This is a Monthly Strategic Focus Update, arguing why the Nord Stream II project will likely not go through.
The Nord Stream II has been another case of Germany and Russia increasing energy cooperation in times when political tension between them seemed to grow. The energy infrastructure project is meant to be an alternative route for Russian gas exported to Germany, but considering the export capacity of the pipeline – at 110 billion cubic meters, greater than Germany’s demand of 80 billion cubic meters, it is likely that Gazprom has been looking beyond the German market. Together with TurkishStream, the Nord Stream II allowed Russia to avoid the Ukraine natural gas route completely – a goal that Gazprom had set to reach by 2019.
But even if both pipelines are built, Ukraine will remain an important transit state for Russian natural gas as their construction would allow Russia to keep the Ukraine-Slovakia border as an anchor point for natural gas imports, with Gazprom gaining flexibility to send natural gas where it wants, depending on market or political interest.
On Aug. 12 the Polish anti-trust agency ruled against the Nord Stream II, saying that the pipeline would put too much of the gas market in the hands of foreign companies, considering that the European companies involved in the project are already in the Polish market and that Gazprom already enjoys a dominant position in the local natural gas market. Poland’s geographical position makes Russia and Germany the only source countries for most of its energy at the moment. A closer relationship between the two would give them leverage over Poland – and the new Nord Stream II pipeline would allow Gazprom to completely bypass Poland, which could translate into potential supplies cutoffs or renegotiation of contractual terms to the detriment of Warsaw. The anti-trust agency also mentioned that the existence of the new pipeline could have a negative impact on the pricing power of Poland’s new LNG terminal in Świnoujście, operated by a local company.
The ruling has provoked the withdrawal of Gazprom’s Western partners (ENGIE, OMV, Winterhall, Shell, and Uniper) from the Nord Stream II project as the even if the consortium was not registered in Poland, the companies were doing business in the country and were therefore subject to Polish competition laws. But their withdrawal doesn’t necessarily stop the project, as Gazprom said it will not give up on it. This means however that Gazprom needs to finance it. As of Aug. 12, the application for the EU funds is no longer possible as no European companies are involved in the project. But Gazprom may look for other partners or legal loopholes – even if it is improbable to find either of the two.
The EU also needs to approve access to Opal link – jointly owned by Gazprom and German oil and gas producer Wintershall, connecting the existing Russia’s Nord Stream pipeline to the pipeline infrastructure in Central and Western Europe, to Germany and the Czech Republic. The access has been requested by the project consortium in order to be able to double capacity of the undersea pipeline, the Nord Stream II. The plan needs the Commission’s approval because it bypasses EU anti-monopoly rules that cap Gazprom’s use at half of Opal’s capacity. This is of core importance for the project’s breakthrough which sees an increase of Russian gas sent to the system. The EU Commission has delayed making a decision on the matter and announced in July that it expects more technical details from Germany by the end of September in order to decide whether to allow it to happen. Even if the plan was agreed between Germany’s regulator Bundesnetzagentur and Gazprom, as the project currently has only Gazprom as the project’s operator, with no other European company being part of the consortium, it is unlikely for the EU to approve access.
Poland and the other Eastern EU member states are not the only ones saying that the Nord Stream II is damaging to the European energy security. The European Commissioner of Climate Action and Energy Miguel Arias Cañete, said there were “serious doubts” whether Nord Stream 2 was compatible with the EU’s “strategy of security of supply”. He said diversification of routes and sources is key to this strategy and “Nord Stream 2 does not follow this core policy objective. On the contrary, if constructed, it would not only increase Europe’s dependence on one supplier, but it will also increase Europe’s dependence on one route.” In a recent visit to Sweden on Aug. 25, the U.S. Vice President Joe Biden said that the project is “a bad deal” for Europe.
However, if Gazprom finds resources to finance the project and approval for the Opal access is given, further approvals for the project would need to be issued by the countries whose waters the pipeline will cross: Russia, Finland, Sweden, Denmark and Germany. In theory, if Gazprom can get the money and other companies get to be involved in the project (unlikely), then it could get the project going, considering that these are the countries that Nord Stream I crosses and there was no permitting issue there.
But even if the project initial steps are bypassed, there are several other questions relating to the Nord Stream II viability:
- If Gazprom goes ahead with the project, there is still the anti-trust law that will likely get it to court. Gazprom already has what under EU (and nation states law) is called to be a “dominant position” and with Nord Stream II it is likely to get monopoly charges. This is one reason for which Gazprom didn’t ever go ahead alone with infrastructure projects.
- If the project goes under the Third Energy Package, then it will not be approved by the host countries. Under article 11 of the Third Gas Directive, the regulators must refuse to grant certification to a project if it does not a) comply with the “unbundling” and third-party access requirements of the Third Energy Package, and b) if the project puts at risk “the security of energy supply of the member state and the European Union”. Gazprom says that the project is offshore and the Third Energy Package is applicable only to onshore projects – but indications are that the EU says differently. The Commission is in communication with the German authority and even if a legal advice was issued to the Commission, favoring Nord Stream II, the issue is not settled as DG Energy has kept the case opened.