Nord Stream-2: The Story Continues

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1 European Union Centre of Excellence Policy Briefs University of Alberta Number 2, 2016 Nord Stream-2: The Story Continues Matúš Mišík, Ph.D. EUROPEAN UNION Centre of Excellence

2 The European Union Centre of Excellence has been co-funded with the assistance of the European Commission. The contents of this policy brief are the sole responsibility of the author and can in no way be taken to reflect the views of the European Commission. Matúš Mišík, European Union Centre of Excellence, University of Alberta Edmonton, Alberta, March, 2016 European Union Centre of Excellence University of Alberta HM Tory Building University of Alberta Edmonton, Alberta T6G 2H4, Canada

3 Nord Stream-2: The Story Continues Matúš Mišík, PhD. In spite of the significant outcry from Central and Eastern European EU Member States (CEE) over the development of the Nord Stream pipeline, which transports natural gas from the Russian Federation directly to Germany through the North Sea thus circumventing Ukraine and decreasing CEE position as transit countries the second part of the project is proceeding as planned. Moreover, the change in Gazprom s rhetoric that focuses on criticism of the EU energy rules indicates the new strategy of the Russian exporter. The original Nord Stream pipeline consisting of two lines (both with a capacity of 27.5 billion cubic meters (bcm) of natural gas a year) became operational in November 2011 after the completion of its first line (the second one was commenced in 2012). The pipeline connects the Russian Federation (Vyborg) directly with Germany (Greifswald) through the North Sea, thus circumventing all transit countries and directly supplying the biggest EU importer of Russian natural gas. The construction of the first line started in April 2010, which makes Nord Stream one of the fastest completed infrastructure projects of this size. The pipeline met with significant criticism from the Ukrainian as well as the CEE side as these traditional transit countries feared a decrease in transit through their territory, which they linked to a decrease in their energy security. However, the pipeline had significant political backing from Germany as Gerhard Schröder, former German Chancellor became the chair of the Nord Stream consortium shareholders committee. Furthermore, many other EU Member States had a positive attitude towards the project claiming that the new pipeline will improve energy security of the EU in general. Nevertheless, the utilisation levels of the pipeline had been rather low until recently and the pipeline is not fully booked even today. For example, in 2015, only 71 % of the Nord Stream capacity was utilised although this year set a new record (Naturalgaseurope 2016a). Page 4 European Union Centre of Excellence Policy Briefs

4 The development of the Nord Stream-2 pipeline was announced on 18 June 2015 at the International Economic Forum in Sankt Petersburg, when Gazprom signed a statement of interest with OMV (Austria), E.ON (Germany) and Royal Dutch Shell (a British-Dutch company). Gazprom formed a consortium for Nord Stream-2 together with the aforementioned companies as well as BASF/Wintershall (Germany) and ENGIE (formerly known as GdF Suez, France) on 4 September 2015 (euactiv 2015a). Gazprom has 50% of shares in the project, while the other partners have 10% of shares each. All this happened while EU sanctions against Russia were in place. Once the Nord Stream-2 has been put into operation, total capacity of all four lines will be 110 bcm, which is almost the entire volume of the Gazprom export to Europe. The company shipped bcm of natural gas to European countries (excluding Turkey) in 2015 (Gazpromexport 2015). On the other hand, Gazprom has booked the capacity of 50 bcm of natural gas a year on a ship-or-pay basis through Slovakia (and thus also through Ukraine) until 2028 (Naturalgaseurope 2016). However, Gazprom s utilisation of this transit route is decreasing. In 2014 Gazprom sent only 46.5 bcm of gas through the Brotherhood pipeline (compared to 76,2 bcm in 2008; eustream 2015), while the technical capacity is more than 100 bcm a year. The total costs of Nord Stream-2, which is due to start transporting gas to Germany at the end of 2019, are estimated to be 9.9 billion euros. The current transit contract between Ukraine and Russia will terminate at the very beginning of 2020 (Forbes 2015), which means that Nord Stream-2 can fully replace the Brotherhood pipeline, thus making transit through Ukraine obsolete. Nord Stream-2 was announced after several previous infrastructural projects had not been materialised. Russia planned to build South Stream, but due to strong criticism from the European Commission (as well as the US) the project was cancelled in December 2014 by President Putin and supplemented by the Turkish Stream. The latter pipeline was supposed to bring natural gas only to the European borders, thus circumventing the EU s internal energy market rules the main challenge of the European Union Centre of Excellence Policy Briefs Page 5

5 former. The South Stream was supposed to bring gas to the Central European gas hub in Austrian Schwechat, which would require following internal energy market rules. However, the Turkish Stream (or TurkStream) has been postponed after the tension between Russia and Turkey increased in the second half of 2015, following Turkey s downing of Russian fighter jet. In order to diversify its natural gas export and in response to increased tension with Europe, Russia has announced an infrastructure project with China. However, this project is developing very slowly. The EU also tried (and failed) to develop its own pipeline, Nabucco. This project was supposed to bring natural gas to Europe from sources other than Russia and was for this reason also backed by the US. However, it did not materialise and was partly supplemented by the much smaller Trans-Anatolian Pipeline (TANAP) with connection to the Trans-Adriatic Pipeline (TAP) which should bring gas to Europe starting in The first critical voices were raised only a few weeks after the official launch of the Nord Stream-2 consortium and were similar to the case of South Stream: energy suppliers (in this case Gazprom) have to be separated from transit companies. However, Gazprom owns 50 % of shares in the company responsible for the development and operation of Nord Stream-2, which is considered to be a breach of these EU rules. The European Commission expressed its concerns about the project not being in line with EU rules already in November Maroš Šefčovič, Vice-President for the Energy Union, claimed that all new pipelines must respect European law (euractiv 2015). Seven CEE countries sent a letter to him at the end of November, asking him to scrutinize the Nord Stream-2 project to the fullest extent (euractiv 2015b). Moreover, after the European Council meeting on 18 December 2015 its president Donald Tusk similarly argued that new infrastructure, including Nord Stream-2, has to fulfill all requirements of the EU law. The conclusions of the meeting stated that [a]ny new infrastructure should entirely comply with the Third Energy Package and Page 6 European Union Centre of Excellence Policy Briefs

6 other applicable EU legislation as well as with the objectives of the Energy Union (European Council 2015: 8). Energy became part of the meeting agenda after being forced in by the CEE countries together with Italy, an unexpected partner of CEE in this matter (Politico 2015). Moreover, the Nord Stream-2 project was also criticised by US representatives who claimed that by bypassing Ukraine the country will lose $2.2 billion a year in transit fees and cement EU s dependency on Russian gas supplies (euractiv 2015). Companies from EU Member States are still very much interested in the project in spite of such strong criticism from their own governments (although not all of them). Apart from German energy companies (E.ON, BASF/Wintershall) Nord Stream-2 is even currently strongly supported by OMV as well as the Austrian Government (Globalresearch 2015) and Shell (Naturalgaseurope 2016b), and the project proceeds as planned. Reacting to this criticism, Gazprom executives claimed that the third liberalisation package rules (that require the separation of energy supply from transport) do not apply in the case of Nord Stream-2, as it does not enter any EU member country (Naturalgaseurope 2016). They argued that liberalisation rules apply only to onshore pipelines that are actually situated on the territory of EU states and not offshore ones such as Nord Stream-2 that use international waters (Lissek 2016). Therefore, according to Gazprom representatives, the criticism from Central and Eastern European EU Member States as well as the European Commission and other stakeholders does not hold. This type of argumentation by the Gazprom representatives shows the change in Gazprom s approach to the EU and its rules. Previously, Gazprom neither responded to criticism of its infrastructural project by pointing out the loopholes in the Community rules nor engaged in the discussion on the EU rules. The change in rhetoric indicates Gazprom s learning process that tries to fight the EU with its own weapons. European Union Centre of Excellence Policy Briefs Page 7

7 Literature euractiv (2015) Germany-favoured Nord Stream-2 risks strangling Ukraine, US says. Accessed 8 February euractiv (2015a) Germany helps Russia bypass Ukraine via Nord Stream 2. euractiv (2015b) Seven EU countries oppose Nord Stream. com/sections/energy/seven-eu-countries-oppose-nord-stream Accessed 10 February eustream (2015) Annual report. Forbes (2015) Russia Won t Renew Gas Contract With Ukraine. forbes.com/sites/kenrapoza/2015/07/25/russia-wont-renew-gas-contractwith-ukraine/#686fc3e92c2a. Accessed 8 February Gazpromexport (2015) Delivery statistics. statistics/. Accessed 22 February Globalresearch (2015) European Energy Firms Agree to Expand North Stream Pipeline with Russia s Gazprom Lissek, U. (2016) Nord Stream s vital role in EU energy needs. Financial Times, 10 January a82b43f6b2f.html#axzz3zo0tIuQZ. Accessed 10 February Naturalgaseurope (2016) Nord Stream 2 fits with the market : Gazprom M&T. Naturalgaseurope (2016a) Nord Stream pipeline hit record delivery rate in Page 8 European Union Centre of Excellence Policy Briefs

8 Naturalgaseurope (2016b) Gazprom, Shell stress need for Nord Stream 2. Accessed 10 February Politico (2015) Russian pipeline plan draws EU fire. nord-stream-donald-tusk-eu-council-italy-central-eastern-europe-russiagazprom/. Accessed 10 February European Union Centre of Excellence Policy Briefs Page 9