Nord Stream 2: The delicate balancing act between business and politics

 

by Laura Camarut, EPG Fellow

EU-Russia relations have sunk to a new low after the poisoning and subsequent arrest of Alexey Nalvany, the prominent Russian opposition figure. The elephant in the room is once again Nord Stream 2, almost finished but as contentious as ever. In the light of the recent events, calls to abandon the project are growing stronger, raising once again the question whether the benefits of the project are enough to outweigh its complications and whether it is right to assume that business and politics can truly be separated when dealing with Russia.

The project is led by Gazprom, in partnership with a consortium of 5 European companies – Germany’s Uniper and Wintershall Dea, France’s ENGIE, Austria’s OMW and the Netherlands’ Shell, and it represents a total investment of 9.5 billion euros, fully privately funded. According to the project team, the pipeline is an important element for Europe’s energy security, by creating a direct route for gas imports from Russia. With domestic gas production in decline, Europe needs to secure alternative gas supplies that are both reliable and affordable to meet future demand.[1] Nord Stream 2 is not expected to significantly impact gas flows to Europe, but rather to provide an alternative route for the gas that is currently transported through Ukraine. Nord Stream 2 is designed to transport 55 Bcm/year, scaling down the gas sent via Ukraine. This is already reflected in Gazprom’s transit plans, that reduced the volumes transported via Ukraine to only 40 Bcm/year in 2021-2024 – down from 65 Bcm/year in 2020.[2]

Critics on several fronts

The project proved to be highly divisive among European countries. Most countries from Eastern Europe were fiercely opposed to the project, arguing that the last thing Europe needs is more dependency on Russia’s energy.  Poland has gone lengths to fight it through legal means: it fined six companies involved in the project, with the fine going as high as $7.61 billion for Gazprom. At the EU level, the Parliament adopted in January 2021 a resolution calling to stop the project in the light of Navalny’s arrest. This resolution has, however, only symbolic value. EU institutions have been unsuccessful in finding concrete ways to hinder the development of a project that severely damaged European unity on energy policy.

Another important criticism was the impact on Ukraine, a close ally of the European Union, who would be deprived of an important source of revenues coming from transit fees and left at Russia’s mercy regarding gas imports for its own use. This matter has been settled to some extent by the trilateral gas talks (Ukraine-Russia-EU), that led to an agreement regarding a long-term transit of gas contract via Ukraine.

It also attracted an aggressive reaction across the Atlantic. The US opposed the pipeline from the beginning, describing it as a threat to Europe’s energy security due to the tightening of ties to Russia and eventually imposed sanctions targeting private companies involved in the project, leaving it about 94% complete. So far, US sanctions applied only to smaller companies, but with a crucial role in the competition of the project – pipelayer company Allseas suspended its activity on Nord Stream 2 in December 2019 due to US sanctions, leading to important delays in construction. The US also has its own commercial interests in the European gas market, that it now reaches through LNG exports. Europe’s third biggest supplier of LNG, the US expressed its availability to supply more gas to Europe. However, as LNG remains significantly more expensive than pipeline gas from Russia, the US cannot present itself as a real alternative to Russia in terms of gas supplies. It now remains to be seen how the new administration will impact the fate of the project. Joe Biden has already expressed his opposition to Nord Stream, but it is not certain whether sanctions will remain the preferred strategy. German officials are reportedly hoping that the new Secretary of State, Antony Blinken, who wrote in the past about the ineffectiveness of US sanctions in stopping Russian pipelines to Europe, will bring a change in the current US approach.[3]

Germany remains the main supporter of the project

The task of solving this deadlock lies mostly with Germany, the fiercest supporter of the project among European countries, who insisted that the rationale of the project is purely commercial. Germany is the largest importer in the EU of Russian gas and its domestic gas consumption is expected to increase in the future. As part of the country’s Energiewende, coal power generation has to be phased out by 2038, and nuclear power will be phased out by the end of 2022. Thanks to significant investments in renewable energy sources, they will make up for most of the retired capacity, but gas-power plants will be needed to make up for the intermittency of renewables.

However, this cannot be framed simply as a German problem. From the energy policy angle, Russia is the largest supplier of natural gas to the EU, having provided 39.3% of the EU gas imports in the first semester of 2020 and 44.7% in 2019.[4] According to Gazprom data, Russia’s exports to Europe have increased steadily in the past 20 years.[5] Even at the peak of the tensions following the annexation of Crimea in 2014, Europe’s gas imports continued to increase (from 158.6 billion cubic metres in 2015 to 198.97 billion cubic meters in 2019[6]). The economic sanctions imposed on Russia targeted its energy industry, mainly through foreign technology and capital bans, but not specifically exports to Europe.[7]  The Russian energy industry – particularly the oil industry, with significantly more weight in the Russian economy than gas[8], was hurt by the sanctions. Western avant-garde technology, critical in securing Russia’s long-term development interests in the Arctic or in the LNG sector, were made inaccessible but there were no restrictions on the volumes of oil and gas that could be sold to Europe. Attempts to diversify oil and gas sources have failed in the past. The emblematic example is Nabucco, a pipeline project that was explicitly motivated as an alternative to Russian supplies. Despite all the political support that it gathered, the project ended up being abandoned due to insufficient reserves in the Caspian region to justify it.

Implications for EU energy policy

From the political point of view, Nord Stream 2 is complicating the dynamics within the EU, relations with Russia and with other key external partners, notably the US and Ukraine. It showed how far the EU is from a common energy policy, if a major infrastructure project could go on even with fierce opposition from several member states. European countries have varying degrees of dependency to Russian gas. Among the largest importers of natural gas (Germany, Spain, France, Italy, and the Netherland), Russia’s share varies from less than 25% for Spain, France and the Netherlands, to between 25% and 50% for Italy and between 50% and 75% for Germany.[9] While Eastern European countries have very high shares of Russian gas imports (between 75% and 100% for Bulgaria, Czech Republic, Hungary, Romania, Slovakia and 50% and 75% for Poland), they import considerably less in absolute terms than Western countries.

A key reason why Nord Stream 2 is so divisive in Europe is the different perceptions that EU member states have with regard to Russia. The Polish prime-minister, Mateusz Morawiecki, illustrated these differences when he criticized the French president’s comments on NATO: “President Macron is in a different position because he does not feel the hot breath of the Russian bear on his neck”.[10] In the relation with Russia, Nord Stream 2 reinforces the perception that crossing red lines is tolerated due to the dependency on oil and gas imports. The arrest of Navalny and the repression of protests are against the values that the EU stands for in global affairs. While imposing a new set of sanctions is on the table, it is unlikely to impact Nord Stream 2 or the volume of gas imports from Russia.

Nord Stream 2 is a powerful symbol of the very complicated relation between the EU and Russia, and of all the entanglements that derive from it. The reactions it provoked in the US and in Eastern Europe are just the prolongation of the same dynamics have animated this energy relationship for decades. The answer to the questions raised in the beginning of this article – on the balance between benefits and costs and on the separation of business and politics in relations with Russia – vary greatly depending on the country that answers them. Perhaps the most regrettable consequence is the rift that it caused to EU unity on energy policy, challenged on other fronts as well. Given the advanced stage of the project, regardless of its outcome, it already caused significant damage to efforts to build a common EU position on these matters. To policymakers and leaders still committed to this goal, Nord Stream 2 will serve as a valuable lesson for setting future expectations.

 

[1] Nord Stream 2. Rationale. https://www.nord-stream2.com/company/rationale/

[2] S&P Global Platts (2020). Commodities 2021: Nord Stream 2 uncertainty to cloud European gas. https://www.spglobal.com/platts/en/market-insights/latest-news/natural-gas/122220-commodities-2021-nord-stream-2-uncertainty-to-cloud-european-gas-in-2021

[3] Financial Times (2021). Germany aims for new deal with Washington on Nord Stream 2. https://www.ft.com/content/548067b9-2ff0-4a2a-94af-b74d763f4561?fbclid=IwAR3tN-jz3OemvD4X6lvUQwlyifunpOhs8yFHLbZKG5NIzwoHCWOiVKX9eP4

[4] Eurostat (2020). EU imports of energy products – recent developments. https://ec.europa.eu/eurostat/statistics-explained/pdfscache/46126.pdf

[5] Gazprom (2019). Delivery statistics. Gas supplies to Europe. http://www.gazpromexport.ru/en/statistics/

[6] Ibid.

[7] Atlantic Council (2015). Energy Sanctions and Russia: What Comes Next? https://www.atlanticcouncil.org/wp-content/uploads/2015/09/Energy_Sanctions_and_Russia_0910_web.pdf

[8] Ibid.

[9] Eurostat (2020). EU imports of energy products – recent developments. https://ec.europa.eu/eurostat/statistics-explained/pdfscache/46126.pdf

[10] Financial Times (2019). Poland’s prime minister brands Macron ‘irresponsible’ on Nato. https://www.ft.com/content/a0a71b16-03a1-11ea-a984-fbbacad9e7dd

 

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