WHY THIS IS NOT THE END OF NORDSTREAM 2

Nord Stream 2 is a Russian-German gas pipeline project that connects both countries via the Baltic Sea. The pipeline construction is about to be finished, the gas supply contracts are signed, the German interconnection pipelines are built and operational, and the investment costs of about $11.5 billion are sunken. What is missing is about 160 kilometers of pipeline laid in the Baltic Sea. Only foreign sanctions on pipe-laying vessels prevent the project’s realization.             

The United States, Ukraine, some Central European countries, as well as the EU Commission, have been opponents of Nord Stream 2 . The cancellation of Nord Stream 2, however, is too big of a step. For some good reasons, the Nord Stream 2 consortium has pushed the construction of the pipeline through.  The majority of the German political elite across the political spectrum supports the Nord Stream 2. The vocal opposition against Germany’s support of Nord Stream 2 is foreign and the foreign position against the pipeline has not changed since 2015. The US is the most powerful and most active opponent of Nord Stream 2. In 2019, the US government-imposed sanction on pipe-laying vessels, which has since set the construction on hold.  With Nord Stream 2 prevented, the US government and industry expect to create a Liquefied Natural Gas (LNG) export market in the EU. Poland is critical to Nord Stream 2, as it sees the pipeline diminishing its role as an important gas transit country. Currently, Germany imports most of its gas imports from Russia via the Belarus-Poland transit pipeline. Nord Stream 2 would change Germany’s reliance on the Polish pipeline, which to Warsaw’s belief would increase Poland’s political reliance on Moscow. Other Central European countries share the fear of increasing Russian influence. Ukraine is the strongest European lobbyist against Nord Stream 2. Russia openly admits that the Baltic pipeline project is there to create an alternative to the Russian-Ukrainian gas transit route. Currently, the EU receives most of its imported gas from Russia, via the Ukrainian transit pipeline. Different from Poland, Ukraine seeks to maintain the status quo of the EU’s reliance on Russian gas supplies. The Ukrainian government is concerned to lose about $3 billion annually in gas transit fees if alternative supply routes are established. These transit fees have supported Ukrainian oligarchs for decades and will continue to do so.

Factually, almost all Nord Stream 2 opponents are driven by individual and mostly economic interests. Their lowest common denominator is the cancellation of Nord Stream 2.

The main and least complex argument against Nord Stream 2 is Germany’s and Europe’s increasing over-reliance on Russian gas. But this argument is only substantial in so far that the EU will most likely import more gas from Russia than from anywhere else if Nord Stream 2 is in place. This is an easy solution for a complex question of future gas supplies. It is a fact that the EU already imports more gas from Russia than from anywhere else, even without Nord Stream 2 in place. The reliance on Russian gas is already existing.

Those who call for the cancellation of Nord Stream-2 claim that it will make Europe less dependent on Russia’s gas resources. Unfortunately, it is not true. In 2017-2018, Russian gas supply to the EU was relatively stable, and Russia’s share in Europe’s total gas imports amounted to about 33-38 percent. More recently, however, supply has been decreasing. In the second quarter of 2020 Gazprom’s share fell to 27,8 percent—its minimum level in the past twenty years. The new gas pipeline—whether it’s finished or not—will have nothing to do with alleged Europe’s dependence on Russia’s gas. If anything, cancelling Nord Stream-2 will mean that Ukraine remains a transit country for Russian gas for many years to come. There is also another side to this issue that is never mentioned in the debates about Europe’s dependence on Russian gas. In 2019, the share of Russian gas in European consumption was 31,2 percent, whereas the EU’s share in the Russian exports was 77.5 percent. In terms of gas imports, the launch of Nord Stream-2 does not increase Europe’s dependence on Russian gas.

 The EU’s approach to hedge its reliance on Russian gas supplies has been disregarded within the debate around Nord Stream 2 because it is foreign politically not attractive and its execution is too gentle and bureaucratic. The EU in general pursues three goals to mitigate the risk of reliance on Russian gas. These goals are the creation of a unified and liberal gas market, the undermining of gas as a primary energy source, as well as the creation and diversification of import capacities. This allows the EU to act as a stronger political and economic opposite of Russia. Nord Stream 2 fits in the third of the EU’s goals, the creation of import capacity. The pipeline provides the EU with the advantage to not lose Russia as the main supplier while creating the opportunity for the EU of alternative gas import routes to politically unstable states such as Ukraine and Belarus.

Despite Russia’s financial loss of approximately $11 billion, carried by the state-owned gas company Gazprom, the cancellation of the pipeline has a minimal impact to politically or economically destabilize the Russian government. Instead, the status quo of former gas import routes remains in the loop, while it will take years for EU countries to build and benefit from alternative LNG import terminals. Gazprom will not pursue another direct Russian-EU pipeline, but develop its LNG export capacities and explore other foreign markets. This will eventually destabilize the EU’s gas import security and increase gas prices for the consumer.

The two German companies Uniper and Wintershall (BASF) are investors in the pipeline who have economic interests in the pipeline. Uniper will buy and sell gas provided by Nord Stream 2, whereas Wintershall provides pipelines for the internal European distribution. The other non-Russian investors is a French (ENGIE), Austrian (OMV), and Anglo-Dutch company (SHELL) with an equally shared interest.

Whenever foreign political sanctions are imposed, there is a risk of negative consequences for imposing state. The EU will likely suffer more than Russia if Nord Stream 2 is not completed.

Set aside the billions of invested dollars by European companies, the EU gas market will have to compensate for the loss of 55 billion cubic meters of gas import capacity per year. Although the EU will likely be able to compensate for those gas volumes from other import routes, the negative effect on gas prices is certain. Also, the EU gas market liberalization slows down as Central and Western European gas hubs will have fewer transport capacities and volumes for trade. The Nord Stream 2 interconnecting pipeline, EUGAL, owned by Wintershall, is already built and in operation.

Gazprom, as Russia’s pipeline gas export monopoly, enjoys an import monopoly status in many Central European countries, which has allowed the company to dictate contracts and gas prices. The construction of the first Russian-German trans-Baltic pipeline, Nord Stream (1), has supported a declining role of Gazprom’s market power in the EU. Nord Stream 2 will fully comply with EU regulations and thus support gas price liberalization in the EU.

Russian gas in Europe is more an opportunity than a dependency. The import of Russian gas in Europe is beneficial to European countries first before it becomes beneficial to Russia. This is based on the fact that the strategic importance of gas for industries and households have diminished over the last decade. The sources of alternative energy resources and renewable domestic power production in most EU countries have increased, which leaves natural gas in second place. However, the import of gas remains important. At reasonable costs, gas as a fuel of relatively carbon emission provides baseload power for the transition period to an EU wide aimed carbon-free energy mix for the coming decade.

Another factor is no less important. In order to be effective, sanctions must negatively affect those whose decisions caused them in the first place. The cancellation of Nord Stream-2 will have two key consequences. First, Gazprom and several European companies will experience financial loss. Since 2018, the shares of the Nord Stream 2 AG—the project company established for the pipeline construction—are pledged to the European corporations that have financed it; if the construction is cancelled, these companies will become the owners of high-quality scrap metal lying at the bottom of the Baltic sea.