Nord Stream 2 is a bad deal both for Germany and its Eastern European partners, writes Georg Zachmann, Senior Fellow at Brussels-based think tank Bruegel. According to Zachmann, the proposed pipeline from Russia to Germany would “work against efforts to diversify gas supplies”. It may also lead to Eastern European countries having to pay higher prices for gas than Germany and would give Russia a tool to discriminate between countries. Moreover, German support for Nord Stream 2 would risk breaking the “fragile European consensus” with regard to Russia’s violations in Ukraine.
At the end of last year, Gazprom reached a deal with five Western European companies (BASF, E.ON, ENGIE, OMV and Shell). They agreed to add two additional lines to the Nord Stream gas pipeline across the Baltic Sea, increasing the capacity of the pipeline from 55 billion cubic metres per year to 110 billion from 2019. The project has provoked controversy, as it sharpens divisions among EU members about energy and foreign policy.
No technical need for another pipeline
In terms of energy policy, the EU has two goals. It is trying to make itself more independent from individual suppliers, and also aims to do without fossil fuels in the medium term. In recent years the market position of the EU has improved markedly. Thanks to low global energy prices and unexpected falls in gas demand – which in 2015 was around 40% lower than expected according to 2005 predictions – European users have been able to push for significantly lower gas import prices. Prices have halved in the past 2 years, to about $170 per thousand mᶟ.
Due to enduring stagnation in demand for gas in Europe, overcapacity in the global gas market, and continuing underuse of European gas import infrastructure, another expensive pipeline from Russia is not needed to supply the EU in the near future. It would work against current efforts to diversify supply, as Gazprom is already the largest supplier in the EU. And in the medium term there is the question of whether -because of climate change commitments – gas demand in the EU will actually fall faster than domestic and Norwegian production. The time frame in which the Nord Stream 2 project could pay for itself is thus relatively short at best.
Most alarmingly, Gazprom would gain another tool to discriminate between countries
Against these concerns are stacked the interests of the Western European companies taking part. They expect Nord Stream 2 to guarantee them a preferential supply of Russian gas, and hope to strengthen their existing business interests in Russia.
With Nord Stream 2, Germany would also become a gas hub for all of continental Europe. It would therefore benefit not only from the business related to Nord Stream 2, but also from lower gas prices than its neighbours. But this would be a zero-sum game– Germany would only profit at the expense of its neighbours, who would find themselves paying more at the end of the transport route through Germany.
Most alarmingly, Gazprom would gain another tool to discriminate between countries. Gazprom could then credibly threaten to cut off gas supplies in Eastern Europe without threatening its markets in Western Europe. In this way Gazprom could achieve higher prices in Central and Eastern Europe, without having to use illegal “destination clauses” (which allow buyers of Gazprom’s gas to only sell it to domestic consumers).
Severe troubles for Ukraine
In terms of foreign policy, the EU supports Ukraine in its efforts to defend its sovereignty and territorial integrity against Russian interference. Nord Stream 2 would undoubtedly make this task more difficult. On the one hand, Ukraine would lose revenues from gas transit of up to 2 billion US dollars a year, equal to about 2% of Ukrainian output. On the other hand, a large scale cutback in gas transit would make it harder to supply Ukraine with gas.
Because of lower Ukrainian demand for gas and a large increase in gas imports from Slovakia, at this moment Ukraine can do without direct gas imports from Russia. As a result, it has sourced no gas from Gazprom since November 2015. This has offered Ukraine significantly increased political leeway, for example regarding much-needed radical reforms of the corrupt gas sector.
If Germany positions itself as a friend of Russia and supports such a large project, without concessions from Russia on foreign policy disputes, it risks breaking the fragile European consensus on Russia
If Nord Stream 2 gets built, Central and Eastern Europe (especially Slovakia and Hungary) might be supplied with Russian gas from this pipeline, bypassing Ukraine altogether. In this situation Moscow could, at worst, press for reduced western gas exports to Ukraine, and could certainly demand higher prices for any gas sent on such an indirect journey. That would increase readiness in Kiev to once again accept ‘mates rates’ for gas supplied directly from Russia, which would be tied to political concessions.
Even within the EU, Gazprom is still a tool of Russian foreign policy. This was shown in autumn 2014, when Gazprom unilaterally cut supplies by up to 50% to countries (Poland, Slovakia, Austria and Hungary) which sold gas on to Ukraine. Strengthening the market position of such an actor therefore has costs for foreign policy.
A blow to EU unity
What is more, Nord Stream 2 threatens one of the few European foreign policy successes of recent years. Despite the economic concerns of many member states, Europe and Germany in particular managed to find an unexpectedly clear united answer to the annexation of Crimea and Russian involvement in eastern Ukraine.
However, the European compromise to implement economic sanctions in response to Russia’s legal violations remains fragile. If Germany positions itself as a friend of Russia and supports such a large project, without concessions from Russia on foreign policy disputes, it risks breaking the fragile European consensus on Russia — which has only been laboriously held together until now. The resulting loss of trust among European partners would hardly be offset by the improved relationship with Russia.
These disadvantages of Nord Stream 2 could largely be cushioned through extra investment in the domestic European gas network, more financial support for Ukraine, and German guarantees on security of gas supply for Central and Eastern Europe. But the cost of this would be paid by German gas consumers and taxpayers. On the other hand, the indirect foreign policy costs are difficult to measure. To sum up, building Nord Stream 2 would be a bad deal for both Germany and its Eastern European partners.
Editor’s Note
Georg Zachmann is Senior Fellow at the Brussels-based think tank Bruegel. He also works as consultant for the Berlin Economics advisory group in Moldova, Georgia and Ukraine.
Bas says
Smart business investment?
You may assume that the investing parties (Shell, etc) researched the risks before investing so much. Parties such as Shell have other, important strategical, interests in the pipeline.
Politically?
Germany becoming the gas hub for Eastern Europe implies that the role of unstable countries such as Ukraine and Belarus is minimized. Remember the blackmail policy those countries used: They threatened to block the gas pipeline through their country. Ukraine even did it…
It implies that Ukraine becomes less important for Russia, so Russia may decrease it’s investment in the Ukraine civil war. Hence it may ease tensions and save many Ukrainian & Russian lives!
This German policy doesn’t risk the fragile EU consensus on Russia. Opposite.
With increasing transport capacities from Germany (the hub) into E-Europe, Gazprom has less power against those countries as those countries have alternative suppliers; western traders who buy from Gazprom and deliver them via the German hub.
Gazprom is not allowed to forbid trade of gas which it delivers to German utilities & traders it’s against the law. Similar as with electricity, gas is free trade in the EU. So such clauses will most probably be declared illegal by the high court in Luxembourg, who will also assign high compensation.
Cutting all supplies through Nordstream 1 and 2 has more serious consequences for Russia & Gazprom, as then a major income falls away. And it won’t have such immediate consequences, as Germany built substantial reserves in various earth cavities (I believe enough for a whole winter).
The author ‘forgets’ that Nordstream 2 will make the EU less dependent on US gas, hence will decrease US export prices…
Indirectly it will will also decrease Gazprom prices.
Frans Rusting says
Georg Zachmann explains very well why this is not a good idea.
Apart from the question if ‘more infrastructure’ is really required when it is clear that, on one hand, there is apparently enough capacity for the provision of the different countries and on the other, that there is at least no reason to expect that the usage of gas will increase.
Hence, for the EU as a whole, investing in more infrastructure would be a waste of capital.
I fully agree with Zachmann when he writes that “Gazprom would gain another tool to discriminate between countries”.
To my mind this can be avoided if a kind of cooperative company would be created which buys gas on behalf of the countries which would participate in such a company. This would not be a EU-institution, because in the present political reality this would never see the light.
It would be a cooperative, owned by the national entities that are responsible for negotiating contracts with the suppliers of gas. These entities would also be jointly responsible for the governance of the company, which would be jointly controlled by the governments.
Al that is required to realise this is a simple Agreement between countries and an office with a small number of staff.
Karel Beckman says
Frans, you write, “for the EU as a whole, investing in more infrastructure would be a waste of capital”, but the EU is not investing in any capital. Gazprom and its five partners are. No tax money is involved.
Your idea of a cooperative buying entity is worse. How exactly would it work – acting for all these different countries and not being an EU institution? We would create a huge monopolistic organisation with all that involves. We have something better called the free market.
You write, following Zachmann, that NS2 would give Gazprom another tool to discriminate between countries, but both you and he seem to miss the point that gas markets have been liberalised in Europe and destination clauses banned. So anyone buying gas that’s transported through NS2 can sell it on to Eastern European countries at any price. Gazprom cannot control that process. That is, if we make sure the EU markets are liberalised, competitive and unbundled.
Frans Rusting says
Karel,
Not a hughe organisation. Just a small cooperative company negotiating gas prices on behalf of its owners. No own infrasructure or whatever.
Not an EU institution (which in today’s political reality is not realistic), but a cooperative company owned and governed by the national institutions that do the negotiations now.
Like in our proposal for an overlay network for electricity: this is a construction that has proven useful for cooperation between countries that have sovereignty-problems with woàrking together.
By the way: Gazprom isn’t the only supplier, and for negotiating good prices an organisation which negotiates on behalf of a number of countries should get a better result than those countries on their own.
Karel Beckman says
Frans, this does not make sense to me at all. On the buying side there is competition too. There are millions of households buying gas, thousands of industries, dozens of countries. You assume that “national institutions” can take the place of all these buyers. Then what? Distribute the gas over all of them? At fixed prices? How much would they buy? Who would decide that? This is called Communism. It’s been tried, it didn’t work. And why just for gas? Why not also for oil? How would that work? Gas is simply one commodity. No one is “dependent” on gas. Everyone needs energy, not gas. The market can take care of this. The bigger problem here seems to me Eastern European countries trying to live off rents (which they get from being in the right place as transit countries) rather than creating value. Or certain privileged parties in those countries.
Frans Rusting says
Karel,
Sorry. Apparently I am using the wrong teminology. I suppose my background in telecoms has to do with that.
Hopefully I get it right now.
I am not talking about the users of gas.
I am talking about institutes like the Dutch Ggasterra who negotiate, in this case on behalf of The Netherlands, with Gazprom and others, about the price of their gas. The question is: who had the better position in these negotiations? Each of the small ( on a world scale) European countries separate, or a cooperative company which acts on behalf of those countries together?
Don’t forget: the world is a lot bigger than the EU, and if we are not careful, the importance of the EU will be shrinking…. And Gazprom has other customers too (China?).
Erik says
Common purchase consortia were common in the past given accepted at the time public interest, today I believe it would give an issue with EU competition law. Ruhrgas (now no longer formally existing) headed few of such consortia, quote from public websources:
“In September 1977 gas from the Norwegian Ekofisk field began to flow through a new subsea pipeline to the German port of Emden in fulfillment of a contract between Phillips Petroleum and a consortium led by Ruhrgas, which included Gasunie of The Netherlands and Gaz de France. Ruhrgas’s share of the gas was 50 percent.
In November 1981 Ruhrgas took the controversial step of signing an agreement with the Soviet gas export agency Soyuzgasexport to help build and finance a huge new gas pipeline from the Soviet Union. For the obvious needs of diversification, Ruhrgas sought and contracted with a number of other countries to supply its needs. Ruhrgas continued to exercise options for increased deliveries from The Netherlands. In 1991 the company signed an agreement with the Dutch company Gasunie for the supply of an additional 100 billion cubic meters up to the year 2013. In addition, Ruhrgas was developing facilities at the German port of Wilhelmshaven for the import of liquefied natural gas (LNG) from Algeria, Nigeria, and other far-flung sources.
In September 1982 Ruhrgas joined a consortium including Thyssen, Gasunie, and Gaz de France to buy natural gas through an 850-mile undersea pipeline from the Norwegian Statfjord field. The line connected with the Ekofisk pipeline that had been delivering gas to the north German port of Emden since 1977. In 1985 this pipeline became operational. The company announced in August 1990 that it intended to make Norway a more important supply source. The same year, Ruhrgas and the other German importers exercised their option under the 1986 Troll Agreement with Norway and seven Norwegian North Sea gas producers to increase their imports from 8.5 billion cubic meters a year to 13.5 billion cubic meters per year beginning in 1993. Ruhrgas would take about 80 percent of this annual increase. Two new undersea pipelines were planned.”