Nord Stream 2: Is Russian gas politically incorrect?

A lobbying campaign against the extension of the Nord Stream 2 gas pipeline, spearheaded by Gazprom together with five European energy majors, has now engulfed the European Parliament. What are the arguments of the opponents and are they business-focused or politically motivated?

(Russia Beyond the Headlines – rbth.ru – VLADIMIR MIKHEEV, SPECIAL TO RBTH – March 4, 2016)

Twelve members of the European Parliament from five political groups have put together a written declaration calling on the European Commission and the European Council to “take steps to prevent the capacity of the Nord Stream pipeline from being doubled.”

Should the majority of MEPs sign the document (it is open for signature for the next three months), which requires at least 376 supporters, declaration will be sent to the European Commission. The document is in no way legally binding, yet it serves as a vehicle to shape the agenda of decision-making bodies.

It comes in the wake of a letter sent last November to the European Commission by seven EU Energy Ministers representing Poland, Romania, Hungary, Slovakia, Lithuania, Latvia and Estonia. This group shared deep doubts and concerns over the commercial rationale and legal wholesomeness of Nord Stream 2, which is planned to transport gas from Russia to Germany via the Baltic Sea bed, removing the need for shipping it through transit countries in Eastern Europe.

Originally, the letter was also supposed to be signed by energy chiefs of the Czech Republic, Bulgaria and Greece but they defected at the last minute.

Nord Stream 2: a short profile

What is the fuss all about? The MEP-lobbyists are targeting a large-scale pan-European pipeline project to be implemented by Nord Stream 2 AG, registered in Zug (Switzerland), which serves as an umbrella business entity for a consortium of European companies. The project was originally promoted by the Russian government.

The consortium brings together Russia’s Gazprom, two German energy majors, E.ON and BASF/Wintershall, Austrian OMV, France’s ENGIE (former GDF SUEZ), and Royal Dutch Shell.

The endeavor amounts to constructing the third and fourth branches in addition to the existing two strings of Nord Stream 1, eventually doubling the combined throughput capacity up to 110 bcm. Nord Stream 2 is planned to come on stream by the end of 2019.

Accusations filed by G12

So what are the main arguments against Nord Stream 2 by the G12 MEPs? The extension of Nord Stream 2, so they claim, undermines the status of Ukraine as a transit country, threatens the Energy Union and energy security of Central and Southeast Europe, will have dramatic geopolitical consequences, and enhances Russia’s capacity to leverage energy dependence for political influence.

The list includes a more or less routine apprehension of the “likely” adverse effects of the construction and functioning of the two additional pipes for the marine environment of the Baltic Sea, and also questions compatibility with the internal EU energy market.

What is at the root of the dissent? Slovak publication Hospodárske Noviny articulates the main objection: Nord Stream 2 will deprive Slovakia and Ukraine of the “benefits of being transit countries.”

According to Slovak Economy Minister Vazil Hudák, Slovakia would lose 400 million euros every year if gas transit through Ukraine comes to a halt.

In essence, the fundamental criticism by the current leaders of Poland, Slovakia and Ukraine boils down to the apprehension that Nord Stream 2 will dry up the flow of transit fees they receive for pumping Russian gas westward.

Poland and Slovakia have given assurances of solidarity with Ukraine, which is deemed to stand to lose the most, as its previously assured revenues will dwindle.

Counter-arguments

Commenting for RBTH on the accusation by MEPs, Sergei Komlev, head of contract structuring and price formation at Gazprom Export, claimed that the extension of Nord Stream is based on pure commercial viability and substantiated by an economic rationale.

“First and foremost, the consensus forecasts by industry experts suggest that the EU’s gas demand will grow to about 500 bcm by 2035. Taken against the trend, which is a gradual and irreversible decline in Europe’s indigenous gas production, this translates into an additional demand for imported energy. Europe will need approximately more than 140 bcm of additional gas.”

– It might not be necessarily Russian pipeline gas. The extras could come in the form of U.S. LNG already shipped across the Atlantic.

“Partially true, but it does not preclude that a large share of supplies to Europe will still be pipeline gas from Russia. We have an indisputable competitive edge, not only the price tag. Nord Stream 2 will add a direct connection between new northern Russian gas fields and the hubs supplying markets in Southeast, Central, and Northwest Europe. In a wider context, Nord Steam 2 should be regarded as a long-term investment to meet long-term demand.”

The second counter-argument deals with the possible “losers.” Despite the strong-worded warnings by Gazprom that it would cease all shipment of gas through Ukraine after the current contract expires in 2019, certain volumes would be probably still pumped westward along this traditional route.

Gazprom CEO Alexei Miller has been quoted in the media as saying that negotiations with Kiev on a new agreement for the period after 2019 have not been ruled out. If the contract is extended, even stipulating the delivery of smaller volumes, Slovakia will not be cut off from the guaranteed transit proceeds.

Compatibility with EU energy regulations

Russian gas shipped through the Nord Stream pipeline network would end up in Germany before being transported to the Austrian town of Baumgarten, from where it could be delivered via interconnectors throughout Eastern and Southern Europe.

It is a feasible solution. After Ukraine effectively cut off supplies of Russian gas to Europe in 2009 following a contractual dispute between Gazprom and Ukrainian gas company Naftogaz, the EU passed a regulation that requires member states to build more physical West to East reverse flow capacity to improve the security of supply.

Nord Stream’s four-string network fits well into the EU strategy of reverse flows. Moreover, it really does not matter where exactly Russian gas reaches EU jurisdiction and which entry/exit points are engaged for this purpose.

In the last few years Poland, a vociferous critic of its “dependence” on Gazprom, has been sourcing about 20 percent of gas from its western neighbour – Polish President Andrzej Duda recently cracked a joke that “Germany is Poland’s big brother”.

In reality, it is not Big Brother’s gas but Russian gas, since the physical molecules were supplied to Poland through the “virtual reverse flow” at the German-Polish border at Mallnow.

Geology rather than geopolitics

The divisions within the EU member states in respect to Russia, be it either the automatic prolongation of the sanctions’ war or Nord Stream 2, seem to be deepening, and could lead to an institutionalized schism pitting the Old European nations, which designed and accelerated the construction of the Union, against what one American politician termed “New Europe,” compiled predominantly of Poland and the three Baltic States.

Some industry experts claim that Nord Stream 2 will effectively enhance Europe’s energy security. Friedbert Pflüger, former German state secretary and current director of the European Centre for Energy and Resource Security, claimed in an article in writing in Handelsblatt that it was in the interests of the EU to have more rather than less energy infrastructure, and not to alienate traditional suppliers, given that no one had suggested a verifiable alternative.

Meanwhile, in a metaphorical rebuff to critics, Mario Mehren, CEO of German energy company Wintershall, involved in the Nord Stream 2 project, said: “Of course we currently have icy relations with Russia, but the gas business is a question of geology rather than geopolitics.”

Whatever the hate rhetoric implies, it is a hard fact of life: Gazprom’s gas pumped westward through an elaborate network of thousand kilometres long pipelines (it takes a whole week for Siberian blue hydrocarbons to reach the end consumers in Europe) provides energy fodder for industrial purposes, burns in power generation plants to light up electric valves, provide heating and warm homes, and feeds gas ovens to cook meals.

Russian gas can be smeared by certain MEPs as “politically incorrect.” Yet no one can dispute the track record: It has been constantly consumed by European businesses and households for the last 40 years without sweat or fear.

Article also appeared at rbth.com/international/2016/03/04/nord-stream-2-is-russian-gas-politically-incorrect_573273