Nord Stream 2 – not a Private Matter

Nord Stream 2 – not a Private Matter

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In 2015, the Russian energy supplier Gazprom agreed with E.ON, Shell, Engie, BASF/Wintershall and OMV that the Nord Stream pipeline was to be expanded in order to deliver more gas to Germany from Russia. A new 1,200-kilometre-long pipeline was to double existing capacity by 2019. Even though the first two lines are only running to 70 per cent capacity at present, the Nord Stream 2 project is intended to supply a further 55 billion cubic metres of gas to Germany every year. The company New European Pipeline AG was set up for this purpose. It is registered in Switzerland, outside the European Union, and Gazprom owns 50 per cent of its shares.
Disregarding the concept of a European energy union, which envisages the diversification of raw material sources in the EU, and riding roughshod over the resolutions passed by the Paris Climate Conference on reducing CO2 emissions and the associated gradual withdrawal from fossil fuels, the German government is driving the project forward undeterred. In October 2015, for instance, its Federal Minister for Economic Affairs Sigmar Gabriel met with Russian President Vladimir Putin and Gazprom CEO Alexei Miller for bilateral talks on the future strategy for supplying Germany with Russian gas. Although Mr Gabriel and Chancellor Angela Merkel never tire of insisting that Nord Stream 2 is a purely private-sector project over which they have no influence, the planned pipeline expansion is actually far from being simply a private matter. With its 50-year timescale, the project will incur significant geostrategic and infrastructural costs and have a major adverse impact on European policy as well as creating a situation of “carbon lock-in”.

The cost to European policy

Since the present European Commission took up office in 2014, it has pursued the idea of a European energy union. This would have five mutually reinforcing and closely related aspects, designed to ensure greater energy security, sustainability and competitiveness. Even though this energy union is not the finished article in terms of setting its objectives and structure, and, above all, still needs focusing even more strongly on a European energy transition and ambitious climate protection measures, the idea of a joint European approach is nevertheless the right one.
The purely bilateral Nord Stream project runs contrary to this EU-wide approach. The very fact that the consortium is based in Switzerland and the pipeline is to pass through the exclusive economic zone shows how hard attempts are being made to implement it well away from any political or legal influence by European actors. This bilateral approach is being reinforced by Germany’s Federal Minister for Economic Affairs, who stressed during his visit to Moscow that “the main thing is that the regulatory powers rest in the hands of German executive bodies”, that “interference from outside” should be avoided and that “the scope for political involvement in this project” had to be limited. The project and the comments by Mr Gabriel have drawn major criticism from EU member states, virtually all political groups in the EU Parliament, the relevant EU Commissioners and the President of the European Council, who doubted whether the Nord Stream 2 project was compatible with EU energy regulations. This was because, he said, it infringed the provisions of the Third Energy Package on the unbundling of suppliers and pipeline operators. Energy Commissioner Maroš Šefčovič has stated that Nord Stream 2 is not a project of common interest (PCI).

Geostrategic costs

Gazprom already has a market share of about 40 per cent in Europe, making Russia by far the biggest supplier of gas to the EU. Tensions between the EU and Russia over the Ukraine conflict have intensified the need for European energy policy to achieve its stated aim of diversifying energy sources so that “Europe can quickly switch to other supply channels if the financial or political cost of importing from the East becomes too high”.1 The EU has responded accordingly and developed its own strategy for diversifying its energy sources, focusing primarily on liquefied gas. Representatives of the EU Commission have also kept on insisting that energy efficiency is the top priority. Even though liquefied natural gas (LNG) has so far proved more expensive than piped gas, it has the advantage that it can be collected from virtually anywhere, helping to further diversify natural gas supplies. There is ample potential: although existing LNG terminals in Europe are not currently being used to full capacity, the Commission believes that they could cover 43 per cent of Europe’s gas needs.

By contrast, using Nord Stream 2 to expand capacity would further increase dependency on Gazprom, with the Russian state-owned corporation already taking more and more control of the entire gas supply chain in the EU as it is. As recently as 2015, Gazprom snapped up 20 per cent of German storage capacity in an asset swap with BASF/Wintershall – enough to supply 2.2 million households with gas for a year. Yet this is an energy company which, far from being a traditional supplier to the private sector, has close ties to the political system and the Russian government. The Russian state’s stake in Gazprom amounts to 50 per cent of its shares plus one. Events in Ukraine, but also in the Baltic states, show that import prices for Russian gas are primarily a political issue and there is a great degree of variation across Europe for what is essentially the same product.
There are clearly a number of other gas sources – such as liquefied gas from Qatar and Algeria or piped gas from Azerbaijan – that are also politically questionable (just as with oil imports from many countries). In those cases, however, there is much less of a unilateral dependency and the EU has not imposed economic sanctions against those countries – as is the case with Russia – even where we find their governments extremely problematic. The medium-term objective must be to focus on truly domestic resources such as wind, solar, water and biomass and on saving energy instead of spending billions of euros importing natural gas from autocratic regimes.
In any case, it is hard to see how the Gazprom project can be reconciled by any stretch of the imagination with Germany’s policy on Russia and Ukraine. Expanding capacity to, by then, over 100 billion cubic metres would mean a significant shift in the transport routes for Russian gas within Europe because no major increase in the demand for gas is expected and the international gas market is suffering from massive oversupply.2 Gas consumption in the EU is already flatlining and the energy transition is set to make it fall. Accordingly, Gazprom has already announced plans to stop supplying gas to the EU via the Ukraine from 2019 onwards – the date Nord Stream 2 is set to come on stream.

This would deprive a heavily indebted Ukraine of transit charges worth some EUR 2 billion. It is not at all clear as yet how this loss of income for the country would be compensated. Even though it is now being asserted that gas will continue to flow through Ukraine beyond 2019, an agreement between Ukraine and Russia on transit charges is being complicated further by Nord Stream 2 in addition to the impact of the ongoing conflict. It is also clear that Ukraine needs to become less dependent on imports and transit income whatever happens, so it cannot be in the interests of Germany or the EU to destabilise the country even further. Nord Stream 2 undermines the attempts being made to modernise Ukraine’s extremely outdated gas network. It is beyond doubt that the additional uncertainty surrounding the future of gas transit through the Ukraine will lead to a further fall in investment.

Infrastructural costs

The consortium is expecting Nord Stream 2 to cost some EUR 8 billion to build, around 30 per cent of which will be raised from its own funds and 70 per cent from borrowed capital, with no funding from the public purse. However, this completely forgets that, although the Nord Stream 2 pipeline will end in Lubmin on the Baltic coast, the supply and transportation of the gas will not. Expanding Nord Stream’s capacity will also mean major new investment in the Baltic Sea pipeline link (OPAL) and the Northern European natural gas pipeline (NEL), which distribute Russian gas in Europe, because their capacity is currently only designed to cater for Nord Stream 1. It is not yet clear who will be responsible for increasing this capacity and whether taxpayers will ultimately have to help foot the bill, for example in the form of German or European subsidies. What is clear, however, is that shifting Russian gas supplies to the north of Germany will lead to changes in the gas supply infrastructure and in supply security throughout Europe. This will necessitate huge investment, which could adversely affect the goal of interconnectivity, for instance, and ultimately also hit consumers.
And then there is the fact that, given the political costs described above, the project would only be possible at all if there were a “buy-out” of the contract. It is already being suggested that Ukraine could serve as a gas storage facility and Poland could be compensated, for example by modernising its infrastructure. But that too would have to be paid for.

Costs to climate policy

At the World Climate Conference in Paris, 195 countries reached a binding agreement under international law to limit global warming to well under two degrees. The new climate agreement also states that the world must become climate-neutral in the second half of the century. For Europe this means switching entirely to renewable energies by 2050. In achieving this goal, modern gas-fired power stations and gas heating systems supplying warmth to Germany’s citizens will play a particularly important role, thanks to their flexibility. The key thing, however, is that they should represent a short and, above all, flexible bridge, so that we do not find ourselves in a new fossil fuel “gas lock-in” in the wake of the long overdue phasing-out of carbon.
According to the European Commission, the EU as a whole requires about 400 billion cubic metres of natural gas a year. Not only the European Court of Auditors but also other experts criticise this estimate as greatly exaggerated. Meanwhile, estimates of the new supply from outside needed to offset the decline in Norwegian and Dutch gas are equally divergent as this depends mainly on what happens with the increase in renewable energies and energy efficiency. For example, a 1 per cent improvement in energy efficiency will mean a 2.6 per cent drop in the demand for gas. In other words, the more that is invested in fossil fuels, the greater the risk of a misfiring energy policy.
Given this, it would be counter-productive to invest now – just 35 years before the decarbonisation target – in a major fossil fuel project which the Nord Stream consortium claims is designed to last for 50 years.
Instead, the aim should be to create an infrastructure that will not impede climate targets. To take account of the current level of demand for natural gas and its anticipated fall, the federal government needs to be a reliable partner in improving European gas supplies. The development of interconnectors, liquid hubs and a better LNG strategy for the transition to a Europe that uses 100% renewable energies must be accelerated and enshrined in a far-sighted power to-gas strategy that is in line with the climate goals.
Instead of setting our fossil fuel infrastructure and fossil fuel dependency in stone for decades to come with Nord Stream 2, we need to ensure that our energy comes increasingly from renewable sources and take measures to reduce demand. These include adopting an ambitious strategy for energy-efficient heating and cooling to replace inefficient heating systems and promoting a switch from using natural gas to renewable energy as fuel (solar energy, geothermal energy, sustainable biomass, repurposing surplus energy (“power-to-X”)). To this end, the EU should use its financial mechanisms, guarantee funds and technical assistance to stimulate investment in energy efficiency by implementing a de-risking strategy mainly targeting countries in Central and South-East Europe as already proposed in the Luxembourg Declaration.

Conclusion

Although Nord Stream 2 may be self-funding as far as it being a pipeline project is concerned, its negative political and economic knock-on costs are immense. It also goes against Europe’s decarbonisation commitments under the Paris Agreement and further entrenches dependency on fossil fuels. It undermines the continued development of a European energy union and makes Europe less competitive, since it renders the EU dependent on a single supplier that could use its monopoly as a way of exerting pressure in the future. Furthermore, Nord Stream 2 cannot be considered as a separate issue to the problems of security policy in Ukraine. All this cannot and must not be in the interests of Germany or the EU.
For these reasons, we will not be adopting a position of political indifference to the project as the German government itself is currently attempting to suggest, but will instead be explicitly opposing the expansion of this unnecessary infrastructure project that is harmful to the environment. We need to focus on truly domestic energy sources such as solar, water, wind and sustainable biomass. Not only do they now generate power far more cheaply than new gas or coal power stations will, they also free us from a dependency on expensive imported energy.

This text was first published on March 22, 2016 on oliver-krischer.eu.

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