By opening up an additional route for cheap Russian gas to Germany, the Nord Stream 2 pipeline project may look like a good deal for Europe. However, its advantages are primarily short term, writes Agata Loskot-Strachota of the Centre for Eastern Studies (OSW) in Poland. In the longer term the pipeline increases the possibilities for Russia’s excessive influence on the European gas market, undermines the policy goals of the Energy Union, and hinders the realisation of a cohesive EU foreign policy towards Russia and Ukraine.
Nord Stream 2, the gas pipeline joint venture through the Baltic Sea that Gazprom has entered into with some of the largest European energy companies (Eon, BASF/Wintershall, Engie, OMV, Shell), is leading to renewed controversy within the EU. Germany’s vice-chancellor Sigmar Gabriel in a recent visit to Russian president Putin declared that Nord Stream 2 is “in our interest; but it is not just in Germany’s interests, it is a very interesting project even beyond Germany’s borders”, adding that he hoped the project’s legal framework will remain under the competence of the German authorities. If it will, “then opportunities for external meddling will be limited”, he said.
By contrast, the new Polish government has called upon the EU to take action to ban the pipeline altogether. In its progress report on the Energy Union released on 18 November, the European Commission said “these pipelines [Nord Stream 2 consists of two pipelines] will have to comply fully with EU law. The Commission will assess any such project against the European regulatory framework on its own merits. ”A similar controversy occurred over the first Nord Stream project, which became operational in 2012.
The case of Nord Stream 2 clearly reflects some of the most important dilemmas associated with the EU’s energy policy and future of the Energy Union. Its proponents present the project as a strictly commercial venture – beneficial for the European gas market and increasing the security of deliveries from the largest and cheapest supplier. They argue there is no reason to “politicise” the project. Its opponents on the other hand say this venture contradicts the goals of the EU’s energy policy, as defined for example in the Energy Union document presented by the European Commission in February and will in the long term lead to increased dominance of Russia over the EU gas market.
The new old Nord Stream
Nord Stream 2 differs very little from the original. Just as Nord Stream 1, it is to consist of two parallel lines with a joint capacity of 55 bcm, and will follow the same route for over 90% of its length. The gas will flow directly to the German market, and from there it will be further distributed in the EU. The members of the consortium are also largely the same – Gazprom holds 50% of the shares, while the rest belongs to companies from North-Western Europe. This time, in addition to Eon, BASF and ENGIE, who are all part of Nord Stream I, Shell and Austrian OMV will also participate in it. The North European Pipeline AG company, just as Nord Stream AG, is registered in the Swiss city of Zug. The European partners, similarly as before, can receive shares in the Russian gas fields that form the project’s resource base through asset swaps. BASF (Wintershall) has already finalised such an agreement with Gazprom, while OMV is still negotiating the details.
The estimated cost of Nord Stream 2 is somewhat higher than in the case of Nord Stream 1 (€9.9 billion versus €7.4 billion), despite the fact that it will be easier to implement technically – it is always hardest to construct the first pipeline – and legally – the necessary procedures and actions (for example obtaining the Environmental Impact Assessment) were already developed during the realisation of Nord Stream 1.
Nord Stream 2 is likely to increase the importance of the German and Austrian hubs in the European market and could even lead to a merger of the German and Dutch hubs
However, since the realisation of Nord Stream 1, much has changed on the European and global gas markets. The US shale revolution and the global LNG revolution have led to greatly increased gas supplies from a wide variety of sources, i.e. to greater competition, resulting in lower prices. The ongoing liberalisation and integration of EU gas markets has facilitated this process, leading to more choice for European consumers. At the same time, demand for gas has gone down in the EU, inter alia as a result of competition from renewables and coal.
These market developments have had a negative impact on the results of Gazprom, which has seen its exports to Europe decrease and prices go down. According to current Russian estimates, in 2016 the average price of Russian gas for European consumers will be some $200 per thousand cubic metres, the lowest in 11 years. Last year, Gazprom’s sales on the EU’s gas market dropped by 10%.
Although Gazprom has responded to these challenges in part by trying to diversify its customer base, particularly by pursuing megadeals with China, the company seems to recognize that Europe will remain its most important export market for a long time to come. In consequence it seems it has decided to adapt its strategy in the EU, and currently it looks like it might be trying switching from a defence of its prices to defence of its market share in the EU. This adaptation includes an increased openness towards changing market and regulatory conditions in Europe and a willingness to exploiting the possibilities created by the liberalised European gas market. Amongst other actions, the Russian company currently:
- appears to seek a settlement agreement with the European Commission in its antitrust case
- seems to be ready to try out new methods of gas trade with its European customers, selling gas through self-organised auctions, increasing the role of spot prices, and increasing its presence in the ‘liquid’ segment of the EU gas market, entering gas-to-gas competition more frequently (Gazprom has promised its Nord Stream 2 consortium partners to increase sales at spot prices and announced its intention of auctioning gas for supply to the Baltic states upon expiry of their contracts)
- is strengthening its partnerships with key European gas companies (Shell, Eon, Engie, OMV, Wintershall) despite the ongoing sanction regime and tense political relations between the EU and Russia
- is increasing its flexibility of operation on the European market, for example by increasing its access to EU storage, acquiring shares in internal EU infrastructure (see the recent asset swap with BASF, which resulted among other things in Gazprom acquiring control over the Rehden and Jemgum storage facilities in Germany and shares in Heidach in Austria, and the forthcoming asset swap with OMV) as well as building additional gas pipelines to Europe, such as the proposed Turkish Stream and of course Nord Stream 2
Nord Stream 2 and the EU gas market
Construction of Nord Stream 2 would double the capacity of the biggest direct Russian export route to its main destination, Germany, and also via the German network to the markets of neighbouring countries and the entire EU. This will substantially increase the importance of the Baltic route, whose annual capacity of 110 bcm will be only a little lower than the current capacity of the Ukrainian route (142 bcm). The new capacity will enable the Russian side to relatively quickly increase its export volumes to the EU, in the case of increasing demand or import needs, for example if domestic gas production in the EU further falls, e.g. if more production caps are enacted in the Netherlands. At the same time it would clearly constitute a surplus capacity as the existing capacity is not fully utilised. In 2014 the available capacity for Russian gas exports to Europe and Turkey was 307 bcm while actual Russian exports amounted to less than 147 bcm.
Assuming that actual growth of Russian gas exports to the EU in the next several years remains limited, construction of Nord Stream 2 will increase independence of these exports from transit via third countries – first of all Ukraine but also Poland. Simultaneously, and possibly even to a greater extent, it would increase the options for the Russian side of choosing the optimal routes for gas supply to delivery points agreed upon with its EU consumers. Along with other Gazprom assets in the EU (e.g. shares in German Gascade, storage facilities in Germany and Latvia), Nord Stream 2 would thus provide the Russians with increased flexibility in choosing routes and final markets for its gas.
In the context of further liberalisation of both the EU market and Russian gas trade, Nord Stream 2 would thus increase the possibilities of Gazprom to supply gas to chosen hubs – NetConnect Germany (NCG) and Gaspool (GPL) in Germany and TTF in the Netherlands – at competitive prices. This will enable Gazprom to increase its share on the hubs and its ability to influence prices. The option to supply up to 110 bcm of gas to the German market, while retaining the option of supplying this market via other routes (Yamal-Europe or Ukraine, Slovakia and Czech Republic) will strengthen Gazprom’s position and leverage on the North West European market.
Nord Stream 2 would allow Gazprom to utilise the regional infrastructure, qite often constructed with support from EU’s instruments as Connecting Europe Facility, or its needs without violating EU competition regulations
At the same time, the declared intention to transmit substantial volumes of gas from Nord Stream 2 to the Baumgarten-Central European Gas Hub (CEGH) combined with the possibility of obtaining substantial third-party access exemptions for Nord Stream 2’s onshore German/European legs (as happened in the case of NEL & OPAL) would allow Gazprom to at least maintain Russian share in the Austrian CEGH and Central European market. This increased share on key European hubs supported by relatively low gas production costs in Russia, will allow Gazprom to compete more effectively with supplies from alternative sources, such as LNG and new pipeline gas supplies. It could even disable or affect some of the planned alternative projects, for example the planned LNG terminal in Wilhemshaven or the Eastring pipeline project. And it could potentially influence the share of Norwegian gas in this part of Europe.
Thus, construction of Nord Stream 2 could have the following effects on the EU’s market: (i) decrease the gas price in the short and medium term, (ii) increase the share of Russian gas in North West Europe (iii) increase possibilities for the largest gas supplier in the EU (and globally) to influence/manipulate prices (iv) hinder diversification of sources of supply which in the longer term could enable Russia to increase its prices again.
Nord Stream 2 and Germany
Construction of Nord Stream 2 could result in an increased share of Russian gas in the German market. Although German gas consumption is currently going down, the ongoing energy transformation (withdrawal from nuclear energy, but also from coal) could lead to gas making a comeback as transition fuel. At the same time, the decline in the EU’s domestic gas production (including in Germany and the Netherlands) could lead to increased demand for gas imports in Germany.
Nord Stream 2 would also increase the importance of the German gas market in the EU. There could be more gas trade on the German exchanges, more transit via Germany to other parts of the EU, including the Austrian CEGH hub, and further development of onshore gas infrastructure (storage facilities, pipelines). Nord Stream 2 is also likely to increase the importance of the German and Austrian hubs in the European market and could even lead to a merger of the German and Dutch hubs. But increased imports of Russian gas in combination with increased investment from Gazprom in German gas infrastructure would also translate into bigger German dependence on Russian gas.
Changes in the Central European gas market
The situation on the Central European gas market has changed significantly since 2014 and the outbreak of the crisis in Ukraine. In addition to the ongoing process of liberalisation and gradual integration of the region, the following factors were of influence:
- a further decrease of Russian gas transit via Ukraine, hence also lower transit of gas through Slovakia to the EU’s West and South, combined with increased transit of gas through Nord Stream
- an abrupt decrease of the amount of Russian gas imported by Ukraine, which led to
- growth in reverse gas flow deliveries from the EU to Ukraine;
- a temporary decrease of Russian gas supply to a number of consumers, including Central European ones, from September 2014 to March 2015, when shortages of deliveries from the East were compensated by imports from Western Europe
Thus, we have seen increased West-East gas flows and changes in the role played by some Central European transit countries (increased role of Czech Republic, decreased role of Slovakia) and of various infrastructural links. Germany’s role has also greatly increased in importance, including for Ukraine. As a result, we have seen accelerated development of regional integration. Gas flows and trade have become more fluid and multidirectional, the number of short-term transactions has increased, just as the role of spot prices. The basis for these developments was created by the ongoing integration and liberalisation of the Central and East European gas markets, but the direction and pace was driven by external factors, the most important of them being Gazprom’s strategy towards the EU and Ukraine.
Construction of Nord Stream 2 would strengthen these tendencies, elevating Germany’s significance as an important gas transit and trade hub for Central European and Ukrainian markets, and altering the role of Central and Eastern Europe within the EU gas market. It could result in increased utilisation of the existing (or under construction) cross-border infrastructure between Central Europe and Germany for the transit of gas from Nord Stream 1&2, or even to the construction of such infrastructure for this very purpose (which could already be observed in 2014 with the increase of cross-border capacities at the Lanzhot border point on the Czech-Slovak border).
It cannot be ruled out that some of the regional interconnectors currently being built, for example within the North-South Gas Corridor, would be utilised for the transfer of Russian gas from Nord Stream 1 and 2 to the East and South of Europe. This in turn would limit the capacities available for gas from non-Russian sources. Simultaneously, the possibility for Russia to divert gas from its existing export routes to Nord Stream 2 would increase the uncertainty regarding the utilisation (and hence profitability) of the existing transit infrastructure in Slovakia or Poland. This could hinder network development planning and indirectly increase the dependence of regional gas policy and strategic infrastructural decisions on external factors (the strategy of Gazprom and Western companies, German gas policy, Russian policy, etc.).
Additionally, the availability of large quantities of Russian, potentially cheaper, gas from Western direction could limit the feasibility of gas imports from alternative sources through the existing infrastructure or the one currently being built in the region (for example the LNG terminals in Klaipeda and Świnoujście) and hamper construction of new infrastructure aimed at diversifying the sources of gas for the region. This would make it easier for Gazprom to retain or increase its gas sales in the region. Nord Stream 2 would also allow Gazprom to utilise the regional infrastructure (quite often constructed with support from EU’s instruments as Connecting Europe Facility) for its needs without violating EU competition regulations. Therefore Nord Stream 2 would create a chance for Gazprom to achieve at least some of its key goals in the region, even if had to change its practices as a result of the European Commission’s antitrust probe.
This limits the options the EU has in its energy and foreign policy towards Russia. Stronger economic ties make it harder to take difficult political decisions
Lower availability of non-Russian gas to Central and Eastern Europe would be a challenge both for the prospects to create competitive gas markets in the region, the fundamental paradigm of the current gas supply security policy of most of the region’s states which is diversification of supply sources, and to achieve the goals of EU energy policy, including the regional goals proposed within the Energy Union framework.
The construction of Nord Stream 2 would thus present a chance to lower Russian gas prices in Central and Eastern Europe, leading to greater convergence with prices in Germany and Austria’s gas hubs. At the same time Nord Stream 2 would influence the shape of gas markets in the region, including the direction of integration of regional markets with each other and the EU, and limit the possibilities to realise current energy security policy in the region, which are largely based on diversification of sources.
Nord Stream and the Energy Union
The consequences of Nord Stream 2 for the EU’s gas policy towards Ukraine
Since the outbreak of crisis in Ukraine one of the main goals of Russia has been to become able to fully bypass the Ukrainian transit system. The Turkish Stream gas pipeline project (which succeeded the South Stream project) has been aimed at this, and it is also one of the goals behind Nord Stream 2. The planned capacity of Nord Stream 2 (55 bcm) would allow for an almost complete redirection of gas flowing currently to Europe through Ukraine (59.2 bcm in 2014).
The challenges may lie in EU regulations (Third Party Access obligation), which presently limit the utilisation of the land pipelines by a single supplier (as in the case of the OPAL pipeline, which was exempted from the TPA rule for 50% of its capacity, though Gazprom has been applying for 100% exemption ever since). However, Gazprom may find ways to overcome these limitations, for example through the increased use of auctions or hubs, or for example through capacity bookings by its European partners. Therefore, the possibility that Gazprom may be able to redirect gas away from Ukraine seems real. This would significantly decrease Ukraine’s revenues and undermine the economics of investments in Ukrainian infrastructure that are badly needed for proper functioning of the system.
The diminishing significance of Ukraine in the system of Russian gas supplies to Europe may lead to decreased interest from the EU (including European companies) in cooperating with or investing in Ukraine. Ukraine would still be an important recipient of gas, but would not be significant anymore as a transit country. Its gas infrastructure would lose its meaning for the European side. As a result, there would be much less chance of securing the external financing for the modernisation of Ukrainian gas pipelines. There would also be much less European interest in the integration of Ukraine’s gas sector with the EU one, especially if the current gas market reforms are not going to be substantially advanced and effectively implemented.
Such a scenario could result in Ukraine’s increased susceptibility to give away the control over its gas infrastructure to Russia. This would substantially lower the chances of realisation of the EU’s currently defined gas-related goals in Ukraine (strategic partnership, retaining the transit via Ukraine, integration) as laid down for example in the Energy Union package. It would undermine the effectiveness of the actions undertaken so far in Ukraine within the bilateral cooperation framework or under auspices of the Energy Community (undermining also the Energy Community itself), as well as the credibility of EU gas policy in other neighbourhood countries. The potential control of the Russian side over the gas infrastructure in Ukraine would enhance Gazprom’s toolkit and flexibility of actions on the EU gas market, especially in Central Europe.
Consequences for EU-Russia gas relations
The crisis in Ukraine had a negative effect on political relations between the EU and Russia. Western sanctions have hindered economic cooperation, the negotiations on the key issues for the bilateral gas relations were frozen. At the same time the EU renewed and intensified actions aimed at diversifying gas supplies and lowering the dependence on Russian supplies.
The agreements on Nord Stream 2 contrast with both the letter and the spirit of EU policy towards Russia in the last two years. They show the interest of important European energy companies in normalisation, or even enhancement, of gas cooperation with Russia. Construction of a new, large gas pipeline of strategic significance for the EU gas market would not be undertaken without the perspective of a stronger long-term partnership of shared interests and risks.
This limits the options the EU has in its energy and foreign policy towards Russia. Stronger economic ties make it harder to take difficult political decisions (which, for example, could be seen in the discussions about the EU’s economic sanctions). The construction of Nord Stream 2 would in particular increase Germany’s and Austria’s interest to return to business as usual with Russia, without taking into account the situation in Ukraine.
… and the Energy Union
To sum up, the Nord Stream 2 agreement – signed without consultation with partners in the EU (neighbouring states, other companies, EU institutions) – undermines several goals of EU energy policy set over the last year and a half. It:
– hinders the diversification of gas supply sources
– undermines the proposed increased cooperation among EU Member States
– hinders realisation of goals of EU policy in Central Eastern and South Eastern Europe aimed at ensuring that each country has at least three independent sources of gas supply
– hinders the development of cohesive EU policy on Russia, independent from the particular interests of individual states and companies
– hinders realisation of EU energy policy goals towards Ukraine
Nord Stream 2 also shows the limitations of the European Commission’s role in the EU’s energy policy. It is the interests of some big European companies (most probably supported by particular states) and Gazprom which in this case shape the EU gas market and create the framework for EU gas relations with Russia. Regardless of how strong Gazprom’s position could become, the role of EU institutions remains limited – as was emphasised several times by for example Commissioner of Energy Canete – to scrupulous oversight that the existing EU laws are respected. It remains an open question what are the primary EU goals in regard to the EU gas market, what role EU institutions should have and what kind of tools are needed to accomplish this goal.
Agata Loskot-Strachota is Energy Policy Expert at the Centre for Eastern Studies (OSW) in Warsaw. The opinions expressed in this article are the author’s alone. For her previous articles on Energy Post, see here.
 Shares in Nord Stream AG: Gazprom 51%, E.on 15.5%, Wintershall (BASF) 15.5%, Gasunie 9%,GdF (ENGIE) 9%; in the North European Gas Pipeline AG: Gazprom 50%, E.on, BASF, OMV, ENGIE and Shell 10% each . See: www.nord-stream.com, http://www.gazprom.com/press/news/2015/november/article250972/
 Includes Ukraine’s transit capacity in European and Turkey’s direction, Nord Stream, Yamal-Europe, Blue Stream & connection to Finland capacity.
 See http://www.gazpromexport.ru/en/presscenter/publications/#brochure
 for example by decreasing the role of the long-term gas supply and/or transit contracts, or by resigning from including in these contracts concrete delivery points
 Por http://www.icis.com/resources/news/2014/09/23/9823215/czech-to-slovakia-natural-gas-flows-increase-after-lanzhot-capacity-expansion/ (znaleść późniejsze)
 See: http://en.gaz-system.pl/our-investments/integration-with-european-gas-tramsmission-system/north-south-gas-corridor/, https://ec.europa.eu/energy/en/topics/infrastructure/north-south-east
 See p.ex. A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy, February 2015, European Commission p.4 http://eur-lex.europa.eu/resource.html?uri=cellar:1bd46c90-bdd4-11e4-bbe1-01aa75ed71a1.0001.03/DOC_1&format=PDF
 See: EC Stress Test Report Results, October 2014 https://ec.europa.eu/energy/en/news/stress-tests-cooperation-key-coping-potential-gas-disruption
 See p.ex. MoU on Joint Approach to address the natural gas diversification and security of supply challenges as part of CESEC initiative, July 2015 https://ec.europa.eu/energy/sites/ener/files/documents/CESEC%20MoU_signatured.pdf
 See p.ex. A Framework Strategy for a Resilient Energy Union…, p.21, point 15
 As stated p.ex. in State of Energy Union 2015, p.10 http://ec.europa.eu/priorities/energy-union/state-energy-union/docs/communication-state-energy-union_en.pdf
One of really good, valuable and excelent article on this site indeed. Very good. I appreciate it. But its a little too long. Thats the only problem.
Indeed, the article is an example, in a sense.
Well, the point is – who will put money to revive Ukrainian transit?
While war in Turkey/Iraq/Syria is tiding, and LNG prices looks weaker for a long term…
Karel Beckman says
On 27 November, Reuters reported that ten EU nations have written a letter stating their opposition to Nord Stream-2: Bulgaria, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia: http://www.reuters.com/article/2015/11/27/us-ukraine-crisis-nordstream-idUSKBN0TG0JX20151127?feedType=RSS&feedName=worldNews#Qbwu3jBROgtAgyBC.97