Nord Stream II Project: Old Solution to New Problem(s)

Martedì, 9 Febbraio, 2016

by Sergio Matalucci

Nord Stream II has been described as the gas pipeline that is dividing the European Union, leading to renewed controversy within the EU. Some commentators even said that the project is bringing Europe back to the Iron Curtain period, suggesting a stark opposition between West and East.

Despite the ado, these opposing positions and interests are nothing new. They pretty much resemble the fuss around the Nord Stream I project, which was compared in 2006 to the Soviet-Nazi Molotov-Ribbentrop Pact by Radosław Sikorski, then Polands defence minister. The only significant differences stem from the new EU regulatory framework on energy infrastructures, the different geopolitical standing of Ukraine, and the fact that Eastern European countries are now active members of the European Union.

Hence, as suggested by the recent lawsuit filed by Ukraine against the project, the legal and political turfs are likely to be the battlegrounds for the opposing factions. If some experts think that tensions are expected to lead to lengthy delays in the pipelines construction, but will not result in its cancellation, the opposite scenario is also plausible. It will all depend on how Gazprom and Germany will be able to lure key Nord Stream II skeptics, offering them significant compensations. It will also depend on a possible European U-turn on Russia. Rumours do indeed suggest that Brussels could try to find a political solution to the Nord Stream II issue, as part of a larger package, in which energy would not be the only component. 


A step back: A bit of history, and the parties involved 

Three Northern European companies - E.ON, OMV, and Shell - agreed with Gazprom to build a new pipeline from Russia to Germany under the Baltic Sea during the St. Petersburg International Economic Forum in June 2015. If that was simply a non-binding Memorandum of Understanding, the Eastern Economic Forum in September then witnessed the three companies, BASF and ENGIE signing a Shareholders Agreement with Gazprom.

The agreement was followed by the swap of assets between BASF and Gazprom in October, a deal between Gazprom and OMV for oil supply a few days later, and a modification of Gazprom and ENGIEs stakes in the gas project that transferred an additional 1% to the French company. Austrias OMV, Germanys BASF/Wintershall and ENGIE openly threw their weight behind the project, while the other partners - Norway's Statoil, Germanys E.ON and Anglo-Dutch Shell - remained behind the scenes. In general, the situation seems to hint at the fact that Germany and Austria are the countries pushing the hardest, and the ones possibly benefiting the most from the project.

The opposition campaign is more difficult to read. Polands President Andrzej Duda said in December that the project completely neglects Polish interests. Warsaw is spearheading the front of Eastern European countries working against the project. Nonetheless, in December, the Czech Republic and Bulgaria decided not to sign a letter presented a few days before by nine countries - Czech Republic and Bulgaria included - that urged European authorities to intervene against the project. Moreover, Poland is equally taking time, extending the deadline for its review of the Nord Stream 2 project, indicating that any country could change its mind, as a consequence of compensation from Brussels and better commercial conditions from Russia. Similarly, Italy reportedly performed a U-turn in January 2016, asking to take a role in the project it appeared to radically oppose just a couple of weeks earlier. If this change remains just a rumour, the point here is that the opposition front can crumble rather quickly.

The geopolitical developments following the tensions between Russia and Turkey in the aftermath of the downing of a Russian fighter could be one reason for this confusion, further proving that the situation is extremely complex, and that equilibria can adjust as a result of several factors, ranging from economics to politics, passing through military.

Apart from the above-mentioned stakeholders, Finland, Sweden and Denmark are important players too, as they are called to issue permits for Nord Stream II to cross through their economic zones. Their direct interests are not that significant, but their role in the process is equally pivotal. In general, as documents published by WikiLeaks show, Finland and Sweden did not politicise their decisions as regards to Nord Stream I. They seem unlikely to do so now with the new pipeline project. However, their position cannot be taken for granted either. The recent legal opinion by the European Commissions Directorate General for Energy did indeed say that EU laws apply also to the offshore section of the Nord Stream II, further complicating the picture.


What are the interests at stake? What's Brussels doing?

Given an expected drop in gas imports from the North Sea in the next few years, and new commercial possibilities coming from the new pipeline, the benefit of Nord Stream II for Germany and Austria seems quite clear. The same cannot be said for Eastern Europe. Several companies and countries would indeed lose their transit fees. Abandoning the Ukrainian gas system would also pose a threat to countries relying mainly on natural gas coming from the Bratstvo, Soyuz and Trans Balkan pipelines. As already pointed out by documents released by the European Commission in October 2014, Bulgaria is the country that could suffer the most.

Brussels is taking an active role in improving energy security to the most isolated country in the European Union, for instance by directing funds. Indeed, among the new list of Projects of Common Interest, the main recipient of European funds is the gas pipeline project connecting Bulgaria and Austria via Romania and Hungary, which accounts for 83% of the new 217 million investment package announced in January 2016. The rest of the budget will be used for studies, and for a reverse flow interconnection in Germany.

At the same time, European authorities are also supporting the creation of regional natural gas hubs and the transition from long-term contracts to spot prices. This automatically increases the interests at stake for German and Austrian companies. BASF/Wintershall, E.ON and OMV do logically see opportunities stemming from the integration of European gas markets, which are likely to turn European hubs into the main pillars of Europes energy security. These hubs, which are the most advanced in Continental Western Europe, would enormously benefit from the new project, as Russian gas would be brought into Germany, marketed at a Central European hub, and then resold to Eastern Europe.

This new gas route is quite different with respect to the traditional ones, and there is no doubt that Northern European companies would capitalise on the new project, while Eastern Europeans would at least require some form of compensation from Brussels. Therefore, if ongoing negotiations within the EU turn out to be successful, the project will be built, and the main loser will be Ukraine. The country will lose at least $2 billion in transit fees, exacerbating the countrys already difficult financial situation.


Why Nord Stream II could go ahead

Nord Stream II consists of two parallel lines with a joint capacity of 55 bcm, exactly like Nord Stream I, the longest sub-sea pipeline in the world at the moment. The route is likely to be the same, or mostly the same. As for Nord Stream I, the European partners of the project are expected to receive shares in the Russian fields used to produce the gas transported in the new pipelines.

These shreds of evidence, coupled with easier legal implementation procedures due to many obligations already having been concluded by the organisers of the Nord Stream I project, indicate that there are reasons to be confident about the realisation of the project. More so, in light of the political pressures from northern European countries, and the reasonable argument that Germany would be more reliable than Ukraine as a transit country.


Why Nord Stream II could face high hurdles

As for Nord Stream I, the new pipeline would probably require access to the Opal gas pipeline in northeastern Germany. At present, Gazprom is allowed to use half of its capacity. This is a first hurdle. Additionally, there are three factors that could tip the balance in Eastern European countriesfavour.

First, the financial situation of Russia and its oil and gas companies is not as rosy as it was some years ago. This argument is probably tempered by the fact that oil prices are at 2005 levels, and still higher than in the 90s. However, RES growth potential is creating legitimate uncertainties for oil and gas company planning long-term projects.

More importantly, the European context is completely different, if compared to when the Nord Stream I was taking its first steps. Poland and Lithuania, which oppose the project, rose high up in the political ranks over the last decade. In 1997, when Gazprom started hinting at the project, those two countries were not even part of the European Union.

The mid 2000s, when the Nord Stream I got translated from mere intentions into paper, were the years in which Eastern European countries joined the EU. Moreover, back then, the European project seemed way more stable. Things are now completely different, and tensions from the new gas pipeline could add to the migration crisis spreading across the Old Continent. There are not many EU enthusiasts wanting other risks to materialise, and the Nord Stream II will require additional caution.

Last but not least, the regulatory framework for energy projects is now quite different. The Third Energy Package, proposed by the European Commission in 2007, entered into force in September 2009. If some countries will still have an interest to oppose the project after the ongoing negotiations, European laws will be their main weapons. As the lawyers of the Energy Directorate said earlier this month, the project should change to meet the requirements on ownership unbundling, tariff regulation and third-party access [ISPI will publish an in-depth analysis of Nord Stream IIs legal context in the coming weeks]. Moreover, Eastern European countries already said that Nord Stream II would basically contradict the Energy Union, as solidarityis one of the pillars of the project launched by the European Commission in February 2015.

So what?

All in all, the blocs of countries and companies able to make stronger cases and impose their interpretations of the existing laws will be the ones winning this (potentially fratricide) confrontation. If legal issues will be the battleground, the reason of this arm-wrestling is and will be highly political in nature. It seems, though, that European authorities are working on a new position on Russia and on Nord Stream II, which could be presented as soon as this week. Europes new standing vis-a-vis Moscow and the way it will be received could be a trumpet card to avoid more political tussles, or another sign of European weakness. 

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