How the Nord Stream II deal is dividing Europe

EPA/MAURIZIO GAMBARINI

Russian President Dmitry Medvedev (L) meets German Chancellor Angela Merkel at the Chancellery in Berlin, Germany, 08 November 2011. Medvedev is on a one-day-visit to Germany to attend the opening of the 1,224-kilometre-long Baltic Sea natural gas pipeline Nord Stream.

How the Nord Stream II deal is dividing Europe


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The Nord Stream II gas pipeline intends to bring Russian gas to Germany, the UK, the Netherlands, France, Denmark and others.

The Nord Stream Pitch

Through this deal Russia seeks to consolidate market share in its most lucrative market, that is, Europe. And although oil and gas prices have been tumbling, the natural gas market is anything but saturated.

First, because natural gas gains market share against other fuels, especially since Germany’s commitment to go off nuclear energy; one should also recall that at current pricing, environmentally friendly gas can even replace even coal.

Secondly, because with prices under $50 a barrel – gas trailing the oil prices – non-conventional gas is being pushed out of the market. In this scheme, the question of market share becomes more crucial.

The “pitch” of the project is that it is going to add more supply from North Siberia. In this vision, Nord Stream II eyes the 50% anticipated surge in demand for Europe’s industry, homes, and vehicles. That is approximately 200 bn cubic meter a year, of which Gazprom wants to meet 25%, adding 55 bn cubic meters a year into the supply.

This sounds very realistic, especially as Nord Stream anchors Germany a a chief lobbyist for the project. After all, the consortium to build operate the initial venture is led by Wintershall Holding (BASF subsidiary) and E. ON Ruhrgas, while Gasunie, GDF Suez, Engine, OMV, and Royal Dutch Shell are also included in the deal.

The East West Cleavage

But, not everyone is happy. Ukraine and Slovakia are anything but happy, with the Prime Minister of Slovakia and his Ukrainian peer giving a joint press conference in September, in which the Nord Stream II agreement was called by Arseniy Yatsenyuk “anti-Ukrainian and anti-European” and Roberto Ficco regretting that “they’re simply making fools of us.” In circumventing the traditional Soviet route, both Ukraine and Slovakia stand to lose € 2,6 bn a year in transit fees (1,8 bn/Ukraine; 800 million for Slovakia).

Poland objected to the construction of Nord Stream I, calling the project a “Ribbentrop-Molotov Pact.” President Andrzej Duda reiterated that the project neglected Polish interests and – in all likelihood – his party is going to have full control of the Polish executive come Sunday. Germany is not making friends in Central Eastern Europe and the Baltics.

The Question of Finance and Sanctions

This is a € 9.9 bn investment that should bring gas into the market by 2019. How can European companies work with Russian companies in the midst of sanctions, in full knowledge that energy accounts for approximately half of Russia’s public revenue is anyone’s guess.

Obviously, a lot of external financing is going to be necessary. In the current political climate and energy prices, Gazprom cannot take on the cost on its own. But, who will lend Gazprom and at what price. But, sanctions apply on financing as well. Who can, if they will, put up the cash for this project?

A Question of Regulation

Then there is “the Gazprom clause,” with which SOCAR is complying when it comes to Trans Anatolian Pipeline Project (TANAP). There will obviously be a problem if the Commission failed to be as tough on Gazprom. Unbundling regulation means that a third party should have access to the supply network infrastructure and that Gazprom cannot own more than 50% of the project.

How far is Germany willing to lobby for an Article 36 exemption and how will it argue that it adds to supply diversification and competition. For the moment, Nord Stream II merely diverts Ukraine and in fact consolidates Russia’s market share. Can the European Commission afford to be convinced? And if that were the case, how is the Commission going to argue the necessity of gas interconnectors in Europe who may now be seen as merely an alternative distributing network for Russian gas on European tax payers money. There is little doubt that an energy security hedging strategy must combine alternative supply routes, but also upstream supply sources. Who can lobby against that?

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