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January 27, 2020

Nord Stream 2: inside the world’s most controversial pipeline project

Denmark has greenlit the Nord Stream 2 project, a joint German-Russian pipeline aimed at transporting Russian gas directly to Germany under the Baltic Sea. The move is fiercely opposed by the Trump administration, which fears growing Russian influence in the region, but are new natural gas supplies too good to pass up? We report.

On 8 November 2011, Russian President Dmitry Medvedev and European leaders including Angela Merkel met in the German resort of Lubmin to officially inaugurate the Nord Stream gas pipeline.

A press photograph shows Merkel and her counterparts from France and the Netherlands smiling broadly. To them, the rationale behind Nord Stream was solid; transporting affordable, reliable and more sustainable new natural gas supplies from the world’s largest reserves in Russia to the EU internal market addresses the issue of declining EU domestic production and enhances its security of supply.

For Russia, Nord Stream 1 – and more specifically the Nord Stream 2 expansion project inaugurated the following year – will increase its supply of gas to the EU region to 55 billion cubic metres per year.

“From an energy security point of view, Germany is trying to secure supplies in the midst of changing its energy mix as part of the Energiewende policy,” explains Chirag Rathi, consulting director of energy & environment at Frost & Sullivan. “Domestic consumption has been quite variable in the past 10 years, but the last couple of years has seen a marginal increase in gas demand due to higher than usual seasonal winter demand and economic growth.

“Germany’s domestic production, on the other hand, has been in perennial decline for the past decade and with the ban on fracking that is unlikely to change. The Netherlands, one of the key suppliers of gas, is teetering because of issues with its Groningen field.

“Germany has to secure additional supply and with pipeline imports being cheaper than liquefied natural gas (LNG), it makes economic sense.”

Too little, too late? US sanctions, TurkStream and Russia’s deal with Ukraine

Germany may be able to argue the economic case for Nord Stream 2, but the pipeline, which is owned by Russia’s state-run gas company Gazprom, remains one of the most geopolitically divisive offshore projects of modern times, one that continues to alienate Russia’s neighbouring states, divide Europe, and infuriate everyone from President Trump to skateboarding environmentalists.

In October 2019, Denmark granted a permit for a section of Nord Stream 2 to be built near the island of Bornholm, effectively removing the final hurdle preventing the completion of the subsea pipeline – the world’s longest at 1,225km (760 miles) – from Kingisepp in Russia to Greifswald in Germany.

The Trump administration, aware that Russia already supplies around 40% of the EU’s gas supplies and that Nord Stream 2 may reduce its share of the lucrative European market for US LNG, reacted by imposing sanctions in December on certain firms building Nord Stream 2, forcing Swiss-Dutch contractor Allseas – which was due to lay 96% of all the pipes needed for the project – to halt work.

Predictably, Germany, Russia and various EU officials criticised the sanctions, but they have since been overshadowed by two major announcements; firstly, the TurkStream gas pipeline from Russia to Turkey is due to go live later this month, deepening Russia’s influence in Europe’s internal energy market still further, and second, Russia’s new five-year transit deal to ship gas to Europe via Ukraine.

Prime Minister Medvedev said that he saw nothing “catastrophic” in the US sanctions, adding that they would only delay Nord Stream 2 by a couple of months. Rathi also downplays their significance.

“Sanctions are likely to impede progress, but they appear rather half-hearted; it seems the US has accepted Nord Stream 2 as a reality,” he says. “The US is keen to push its LNG exports to Germany and is trying hard to dislodge Russian imports in order to serve its burgeoning LNG export terminals.

“President Trump is also striving to portray the US as a reliable and stable partner vis-à-vis Russia’s past history of using natural gas as geopolitical weapon.”

European union: EU looks to reduce reliance on Russia

Opposition to Nord Stream 2 within Europe has in the recent past threatened to derail the project.

EU member states, concerned by the union’s reliance on Russian gas, a lack of competition in the its energy market, and looking to import more US LNG and explore new pipelines – including a planned Norway-Poland route via Denmark – pushed for Nord Stream to be brought under tighter EU control.

“On the geopolitical side, Germany might lose equity because its support for Nord Stream 2 runs contrary to EU member countries’ long-term strategy of achieving an energy union,” Rathi notes.

“The new pipeline is also likely to impede the development of an open gas market with price competition and diversified supply to the EU. The EU is therefore pushing hard to utilise existing and new LNG terminals to import gas from the Middle East and the US to reduce dependence on Russia.

“A case generally made by the EU Commission is that Nord Stream 2 is redundant because EU consumption growth is expected to be tepid and can be served with LNG imports,” he adds.

However, the threat appears to have been removed, subject to further revision by the European Parliament, after Germany agreed that pipelines entering the EU should come under rules governing the internal energy market, including ‘unbundling’ pipeline ownership from the supplier (Gazprom).

Tube strike: environmental concerns and the future of Nord Stream 2

There is also an environmental dimension to the controversy. In May 2019, skateboarding climate activists opposed to the use of fossil fuels occupied a section of the pipeline in northern Germany to draw attention to the environmental impact of natural gas, which they claim is as destructive as coal.

The Russian office of Greenpeace has claimed that Nord Stream 2 violates Russian environmental protection laws by harming rare species in the Kurgalsky nature reserve in Russia’s north-west.

Concerns have also been raised around Nord Stream 2 concerning the potential release of methane, a by-product of burning gas that is thought to be 75 times more powerful than carbon dioxide.

“If total leaks of natural gas exceed as little as 3.5% of overall gas volume, gas is no better than coal from a climate change perspective,” Paul Bledsoe, an energy fellow and strategic advisor for the Washington-based Progressive Policy Institute wrote in the Financial Times.

In light of these concerns, and ongoing geopolitical tension surrounding the project, what impact does Rathi envisage it having on natural gas prices, the gas industry and Germany’s place in the EU?

“Germany is already importing more than one third of its gas from Russia,” he says. “It is still unclear how much the gas consumption will grow in light of Energiewende, but any future demand growth is likely to be satisfied with Russian imports. Also, any EU import substitution is likely to come from Nord Stream 2.

“The pricing might stabilise, which is generally the case with piped gas which is usually locked in for longer-term contracts. However, things might change if Russia goes back to its former strategy of using gas as a geopolitical weapon.”

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