In the last few months, lots of discussions have revolved around the economics and politics of the proposed Nord Stream II project. Nord Stream is a gas pipeline bringing Russian natural gas directly to Germany through the Baltic Sea, allowing Moscow to bypass European transit countries such as Poland, Belarus, and crisis-hit Ukraine. Nord Stream II would double the pipeline’s current capacity, from 55 to 110 billion cubic metres per year (bcm/y).
Here at ISPI Energy Watch, we delved deeper in the matter by focusing on the political and legal aspects of the current pipeline and its proposed expansion. But a high degree of confusion still needs to be dispelled about the exact quantities of natural gas reaching German shores via Nord Stream.
The issue has recently resurfaced in the press, but also in expert comments and political declarations. In late 2015, commentators at Brookings, Politico, and the Atlantic Council were still pointing out that only about half of Nord Stream’s capacity was being used. In late March, eight EU countries opposed to the Nord Stream II project sent the second letter to the European Commission in four months, outlining the rationale behind their arguments. According to one of the co-signers, Lithuanian President Dalia Grybauskaite, Nord Stream II “is not an economic project” because the current pipeline “uses only half of its capacity”. Former Polish Prime Minister and European Parliament President Jerzy Buzek, now Chair of the European Parliament’s important ITRE Commission, also said something along these lines in July 2015. And as recently as last April 8th, commentators were still resorting to this refrain.
Although they tend to miss the point that many of the partners in the Nord Stream II consortium are private companies that would risk losing money if the new pipeline remained underutilised, analyses revolving around the economic rationale of a Nord Stream doubling should certainly be encouraged. At the same time, they need to be based on hard data, not conjectures. Moreover, capacity utilisation is not just a matter of economic decisions, but can also be constrained by legal and technical restrictions that are worth discussing at some length.
First, let’s have a look at the pipelines that bring Nord Stream’s natural gas to the German and European markets. As Nord Stream reaches Germany’s shores, its gas is transported via two inland pipelines (see map).
The first, OPAL, is an 80%/20% joint venture between Wingas (100% Gazprom-owned) and E.ON. OPAL, running North-South from the Greifswald entry point to the German border with the Czech Republic, started operations in 2011 and can transport up to 35 bcm/y. The second pipeline, NEL, runs approximately East-West, bringing Russian gas closer to Germany’s industrial heartland of North Rhine-Westphalia, and to the Netherlands and Belgium. The NEL pipeline’s project is led by a Wintershall-Gazprom joint company (which owns 51% of the pipeline) and was commissioned in two stages – the first entering operations in November 2012 and allowing 5 bcm/y to flow through the pipeline, and the second entering operations in October 2013, bringing the pipeline’s maximum capacity to 20 bcm/y.
Figure 1 – Nord Stream gas flows in Germany
Source: OPAL and NEL’s “Physical flows” website data.
Figure 1 shows flows through the two pipelines, along with their combined maximum theoretical capacity (as indicated by the grey area). A dotted line represents Nord Stream’s maximum theoretical throughput over the period. The graph shows physical flows declared at the corresponding OPAL and NEL entry points, and allows us to precisely cover the whole period of operations of the Nord Stream pipeline. To improve comparability and remove daily/hourly idiosyncrasies, we calculate the 30-day-averaged annualized flow.
As shown in the graph, the OPAL pipeline operated alone between end-2011 through end-2012. At the time, even OPAL’s utilization rate remained low at around 10 bcm/y (or about 30% of the total), while Nord Stream’s total capacity was a correspondingly low 20% level. Flows through the OPAL pipeline increased in 2013, averaging about 20 bcm/y, and at end-2013 the NEL pipeline’s second stage entered into operation, also significantly contributing to raising total natural gas imports via Nord Stream.
Currently, around half of the total natural gas imported via Nord Stream flows through either pipeline. Despite two significant maintenance outages (the first in December 2014/January 2015, the second in August 2015), natural gas flows entering the two pipelines have recently trended upwards, stabilising at around 40 bcm/y in the period from October 2015 through April 2016.
Figure 2 – Nord Stream utilization rates
Source: OPAL and NEL’s “Physical flows” website data.
Now that we have a clearer picture about absolute physical flows through the OPAL and NEL pipelines, we can use them to gain a much better estimate of Nord Stream’s utilisation rate. In dark blue, figure 2 reports Nord Stream’s actual utilisation rates, comparing total physical flows with Nord Stream’s theoretical maximum capacity of 55 bcm/y.
As shown, since end-2013 and barring maintenance outages, the pipeline’s utilization rate consistently stayed above 50%, and for most of 2015 it surpassed the 70% threshold. Actual utilization rates are important to investors in pipeline projects, given that as a rule of thumb it is generally assumed that, in order to guarantee sufficient return on investment to project participants, a pipeline requires a utilization rate of around 50%. Compare this to another international natural gas pipeline’s recent utilization rates: TransMed, linking Algeria’s natural gas fields to the Italian gas grid. Figure 3 below shows that yearly utilization rates of the TransMed pipeline between 2005 and 2015 never exceeded 70%, in fact crashing to around 20% in the last two years (2016 is showing a moderate recovery to 40%).
Figure 3 – TransMed pipeline utilization rate
Sources: Italian Ministry of Economic Development, SNAM Rete Gas
Finally, Figure 4 shows an attempt to estimate Nord Stream demand by relying on OPAL flows and third-party access (TPA) regulations in Europe. Not being considered a cross-border interconnector, the NEL pipeline cannot apply for an exemption from TPA rules contained in Directive 2009/73/EC (part of the EU’s Third Energy Package). For this reason, all of the pipeline’s total technical capacity must be auctioned to suppliers. On the opposite, OPAL was granted an exemption from TPA rules, so that today 50% of the pipeline’s total capacity can be, and is, freely used by Gazprom. The remaining 50% must be auctioned and can therefore be bought by independent suppliers.
While the NEL pipeline is already used at almost 100% capacity, the OPAL pipeline bringing natural gas to the Czech Republic border faces more competition from Russian gas flowing through other pipelines. A possible measure of demand of Nord Stream’s natural gas is therefore the effective use of OPAL’s spare capacity of 17.5 bcm/y. Figure 4 shows two attempts to gauge demand through this method. For each year, the graph reports the percentage of days during which natural gas flowing through the pipeline either exceeded the exempt capacity (being above an annualized rate of 17.5 bcm/y), or exceeded 110% of exempt capacity (i.e. above an annualized rate of 19.25 bcm/y). As shown, the number of days during which non-exempt capacity was bought and used went up from around 60% in 2013 to 100% in the first four months of 2016, while the number of days in which gas flows going through OPAL exceeded 19.25 bcm/y increased from an average of 24% in 2013-2014, to an average of 58% in 2015-2016.
Figure 4 – Growing OPAL demand?
Source: OPAL’s “Physical flows” website data.
Nothing of the above implies that Nord Stream II partners have an outstanding economic case for supporting the doubling of Nord Stream. Considering EU's anaemic natural gas demand, politics undoubtedly enters their equation in going through with the project. At the same time, available data paints a much more complex scenario than tends to be portrayed by experts, politicians, and the press alike. All the more reason to continue to closely follow the political, economic and technical discussions around Nord Stream I and II in the coming months.
Matteo Villa, ISPI Research Fellow