Nord Stream 2: A Purely Economic Project for Some, a Highly Political One for Others

April 13, 2016 | 00:00
Nord Stream 2: A Purely Economic Project for Some, a Highly Political One for Others
Nord Stream 2: A Purely Economic Project for Some, a Highly Political One for Others
Veterans in the European energy sector, whether working in business, in politics and administration or as journalists, have in these months had a feeling of déjà vu. Then, in 2006 until 2012, the electrifying words were Nord Stream 1, now they are Nord Stream 2. The same procedure as last time? In many ways, yes. At that time everything was new and the idea, to put a 1200 km long gas pipeline from Russia to Germany on the bottom of the Baltic Sea, was visionary for some and for different reasons shocking and unacceptable for others. Now, the Russian state-owned gas company Gazprom, joined by five Western European energy companies, is planning a parallel pipeline and the same confrontational discussion emerges: For the supporters it is a purely economic project in order to meet the EU’s future demand of gas, entirely financed by private funds. For the antagonists Nord Stream 2 (NSP2) is a tool in conflict with all the energy goals of the EU such as sustainability, affordability and security of supply. Furthermore, NSP2 would be a solidarity blow to the Ukraine since, as a result, there could be the possibility for the end of its transport of Russian gas to the west and the south and with it a loss of about € 2 billion of transit fees. So, is Nord Stream 2 for the EU an economic issue or a political one, and what about the legal aspects? For the EU, Nord Stream 1 was a “Project of European Interest”. Now, NSP2 has even split the European Commission. However, the NSP2 consortium is optimistic. On April 6th, it signed the first contracts with the Russian companies OMK and Chelpipe for the procurement of pipes.

The same day, April 6th, four Members of the European Parliament, representing all the major parliamentary groups, had been invited to a discussion under the headline “Nord Stream 2 – Energy Union at the Cross Road”. The event was very well attended, among the speakers were Jerzy Buzek, former President of Poland and President of the European Parliament, Maroš Sefčovič, Vice-President of the European Commission, Andriy Kobolyev (CEO of Naftogaz of Ukraine) and Didier Seeuws (Council of the European Union). To be fair, none of the organisers claimed that their intention with this event had been to present a balanced and comprehensive debate about the delicate, sensitive and controversial issue. Because that is precisely what it was not. The only person defending the project, that had been invited to one of the two seven headed panels, was Ulrich Lissek, Nord Stream 2 Consortium Communications Director. Twice he tried to correct a wrong figure, frequently used by the opponents of NSP2, that Nord Stream 1 only has an occupation rate of meagre 50%, whilst in reality it is above 70%. But no one, at least not on the panels, was prepared to listen and continued to use the for them obviously more convenient 50% figure.

To the facts: At the end of 2012 Nord Stream 1 commenced transporting Russian gas through the Baltic Sea from Russia to Germany. In general, the project works without major problems. The shareholders are: Gazprom 51%, the German companies E.ON and Wintershall/BASF each 15.5% and the French GDF Suez and the Dutch Gasunie with 9% each. The cost: € 7.4 billion. The company, Nord Stream AG, is registered in Zug/Switzerland.

Even though Nord Stream 2 is supposed to almost entirely follow the line of its predecessor, for geological reason there will be another starting point in Russia. The ownership structure is also different. Gazprom 50%, and BASF/Wintershall, Engie (former GDF Suez), EON, the Austrian OMV and Royal Dutch Shell 10% each. In two parallel lines on the sea bed NSP2 will be able to transport 55 bcm natural gas per year. The commissioning date is set for the end of 2019. The cost: about € 8 billion, entirely financed by private funds. 30% are supposed to originate from the shareholders and 70% from external financing. In an interview with EER, Ulrich Lissek made the point that “financial markets in Europe, Middle-East and US have shown great interest in the project.”

When in September 2015 Nord Stream announced the project, it surprised the energy market players, the politicians and the financial world. The reality at that time was a shrinking gas demand and low prices since 2008. Another surprise was the participation of Shell in this project. However, the British-Dutch company gave EER its explanation for joining NSP2. “Shell believes in the future of gas. The role of natural gas in the European Union is projected to increase over the coming years. At the same time, indigenous gas production in Europe is declining, increasing the demand for further imports. These developments in the EU natural gas market call for additional reliable, long-term supply options.”

This is the general line of arguments adopted by all the shareholders. According to Nord Stream 2, the domestic gas production in Western Europe (EU and Norway) will decline until 2035; about 100 bcm will have to be replaced; furthermore, total demand will increase moderately to 500 bcm. In total. In 2035 there will be a supply insufficiency of 140 bcm. NSP2 would be able to cover about one third, 55 bcm, of this; two thirds will have to be supplied by other sources.

For the critics, everything that NSP2 represents is wrong

Seen from the NSP2 position, the additional 55bcm gas coming from Russia through the Baltic Sea to Germany and the rest of Europe secure the supply demand from a sustainable source, help to develop the internal energy market, extend competition and is, especially compared to coal, very environmentally friendly. Today, Russia is contributing 6% to the EU energy market and covers about one third of the EU gas consumption. During a short period of time, Russia was even overtaken by Norway as the largest supplier. Even with NSP2 in operation, the Russian gas share in the EU would not exceed 40%, says the Consortium, not 60% as claimed by the critics.

It is essential to point out, that according to EU regulations, neither the Commission nor the Parliament or the Council have any legal tools to interfere in the construction of another gas pipeline through the Baltic Sea. It is up the authorities of the member states whose territory, on land or on sea (territorial waters or exclusive economic zones), the pipeline passes to decide whether the project meets the national, international and EU criteria. The EU member states involved are Finland, Sweden, Denmark and Germany.

Some Members of the EU Parliament are trying to get the NSP2 case acknowledged by Parliament with the help of a Written Declaration. The rules for a Written Declaration say “if, at the end of a three month period from its entry into the register (7.3.2016), the declaration is signed by a majority of the Members of the European Parliament, it is published in the minutes and forwarded to the EU institutions named in the text, together with the names of the signatories”. Among the signatories is the Swedish conservative Member of Parliament, Gunnar Hökmark. He explains to EER his reasons why he is against NSP2. “One of the main aspects of the Energy Union is diversification and to decrease dependence vis-à-vis major gas suppliers, notably Russia. The expansion of Nord Stream stands contrary to that goal, as it would only strengthen Russia’s already tight grip on the European energy market. Accordingly, it threatens security of supply, particularly in Central- and Eastern Europe, of which we have seen too many examples in the past, and would dramatically impact on the geopolitical stability of the European continent. Also, allowing Russia to completely bypass Ukraine as transit country, it would effectively undermine prosperity and threaten the security and sovereignty of Ukraine.

"The EU must instead focus on completing the internal market for energy, boosting transmission capacities across the Union and develop solidarity mechanisms to guarantee a security of supply, not to mention taking step towards phasing out fossil fuels.”

Whether the signatories will get the needed majority is not certain.

The in these months often mentioned Energy Union is a list of EU goals, a sort of list of desiderata, which the different EU institutions will try to transfer into EU rules.

Another argument frequently used by the opponents of NSP2 is the Third Energy Package (TEP). However, whether it is applicable to NSP2 is very much disputed, even internally in the EU Commission. In a document, leaked by the European Commission’s Directorate General for Energy (DG ENER) to the news agency Bloomberg Business, it let it be known that “it could be concluded that, assuming EU energy law applies to the part of Nord Stream 2 under EU territorial jurisdiction, the applicable requirements on ownership unbundling, tariff regulation and third-party access would not be met without changes to the project.” The Legal Service of the Commission takes a totally opposite view, namely that “EU Energy law (and the Gas Directive in particular) is not applicable to any part of the Nord Stream II project”. DG ENER comes to the conclusion that “in practice that would mean that Russian law could regulate the entire regime of the Nord Stream II project”. Asked about the jurisdiction under which NSP2 will be operated, Ulrich Lissek says, “in principle, the jurisdiction of a country is limited to its own territory. Russia cannot unilaterally extend its regulation over Nord Stream 2 beyond its own territory.”

The crucial point in the Third Energy Package (TEP) is that it is only dealing with the internal market and not with gas imports into the internal market. Those opponents who would like to use TEP in order to stop NSP2, are confronted by Ulrich Lissek with the argument that, “we are only asking for equal treatment. TEP has not been used regarding the existing Nord Stream pipeline and not for any of other pipelines crossing the Mediterranean from North Africa to Europe”.

Nine Presidents or Head of Governments of the Czech Republic, Hungary, Poland, Slovak Republic Romania, Estonia, Latvia, Lithuania and Croatia chose another way to try to get rid of NSP2. They sent a letter to Jean-Claude Juncker, President of the European Commission, stressing the “most important feature of the Energy Union for us is to enhance energy security by diversifying sources, suppliers and routes”. For them Nord Stream 2 “can pose a certain risk for energy security in the region of Central and Eastern Europe”.

The special interest of the US

In this dispute about the legality and political criteria of NSP2, one has to take a special look at the US. Already when NSP1 was discussed, the US surprised with its – what many Europeans interpreted as – interference in European business. Now again. Richard Morningstar, a former US Ambassador to the EU and Azerbaijan, claims that NSP2 “will wreck the EU’s Energy Union strategy and kill off its plans to boost Liquefied Natural Gas (LNG) in the bloc”. The founding director of the Atlantic Council’s Global Energy Centre describes Nord Stream 2 as “a really bad idea”. One should have in mind that the US is looking for a strong increase of its LNG export to the EU. Of course, NSP2 would be a strong competitor. The new supply route through the Baltic Sea could replace the capacity of 600 to 700 NLG tankers. Furthermore, under normal circumstances, pipe line gas from Russia is cheaper than LNG gas from the US, but as Ulrich Lissek pointed out “LNG tankers can be redirected, there is no chance to redirect a pipeline.”

However, Mr Morningstar touched one for all EU members sensitive nerve: Russia’s role in the Crimea and the situation of the Ukraine. “Rewarding Russia with the pipeline after the annexation of the Crimea sends the wrong political message”, he said. After all, the Nord Stream consortium has to surmount one massive hurdle, and it is called Ukraine. On the one hand, the hard-suffering country can rely on the support of the EU, on the other hand, one cannot ignore the fact that the pipeline, crossing the Ukraine on its way to the west and the south, is in a very bad shape and is in need of billions in investments. However, up till now no one is prepared to provide this sort of funds. Another fact of course cannot be ignored: The Ukraine has, up to now, been unable to get the wide-spread corruption under control. Germany’s Vice-Chancellor Sigmar Gabriel has demanded that NSP2 must not have any negative impact on the Ukrainian transit route which fills the state coffers with about € 2 billion per year. But this sort of protection of the transit route is not enough to solve the problem.

Furthermore, there is another problem looming for the consortium. Poland’s regulatory authority, the Office of Competition and Consumer Protection, has opened an investigation into whether the roles Nord Stream 2 shareholders are playing in the project and in Poland are in accordance with Polish rules. The new government has dismissed its Director General and is looking for a successor. Until this issue is solved, NSP2’s board can not officially be installed.

Finally, the question raised recently in Brussels among veterans, which one of the two NSP campaigns is the hottest and most controversial one, is still not answered. As one veteran put it, “we have not seen the end of it”.

Image: Nord Stream: Arrival of the Inline Inspection Tool in Lubmin. Source: Nord Stream AG.


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