2015-12-17 19:55:00
NORD STREAM-2: SPECIAL TERMS
At the upcoming European Council on 17 and 18 December, the Heads of States and Governments will once again debate a story of gas involving Russia: Nord Stream-2 (NS2).
What's the rationale behind Nord Stream-2?
In 2011, a new gas pipeline started to be operational, Nord Stream-1. It transports Russian gas, directly from Russia to Germany, via an offshore route crossing through the Baltic Sea and the Finnish, Danish, Swedish and German Exclusive Economic Zones (EEZ). It has the potential to carry up to 55 billion cubic metres (bcm) of gas every year and, at that time, was officially meant to meet the expected rise of gas demand in the EU.
In September 2015, major EU companies entered into an agreement with Russian gas provider Gazprom to build and operate Nord Stream-2: two new pipelines across the Baltic Sea, to increase by an extra 55 bcm the export capacity of Russian gas to Germany via the Baltic Sea.
Nord Stream-2 is still supposed to meet a hypothetical rise of EU gas demand, and also to deal with the abandonment of other projects, like the Nabucco project, which was largely abandoned in 2012, the South Stream project abandoned in December 2014, as well as the ill-fated Turkish Stream project, held hostage in the Russian-Turkish war of words that has followed the shooting down of a Russian warplane by the Turkish Airforce.
The European Union is now confronted with the challenge of Nord Stream-2; a project that can hardly be justified by a hypothetically increasing EU gas demand. It is a project that is already infuriating Central Eastern European countries, especially Poland and Slovakia, threatened by the drying up of their own pipelines. In addition, NS2 would bring major economic benefits to Russia at a time when the EU is renewing its sanctions against the country that invaded Ukraine. It would also be used to circumvent Ukraine, thus harming the Ukrainian economy and threatening the EU-supported-rehabilitation of the Ukrainian Gas Transmission System.
The project Nord Stream-2 – a test case for the EU Energy Diplomacy
Nord Stream-2 is sponsored by five major EU companies. Two of them were clearly invited to participate in order to protect their Russian assets: Anglo-Dutch Shell, in the case of Sakhalin, and the German E.ON on with respect to its Russian power plants. Getting the German Wintershall and the Austrian OMV on board was not a surprise for any observer. Getting the French Engie on board could appear logical given the participation of Engie in Nord Stream-1. A shareholder agreement signed in September 2015 gave Gazprom 51% of the shares (and the majority control) and each of the other shareholders 10%, with Engie getting 9%. Subsequently Engie's share was raised to 10%.
The official rationale is that NS2 is only a commercial project. But this project has been very well prepared by Gazprom and its main shareholder, the Russian Federation and its President, Vladimir Putin. Both its content and its timing clearly indicate the political backing that underpins the project. One of its (intended?) consequences is to divide EU Member States on a key issue, the role of Russian gas in Europe, while those Member States are attempting to build their Energy Union.
Given the context, it is clear that there are a lot of politics behind Nord Stream-2, as exemplified by the public support the project got from the German Vice-Chancellor, in Moscow.
For the EU Energy Diplomacy, Nord Stream-2 is a test case. The EU position has been consistent over the last years. The May 2014 European Energy Security Strategy, the February 2015 Energy Union Strategy and the July 2015 EU Council conclusions on Energy Diplomacy all point towards the same conclusion: the adoption of an European common position of the Member States toward any third country energy supplier, of which Russia is by far the most important. The European Council of December 2015 may be the place to test this ambition to speak with one voice, taking NS2 as a concrete test of what a genuine energy diplomacy could look like.
The Commission walks on eggshells while central-eastern member states infuriate
So far, the reaction of the European Commission is prudent. In its 18 November 2015 State of the Energy Union Communication, the Commission "takes note of the plans of commercial companies to build further pipelines connecting Russia and Germany through the Baltic Sea. If built, [Nord Stream-2] would not give access to a new source of supply and would further increase transmission capacity from Russia to the EU, while even now this is only used at 50% rate. These pipelines will have to comply fully with EU law. The Commission will assess any such project against the European regulatory framework on its own merits."
It added: "The EU will only support infrastructure projects that are in line with the core principles of the Energy Union, including the EU Energy Security Strategy".
On 30 November 2015, the Slovak Energy Minister wrote--in the name of Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia--to the Vice-President of the European Commission in charge of the Energy Union (with a copy sent to the President of the European Council) a letter expressing those countries' serious worries about the negative impact that Nord Stream-2 could have on the security of the Central and Eastern European countries and requesting a debate at the December European Council. Their concerns may also be seen in the light of the way Gazprom has managed its relations with them in the past as highlighted by the enquiry of the Commission's DG Competition, now negotiating with Gazprom.
The spirit of the Energy Union requires that the EU and its Member States support a more coherent EU foreign and energy policy that takes geopolitical developments into account. This is precisely what Europe's heads of state and government, meeting as the European Council, can do when they hold discussions on Nord Stream-2 at the same time as they consider the renewal of economic sanctions against Russia.
The likely impacts of Nord Stream-2
1. NS2 is useless as gas demand falls in Europe.
EU gas demand has fallen every year since 2010 while the European Commission has for 12 years consistently overestimated future EU gas demand. Let us moreover keep in mind that the EU wants to reach 20% of energy efficiency gains by 2020 and 27% by 2030. Those objectives, together with the use of the EU funding (e.g. Structural Funds, Juncker Plan, European Investment Bank) and energy efficiency legislation targeting the buildings sector (e.g. Energy Efficiency Directive), will lead to a further decrease of EU gas demand. And those energy efficiency gains are unlikely to be offset by more gas into the electricity mix as the EU is still very far from fixing its ETS carbon pricing system in a way that would reach the level of around €30-40 per tonne of CO2 required to ensure a switch from coal to gas in electricity generation.
2. NS2 would further increase the overcapacity of gas import infrastructures in Europe.
There are huge import capacities that are not used, starting with Nord Stream-1. EU gas demand prospects are not exciting, even with a decline in domestic gas production; the needs for additional imports are not that significant. Import capacities are today at 700 bcma, yet actual imports are around 250 bcma, of which 100 bcma comes from Norway--and Norwegian gas is the most secure gas you can have since Norway is both an ally and de facto a part of the EU internal market through the European Economic Area Agreement.
3. NS2 does not increase the EU energy security.
The EU energy security strategy rests on eight key pillars, and NS2 does not meet any of those. Most importantly for a gas infrastructure project, it does not diversify gas sources. It will still carry Russian gas; indeed, it will not even grant access to non-Gazprom Russian suppliers. Nor does it diversify gas routes.
4. NS2 would undermine Ukraine's security, and weaken its economic stability.
With a falling gas demand and overcapacity of gas import infrastructures, it becomes clear that the real aim of NS2 is to circumvent Ukraine, the Russian Federation having said that it will stop transiting gas through Ukraine by 2019, which is precisely the year when NS2 is supposed to become operational.
This would undermine Ukraine's security as it would allow Russia to cut gas supplies to Ukraine, but not to the EU, thus weakening the de facto solidarity that currently exists between the EU and Ukraine.
Ukraine would moreover see a loss of gas transit fees, accounting for roughly $2 billion (USD); with a similar phenomenon occurring for Slovakia, Romania, Bulgaria, and Poland.
As Ukraine currently is financially supported by the EU, its Member States and the IMF, it means that EU member states will have to provide fresh loans to Ukraine to cover at least part of this $2 billion, but with Kiev's ability to repay such loans being far from entirely certain. In other words, NS2 will slightly increase the public debt of Ukraine and EU Member States.
NS2 would also reinforce Russia's negotiating power on the countries using the Yamal pipeline, i.e. Belarus and Poland.
In other words, NS2 is not acceptable for these countries in economic and geopolitical terms. This is where the Energy Union and the solidarity it implies should play its full role, both to cement solidarity between EU Member States and to avoid increasing Russia's leverage over Belarus, Ukraine, and many EU Member States.
5. NS2 divides the Europeans.
Nord Stream-2 cannot be described as a straightforward commercial project. It has been set up by the Russian Federation and constitutes one of its pieces in the vast geopolitical chess game it is playing. Bringing in some major players like Shell, which normally does not engage in pipeline construction in Europe, can only be explained in terms of Russian arm twisting.
Shell's interests in Sakhalin are big enough to make it necessary for the Anglo-Dutch company to accept the "invitation" to take 10% of Nord Stream-2. The interests of E.ON in Russia are similarly important to justify its entry in the same pipeline.
The final aim of Russia is therefore to apply the classic tactic of divide and rule, to split the Europeans (and Ukraine) and thus dominate them. Or, to use Jacques Delors' metaphor, to follow the example of the last of Ancients' Rome Horatii triplets, who, his brothers dead beside him, successfully took on--and killed--the Curiaces triplets one after the other. Just like the last of the Horatiij, Russia aims at politically defeating the Europeans by dealing with each individual Member State one by one rather than facing a negotiation with 28 united states and more if Ukraine and other Energy Community states are included.
The possible compromises to address Nord Stream-2 while building a genuine EU Energy Diplomacy
As there is a strong willingness from some parties to allow NS2 to proceed, a compromise has to be found in order to identify a win-win solution that is in line with both EU legislation, notably the third energy market package, and the EU Energy Diplomacy project. With this in mind, three potential compromises appear possible:
- First and foremost, this is an EU-Russia project, not a Russia-Germany one. The pipeline crosses EEZs of Finland, Sweden, and Denmark before landing in Germany, meaning that it directly concerns at least four EU member states. In other words, this pipeline is subject to EU as well as Russian law. Establishing a legal regime for the pipeline--an issue not even yet resolved for NS1--can best be solved by an EU-Russia Treaty governing both pipelines in order to ensure that both Nord Stream-1 and Nord Stream-2 are compliant with the third energy market package.
Such a Treaty could also deal with other aspects of the project, such as the possibility for other Russian suppliers such as Rosneft and Novatek to use the line or even for Turkmen and Kazakh suppliers to access the system. Under conditions to be established in agreement with Russia, Ukrainian transit should also be maintained at a certain minimum level to supply Eastern European countries and the Balkans. Similar consideration should be extended to the Yamal pipeline. As a concession to Gazprom, the status of the Opal pipeline, which links Nord Stream with central Europe, could also be resolved.
In addition, the EU could guarantee a minimum level of import from Russia for the next two or three decades.
Such an EU-Russia Treaty would require Member States to give the Commission a mandate to negotiate with Russia, something which has been done already for both the TransCaspianPipeline (TCP) and for the Baltic States Electricity situation with Russia.
The European Parliament should also be involved in this process, to ensure more democratic legitimacy. This is by far the best solution that would guarantee that both Nord Stream-1 and Nord Stream-2 are treated as a matter for EU Energy Diplomacy, as they should be.
- In the absence of an EU-Russia Treaty, which is our favourite solution, NS2 at least has to fully comply with EU rules, meaning that it is considered a transmission pipeline subject to the third gas directive. NS2 needs to be operated by a transmission system operator, which has to be fully ownership unbundled (no grandfather rights are allowed for a project developed post-2012 according to Article 9 of the Third Gas Directive), allowing third party access and being subject to proper tariff regulation. No exemption could be granted as the conditions for exemptions are simply not met.
- A third solution, more radical but in line with the latest gas demand projections of the Commission and the International Energy Agency, is to say that Nord Stream-2 is not needed given both the EU's current and expected gas demand and the availability of sufficient import capacities. But the counterpart should surely be to allow the full use of NS1 by removing current regulatory restrictions causing a bottleneck in Germany. There is also a need to enhance the conditions of transit in Ukraine, in association with Russia, in order to start building trust between Russian suppliers and newly unbundled Ukrainian transporters.
Conclusions
The upcoming European Council will therefore be a test for the consistency of EU policy choices, responding to Russia and helping to shape genuine European solidarity:
- The EU has adopted economic sanctions on Russia as a response to its de facto annexation of Crimea and its illegal military presence in Eastern Ukraine. It would be inconsistent for the December 2015 European Council to renew those sanctions while letting the current version of NS2 go forward without any prospect for changes.
- This European Council will deal with two policy areas linked with the issue of European solidarity: migration and energy. We may therefore witness a situation where Germany (and others) would ask Poland (and others) for more European solidarity in the face of the so-called "refugee crisis" while refusing to show solidarity on NS2. At the same time, Poland will most certainly make calls in favour of European energy solidarity, while its new government uses the pretext of the Paris attacks to give up on Poland's promise to play its role in the refugee crisis.
It will thus be interesting to see whether European heads of state and government are ready to overcome the silo mentality and to start working on constructive win-win package deals. It is also a matter of mutual trust and the expression of the duty to cooperate as envisaged by the Treaty on the European Union.
NS2 is much more than a simple infrastructure project. It is a test for the Energy Diplomacy agreed upon by all EU Member States just five months ago. NS2 thus needs to be discussed at EU level on whether it is needed, in the light of the energy and climate objectives set for 2030, and, if so, it has to be fully governed by EU law.
As part of the EU energy diplomacy, the regulatory framework should be set in a bilateral agreement concluded between the European Union and the Russian Federation. This is the only way for the European Union and its flagship project of Energy Diplomacy to show credibility.
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