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Gas pipeline construction for Nord Stream 2 in the Baltic Sea, November 2018

What is Nord Stream 2? Why are Russia's opponents in Europe and America dead set against it? Meduza explains the controversy surrounding a pipeline that could cut Ukraine out of Europe's gas business

Source: Meduza
Gas pipeline construction for Nord Stream 2 in the Baltic Sea, November 2018
Gas pipeline construction for Nord Stream 2 in the Baltic Sea, November 2018
Bernd Wuestneck / dpa / AP / Scanpix / LETA

On February 12, European Union officials will discuss the status of the Nord Stream 2 gas pipeline, which is currently being built from the Russian town of Ust-Luga to the German city of Greifswald along the bottom of the Baltic Sea. The United States and many European countries oppose the project, but it seems Russia and her main ally in this undertaking — Germany — are nearly at the finish line, following a compromise reached late last week in the EU. Meduza takes a closer look at Nord Stream 2 and why it’s fueled so much international tension.

Why has this pipeline caused such a headache?

Nord Stream 2 is a “twin” to the existing Nord Stream 1 gas pipeline, which came online in 2012. Both pipelines are designed to deliver 55 billion cubic meters (1.9 trillion cubic feet) of gas a year from the Leningrad region to Germany along the bottom of the Baltic Sea. Fifty-five billion cubic meters is more than a quarter of Russia’s entire gas exports to Europe. Gazprom owns a controlling stake in the pipeline, and several European energy companies are major investors, as well. The project is expected to be enormously profitable, paying for itself in under a decade (for comparison, Nord Stream 1’s recoupment period is 14 years, because the terms of the contract include a reduced rate).

But Russia clearly seeks more than simple economic benefits. Currently, Russian gas reaches Europe through Ukrainian territory, and Nord Stream 2 would allow Moscow to escape this dependence for the first time.

Here’s how the supply chain currently breaks down: Russia exports a bit more than 200 billion cubic meters (7.1 trillion cubic feet) of gas to Europe every year. In 2018, about 86 billion of these cubic meters (3 trillion cubic feet) were delivered through Ukraine. According to the U.S. State Department, annual transit fees charged by Kyiv account for roughly two percent of the country’s GDP (about $2 billion). Without Russian gas shipments, Ukraine also stands to lose another one percent of its GDP in gas shortages. Why? Since 2014, Kyiv hasn’t formally purchased gas from Russia, instead taking some of the supply sent through to Europe, in agreement with the EU.

For now, Russia is contractually required to supply gas through Ukraine, but that long-term agreement expires on December 31. 2019. Both sides can sign a new agreement, but it isn’t obligatory. By the end of the year, moreover, Russia plans to finish construction on two new pipelines: Nord Stream 2 (with an annual capacity of 55 billion cubic meters) and TurkStream (with two lines capable of delivering 31.5 billion cubic meters a year). Together, these two delivery systems will allow Moscow to redirect the entire supply of gas currently sent through Ukraine, likely plunging the country into another economic crisis by 2020.

Russian Energy Minister Alexander Novak has already guaranteed that Russian gas supplies will reach Europe, with or without a new Ukraine deal, and Gazprom CEO Alexey Miller says Russia will reduce its shipments through Ukraine to 10–15 billion cubic meters, even if Moscow signs a new agreement with Kyiv.

The Kremlin has two problems: first, nobody but Russia is interested in excluding Ukraine completely from the gas business. Second, the United States has aims on Russia’s share of the European gas market (which currently exceeds a third of the total supply and continues to grow). For these reasons, Nord Stream 2 has faced criticism from both the U.S. and many European states.

How have opponents tried to disrupt construction of Nord Stream 2?

Ukraine has repeatedly asked the European Union to block the project, drawing on support from many experts, politicians in most Eastern European countries, the European Parliament, and the United States. American officials continue to threaten the project’s participants with sanctions. Critics say the pipeline is a political move, warning that it will make Europe too dependent on Russian gas, giving Moscow the ability to exert “energy blackmail.” Romania, which assumed EU Council presidency at the start of the year, planned to “sink” Nord Stream 2 in red tape, introducing amendments to the EU Gas Directive that would prohibit Gazprom from acting as the pipeline’s operator by restricting the role to independent companies, while also reserving half the pipeline’s capacity for other gas suppliers. These new regulations would jeopardize the project’s return on investment and slow its construction timeline.

Germany flatly refused to discuss the amendments — until early February, when France changed course and unexpectedly sided with Romania. On February 8, after all-night negotiations, officials reached a compromise: Germany agreed not to stand in the way of the amendments, provided that the decision to apply the new regulations would fall to the country where a pipeline makes landfall. In the case of the Nord Stream pipelines, this is Germany.

At the same time, German Chancellor Angela Merkel has tried to reassure the project’s opponents outside the EU, telling Ukraine that Russia should sign a new long-term transit agreement with Kyiv, and promising the Americans that Europe will buy more liquefied gas. This latter pledge is precisely what U.S. President Donald Trump wanted from the EU, when he vowed to supply Europe with more gas, if it cuts shipments from Russia.

If it dislikes Russia so much, why doesn’t the EU just buy all its gas from the Americans?

American liquefied gas is considerably more expensive than the gas delivered through Russian pipelines, and Washington has accused Moscow of exploiting a political situation to gain economic benefits. The EU acknowledges that liquefied gas purchases are necessary in order to diversify Europe’s supply and reduce the continent’s dependency on Russian gas. In reality, however, only a few countries (such as Poland) have agreed on major shipments from the United States. In most of Europe, individual companies resort to buying American gas on the open market when the supply from Russia runs out. Since 2015, moreover, Europe has been consuming more and more gas, as EU thermal power plants convert to gas from other kinds of fuel. In Germany, the issue of cost supersedes transatlantic politics.

So Gazprom has won?

It’s too soon to say. It’s now unlikely that Nord Stream 2’s opponents will be able to block the project, but the process of amending the EU Gas Directive could be protracted. If all the bureaucratic barriers aren’t removed by the middle of the year, the pipeline’s completion date might be delayed, forcing Russia to come to the negotiating table in Ukraine without its ace in the hole.

There is also the danger that Washington might impose sanctions on companies participating in Nord Stream 2. Many of these businesses have already said they would leave the project to avoid such penalties.

Dmitry Kuznets

Translation by Kevin Rothrock

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