is a commercial and not a political project.

When it comes to Nord Stream 2, Central and Eastern Europe receive the support of the European Commission. The Commission has been trying to subvert the project, but until now has failed to do so. Its own legal department has rejected the claims of the commission to extend the existing acquis on energy law to Nord Stream 2.

Also, unbundling legislation — under which the majority owner of the infrastructure cannot be the same as the producer of the energy going through it — does not adhere, as the pipeline goes through the Baltic Sea, which is outside of the jurisdiction of the EU. While Germany has already granted a permit to construct the pipeline onto its shores, other littoral states of the Baltic Sea have yet to do so. However, even if this is not permitted, Gazprom could divert the route.

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Although opponents are correct in assuming that Nord Stream 2 will weaken Ukraine’s position and that it is highly likely more gas will be imported from Russia, the overall effect on the EU is rather positive than negative.

This infrastructure does not diversify, as the source of energy is the same. However, increasing the options for import strengthens Europe’s overall position, as the recent explosion at the Baumgarten gas hub in Austria shows. Due to its strategic location in central Europe, the hub has a significant influence on gas prices on the European continent. The explosion caused a major disruption in gas flows from east to west, which influenced LNG prices as far as Asia.

The massive amount of idle regasification capacity shows that in times of crisis, Europe can import from a variety of sources when necessary. This was the case in the UK, which received the first commercial LNG cargo of the Russian Yamal project. Although the project suffered under sanctions, Novatek (MCX:NVTK), together with Total and Chinese investors, finished the project on time and on budget. This shows that the current gas market is truly global and those policy goals and economic fundamentals collide in some cases.  

Europe's position vis-á-vis its energy suppliers would be much more improved when internal market restrictions are further dissolved, interconnectors built, and a truly coherent single energy market created.

Although Nord Stream 2 is majority-owned by Gazprom, all the infrastructure within the single market adheres to EU law, thus unbundling legislation. Due to this measure, Europe could receive energy for the lowest price available while maintaining a safeguard in the shape of idle LNG regasification capacity.

Finally, Ukraine should be able to purchase its gas from Europe instead of Russia for a fair price and without risking a crisis.

Maybe it’s time for a divorce between Kiev and Moscow instead of forcing cooperation on them. 

By Vanand Meliksetian for Oilprice.com

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