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Javier Ramírez

The Nord Stream 2 pipeline

Nord Stream 2 pipeline was completed on September 6th, 2021. It is expected to start suppling natural gas once Germany’s regulator gives its approval, no later than January 8th, 2022 . The project has faced legal battles, sanctions and bitter debates involving not only Russia and the EU but also the rest of Europe and the United States. Few energy projects have been so controversial. Proponents as Russia, Germany or Austria argue it is needed for meeting the growing EU’s demand for imported gas and its advantages in economical and energy security terms. Opponents see the project as a Russia’s attempt to increase its influence over Europe and to starve Ukraine. They also point out the risks for the environment and for the European strategic energy autonomy.

A controversial debate on the geopolitical, economic, and environmental arenas

The EU and Russia are mutually dependent on natural gas. In 2020, 43% of gas imported by the Union came from that country, according to the European Commission. But Russia’s dependence on the EU is even bigger, as EU-27 accounts for 73% of Russian gas exports.

Both parties have made efforts for diversifying their suppliers and export markets, respectively, but both sides will most likely remain mutually dependent, if not more. The reason is the absence of viable alternatives.

After its completion, Russia is pressing for a quick approval by Germany’s regulator. Dmtry Peskov, Kremlin spokesman said last September 15th than “undoubtedly, the quickest launch of Nord Stream 2 would significantly balance out the pricing parameters of natural gas in Europe, including on the spot market. That’s obvious. The demand is high”.

The second EU’s source of natural gas is Norway, which represents a 23% of its total imports, while Argelia supplies only a 6% through 3 pipelines; Transmed that link Algerian gas fields with Italy and supplied 11.44 billion cubic meters (bcm) in 2020; Medgaz, which transported 5.59 bcm and wil increase its capacity to 10 bcm (25%) a year in the fourth quarter of 2021, and GME, which supplied through Morocco 3,67 bcm in 2020. The future of GME is at risk due to the historical disputes between Rabat and Algiers, in an especially difficult moment since last August, when both countries severed diplomatic relations and Argelia suggested it could shut off the supply to the Moroccan pipeline to Spain.

Europe faces the challenge of that there are few countries with large gas reserves and close enough to be connected by pipeline, even it has now the Southern Gas Corridor (SGC) an $45 billion initiative of the European Commission which supplies gas from the Shah Deiz field in Azerbaijan to South Italy through Georgia, Turkey, Greece, and Albania.

The alternative to pipeline supply, liquified natural gas (LNG), which represents a 23% of total EU’s gas imports, is not an economically competive option, mainly due to its cost and the need for an LNG European infrastructure.

Russia is trying to diversify its export markets (it has built a pipeline to China) but it also faces the lack of geographically close relevant markets.

According to the International Energy Agency (IEA), domestic gas production in the EU will decrease by 40% in the next five years, while it’s gas consumption will remain flat. That means a 6% increase in EU gas imports by 2025. Most of these additional necessities will be mainly covered by Russia due to the above-mentioned difficulties for finding other suppliers.

Russia supplies the EU through several pipelines, as the Yamal, via Belarus and Poland; the first Nord Stream, which connects Russia and Germany directly through the Baltic Sea; Turkstream and Blue Stream, with Turkey, and the Brotherhood, Friendship and Soyuz pipelines via Ukraine.

Construction of Nord Stream 2, two 1,230 kilometres long additional pipelines with the similar route and capacity (55 billion bcm) than Nord Stream and a $11 billion project, began in 2018 and should have been completed by December 2019, but the controversies the project have faced led to an almost 2 years delay. On September 6th, 2021, engineers welded together the last of its 200.858 pipe pieces and the gas supply to Germany through the new conduit is expected to start in October.

A long and highly polarised debate have taken place on Nord Stream 2 implications on energy security, geopolitical, environmental, and legal not only in the EU, but also in the rest of Europe and the United States.

Nord Stream 2 is considered by many as a geopolitical move by Russia to weaken Ukraine by cutting off its €2 billion per year income from transit fees. Beyond the economic implications, gas transit has played as a deterrent against further Russian aggressions towards Ukraine, while both countries are involved in an armed conflict that has cost 14,000 human lives since 2014.

Following the Russian invasion of Ukraine in February 2014, the United States, the EU and other countries imposed sanctions against individuals, businesses, and officials from Russia, which responded with countersanctions, including a total ban on food imports from the EU, United States, Norway, Canada and Australia. Even though the sanctions serve as a means of nonrecognition, their costs have been high not only for Russia but also for the EU and the US.

According to a 2017 report by the UN Special Rapporteur Idriss Jazairy, the EU countries were losing about "3.2 billion dollars a month" due to them. He also noted that the sanctions were "intended to serve as a deterrent to Russia but run the risk of being only a deterrent to the international business community, while adversely affecting only those vulnerable groups which have nothing to do with the crisis".

Sanctions shaved 6% of Russia’s GDP, according to one estimate quoted by the European parliament Research Service. In the meantime, Russia's food imports fell from 35% in 2013 to 20% in 2018.

Last May, US president Joe Biden’s administration decided not to impose sanctions to Nord Stream 2. Two months later, the US and Germany, the strongest supporter to the new pipeline, agreed over its construction with a joint declaration in support of Ukraine, European energy security and climate goals.

The agreement includes German economic support to Ukraine as well as the mandate that “should Russia attempt to use energy as weapon or commit further aggressive acts against Ukraine”, Germany will act and will press the EU to do so, including sanctions, specially targeted to the energy business and other relevant sectors.

German Chancellor Angela Merkel failed to get a binding and concrete commitment from Russian president Vladimir Putin to extend the transit agreement with Ukraine, expiring in 2024.

Ukraine and Poland reject the deal fiercely in a joint statement, saying that Nord Stream 2 “has created political, military and energy threat for Ukraine and Central Europe, while increasing Russia’s potential to destabilise the security situation in Europe, perpetuating divisions among NATO and EU member states”.

The agreement is not US’s cup of tea, but Biden administration recognizes that Nord Stream 2 is a fait accompli that cannot be halted once it is already completed. State Department spokesman Ned Price told Reuters that Washington continues “to oppose the pipeline. We view it as a Kremlin geopolitical project that is intended to expand Russia’s influence over Europe’s energy resources and to circumvent Ukraine.”

Critical voices also raised in the EU and Germany, which faces a new political era after the 16-year chancellorship of Merkel. Manfred Weber, conservative EPP leader in the European Parliament said that “the decision for Nord Stream 2 is to the detriment of Europe as a whole and of Ukraine”. At the same time, the European Greens are calling for a re-examination of the agreement after the German elections, according to Euroactiv.

From a legal point of view Nords Stream 2 has also faced numerous obstacles. The main problem is the compliance with the EU’s Gas Directive, that avoid gas producers to control the pipelines that transport their gas and requires non-discriminatory access to the pipelines for other producers. After long negotiations, the EC, Council and Parliament agreed that Germany’s national energy regulator is responsible for applying EU energy law to the pipeline.

After a first rejection from the regulator, Nord Stream 2 opened three separate legal fronts: the German courts, the EU courts and in the independent arbitrage system.

While Nord Stream 2 AG, the consortium of the five shareholders of the pipeline (Russia’s Gazprom, Germany’s E. ON, Netherland’s Gasunie, and France’s ENGIE) insists that the conduit is environmentally friendly as it uses locally sourced inputs and avoids sensitive seabed areas, NGOs argues that it affects conservation areas as the Kurgalsky nature reserve and five Natura 2000 sites in Germany.

From a climate change perspective, Nord Stream 2 argues that it generates one-third less CO2 than LNG due to emissions associated with shipping and liquifying and compares favourably with other pipelines because is 1,000 km shorter than the pipelines transiting Ukraine.

Against the role of natural gas as a necessary transition fuel, environmentalists point out that with developments like Nord Stream 2, EU will remain locked to fossil fuels like natural gas rather to phasing them out.

There is also a lack of consensus on the economic aspects of the project. Existing Russian pipelines have a total capacity of transporting 300 bcm a year, compared with the 199 bcm Russia delivered to the EU in 2019. Therefore, seems to be enough spare capacity.

But the Ukrainian pipelines, with a design capacity of 146 bcm a year, are in a poor state and becoming unreliable. According to a 2017 KPMG study, the cost of replacement would be $17.8 billion.

On the other hand, Nord Stream 2 will provide cheaper gas due to its lower operating costs, the fact that it is 1,000 km that the alternative through Ukraine, and the tendency increased supply. The energy consultancy firm Wood Mackenzie estimates that gas prices in the EU could drop by 25%. According with the EPRS, Germany and France will be the clear winners, whereas Czechia, Slovakia and Ukraine will lose.