Gazprom has been very active in Europe recently, signing a strategic cooperation agreement with Shell, an agreement to build a second Nord Stream pipeline with Shell, E.on and OMV, and a memorandum with the Greek government about building an extension of its Turkish Stream project. All of these initiatives fit perfectly with Gazprom’s strategy, write Szymon Kardaś and Agata Loskot-Strachota of the Centre for Eastern Studies (OSW) in Warsaw. But for the EU they present a problem: they show a deepening rift between EU policy objectives and the interests of European gas companies.
On 18-19 June, during the annual St. Petersburg International Economic Forum, Gazprom signed a protocol with Shell, Eon and OMV on the construction of a new gas pipeline from Russia via the Baltic Sea to Germany (i.e. another Nord Stream); an Agreement of Strategic Cooperation with Shell; and a memorandum with Greece on the construction on Greek territory of a gas pipeline which is intended to be an extension of the Turkish Stream project.
These deals will help Russia carry out the current objectives of its foreign gas policy: they will put negotiation pressure on Turkey in the absence of any progress on the Turkish Stream project; they make the announcement that gas transit will be suspended through Ukraine more credible; and they will deepen internal EU discussions and divisions regarding new infrastructure projects. They also suggest that, contrary to previous announcements about reducing its presence in Europe, Gazprom has not altered its strategy, and still treats Europe as its key market.
The Russian plans to build new pipelines in Europe testify to the fact that the European market is and will remain a priority for Russia
In the context of the political tensions in EU-Russian relations (including the recently extended EU sanctions), as well as the EU’s policy of diversifying gas supplies, the signing of these memoranda and the discussions being held clearly represent a success for Moscow. The declarations concerning new projects show that European companies are interested in reactivating gas cooperation with Russia. They apparently intend to strengthen their own position on the market, without regard for the wider political context. They may also aim at improving the image of gas on the EU market, which has been challenged by the continued risks related to supplies from Russia. Nevertheless, the agreements are still general and preliminary in nature, and it is not certain that they will come to fruition. Their eventual success may depend largely on political decisions taken in Brussels and the most important EU capital cities.
Content of the agreements
The protocol signed by Gazprom and the European energy companies (Shell, Eon, OMV), envisages the construction of a pipeline from Russia via the Baltic Sea to Germany (two branches with a total capacity of 55 bcm, costing around €9.9 billion), which means the de facto reactivation of the plan to construct the third and fourth branches of the Nord Stream gas pipeline. (The first two 27.5 bcm pipelines that make up Nord Stream cost €8.5 billion to build in total.)
Gazprom also signed a strategic cooperation agreement with Shell, and a memorandum on the construction of a third production line for the Sakhalin-2 LNG terminal. In addition, on 18-19 June, Gazprom held talks with ENGIE (formerly GDF-Suez), EDF, Fluxys and Total on Russian gas supplies to Europe, and with VNG on gas storage.
The Russian-Greek memorandum between Energy Ministries provides grounds for cooperation on the construction of a planned new pipeline on Greece’s territory, which is intended to function as an extension of the 63 bcm Turkish Stream gas pipeline (the proposal to build a pipeline from Russia across the Black Sea to the Turkish-Greek border was announced by Vladimir Putin in December 2014, after Russia abandoned the South Stream project). The pipeline is intended to allow the transit of 47 bcm of gas annually via Greek territory. Its construction, which is planned for the period 2016-19, is to be managed by a Russian-Greek joint venture, and funded by Russia’s Vneshekonombank.
Although the agreements signed are preliminary and very general (non-binding declarations of intent), they are an important instrument of Russia’s energy policy towards the European Union and Turkey.
The Russian plans to build new pipelines in Europe testify to the fact that – contrary to Moscow’s declared reorientation eastwards, its ambitious plans for gas expansion onto the Chinese market and numerous statements from Gazprom’s CEO about limiting his company’s presence on the EU market – the European market is and will remain a priority for Russia.
The announcement of the construction of the third and fourth branches of Nord Stream can be seen as a way of putting pressure on Turkey
These new plans also confirm that Russia’s continuing strategic goal is to diversify its gas transit routes to European customers. The memoranda confirm Russian plans to completely cease gas transit via Ukraine as of January 2020. In this way, Moscow is sending a signal to Brussels and Kyiv that it is serious about excluding Ukraine as a transit country, and intends to go through with the plan.
Russia hopes that this will intensify internal discussion in the EU on the development of the gas infrastructure via which Russian gas could reach EU markets after being diverted from the Ukrainian transit route. This effect has already been partially achieved by the mere announcement of the Turkish Stream project, which has led to a number of proposed extensions being suggested, such as Eastring. This is a project announced by Slovakia to build a pipeline linking it with Bulgaria, Romania and Hungary which could be used also as a leg of Turkish Stream. In addition, there have been reports in the Western press about a possible reactivation of the Nabucco project. This was originally supposed to be an alternative to Russian supplies, but the new Nabucco would operate as a route for importing Russian gas to the EU, from Turkey via Bulgaria, Romania and Hungary to Austria. By creating the impression of a kind of ‘rivalry’ between European projects, Russia can continue its traditional policy of undermining the fragile energy solidarity within the EU.
It is also possible that the reactivation of the project to expand Nord Stream is related to the European Commission’s ongoing antitrust proceedings against Gazprom. In a written statement of objections issued on 22 April, the European Commission accused Gazprom of making gas supplies to Bulgaria and Poland conditional on obtaining unrelated commitments from wholesalers concerning gas transport infrastructure; it is therefore possible that Gazprom will be forced to give up its shares in EuRoPol Gaz, which owns the Polish section of the Yamal-Europe pipeline, after Ukraine and Nord Stream the third route of Russia’s gas exports to EU. This would mean that Gazprom would lose control over an important (33 bcm) transit line through Poland to Germany, which could make it attractive for the Russian company to redirect some of its supplies to the new Nord Stream branches.
The two memoranda signed in St. Petersburg are also relevant to the Turkish Stream project. The announcement of the construction of the third and fourth branches of Nord Stream can be seen as a way of putting pressure on Turkey. Ankara has not yet signed any agreements with Moscow on Turkish Stream, as it is still haggling over the size of the gas discounts which Gazprom promised, and probably over other conditions concerning the project. Gazprom is thus sending the signal that Turkish Stream is not the only important project in Russia’s European gas strategy, and is hoping to influence their Turkish partner’s negotiating position. At the same time, the Russian-Greek memorandum suggests Turkish Stream is continuing, despite increasingly critical reports in the media.
The interests of European companies and the EU’s gas policy
The agreements on cooperation which Gazprom signed in St. Petersburg, on both the global and European levels, involve some of the biggest Western European companies: Shell, Eon and OMV. Interest in expanding Nord Stream has also been expressed by Germany’s Wintershall, and VNG has confirmed the continuation of its cooperation with Gazprom on expanding gas storage facilities in Germany. French and Belgian companies (Engie, Total, Fluxys) have also held talks on gas supplies from Russia. This demonstrates that – regardless of what really happens with the expansion of Nord Stream and the other detailed plans – a large part of the European gas business not only sees a need to normalise gas relations with Russia, which have been difficult for more than a year now, but is also trying to revive and strengthen these ties by supporting new joint strategic projects.
The memoranda signed by the European companies and Gazprom contradict the EU’s policy over the last year on diversifying gas supplies
This readiness to cooperate and draw up concrete plans to construct direct supply routes, in particular, may also be a European-Russian attempt to strengthen the role of gas on the European market. According to data from BP, gas consumption fell by a record 12% last year, to levels not seen since the mid-1990s . Gas consumption in the EU has been declining since 2008, and this negative trend deepened in 2014, for reasons including the exceptionally warm winter, increasing energy efficiency, growing use of renewables and increased competition from coal. The deteriorating public image of gas, in particular the perception of continued risk to the stability of supplies from Russia, may also have been a factor.. This has had a negative impact on the financial results of both European gas companies and Gazprom. They are no doubt aware that they need to take action to stem the tide.
At the same time, each of the EU companies involved has its individual interest in cooperating with Gazprom. Shell may wish to further strengthen its leading position on the gas market and get access to Gazprom reserves (after its $70 billion acquisition this year of BG and the significant strengthening of its position on the global LNG market). The German companies are working to strengthen the role of Germany in the European trade and transit of gas (a role which has increased significantly since the worsening of the Russian-Ukrainian gas conflict in the middle of last year. OMV wants to counterbalance challenges to its position on the Central European gas market and threats to the future of the Central European Gas Hub, such as the collapse of the Nabucco project and the fall in export of Russian gas via Ukraine.
The Greek government is seeking cooperation with Russia as a way to strengthen its role on the regional gas market in South-East Europe (including its negotiating position in its pipeline talks with alternative gas suppliers on the one hand and the EU on the other), and also hopes to gain financially from the gas transit.
So far, there have been no clear official statements from the Dutch, German or Austrian governments on the participation of their countries’ companies in the planned joint strategic investments with Gazprom. However, it is very likely that in the current unfavourable political context (as confirmed by the recent extension of the EU sanctions), these decisions were discussed in Berlin, The Hague, Vienna, and so on.
The memoranda signed by the European companies and Gazprom contradict the EU’s policy over the last year on diversifying gas supplies, increasing energy security in Central and South-East Europe, and gas cooperation with Ukraine – including the provisions made in a series of strategic European Commission documents, such as the document on the Energy Union and the European Strategy for Energy Security (one of whose objectives was to reduce the EU’s dependence on Russian gas). Both Maroš Šefčovič, the European Commission’s Vice-President for the Energy Union, and Miguel Arias Cañete, the energy commissioner, have commented on the plans to expand Nord Stream, limit Ukraine’s transit role and increase gas imports from Russia to the EU with obvious reservations.
The chances for the planned gas pipelines
The preliminary and general nature of the agreements signed, the multiplicity of projects which Russia has promoted recently (Turkish Stream, the third and fourth branches of Nord Stream, the Power of Siberia and Altai pipelines, Baltic-LNG, Vladivostok LNG), and finally the difficult political context for implementing joint Russian-EU projects of strategic importance do not yet allow us to precisely predict the future of the planned pipelines.
The documents signed by major European energy companies in St. Petersburg show that, from their perspective, cooperation with Gazprom and Russia is crucial for the future of both the European gas market and for themselves
It is unlikely that all the currently planned projects will be completed at their planned capacities. It is likely, however, that Gazprom will seek to simultaneously implement a more limited version of the Turkish Stream gas pipeline (up to two lines with a total capacity of 32 bcm) and at least one new branch of Nord Stream, which would allow it to maintain its supply levels to the key European market, and to circumvent the problems connected with the implementation of the so-called Third Energy Package. Gazprom has proposed to test this September an option of selling gas (3bcm) that is to be transported via Nord Stream/OPAL pipeline on the St. Petersburg gas exchange, which it wants to turn into a major trading hub.
At the same time it is still possible that the Russian side, despite its declarations, will not push for the complete cessation of gas transit via Ukraine by 2020, but will rather use the alternative routes it has promoted and implemented as a tool for putting more pressure on Ukraine.
The key to the implementation of these new projects, including in particular the new Nord Stream branches – considering Gazprom’s current financial situation and the problems Russian companies are having with acquiring foreign capital thanks to the international sanctions – would be obtaining binding commitments, especially financial, from the European companies. However, at the present time such commitments may be conditional on political backing. Although they would not be contrary to the sanctions regime, they would violate its spirit.
The presence of representatives from major European energy companies in St. Petersburg and the documents they signed show that, from their perspective, cooperation with Gazprom and Russia is crucial for the future of both the European gas market and the specific companies operating in it. In contrast to the European Commission’s statements and actions, which are aimed at reducing the EU’s dependence on Russian gas, this may indicate a growing conflict of interest within the EU on finding an optimal formula –acceptable both politically and by the European businesses – for gas cooperation with Russia. Such a conflict will make it even harder to implement the European Commission’s already demanding gas policy objectives, and could even lead to their being changed. This will also affect the future shape of the European gas market.
Szymon Kardaś and Agata Łoskot-Strachota are Research Fellow and Senior Fellow respectively at the Centre for Eastern Studies (OSW) in Warsaw. This paper was first published by OSW and is republished here with permission from the authors.