Stratfor: A Possible Nord Stream Expansion
Russia is reaching out to Northern European countries to expand its energy footprint on the Continent amid the economic crisis. Over the next six months, Russia's Gazprom, the Netherlands' Gasunie and the United Kingdom's BP will each explore the feasibility of major energy expansions between Russia and Northern Europe. Gasunie and Gazprom signed an agreement April 8 to explore expanding the Nord Stream to the Netherlands. BP and Gazprom signed a similar agreement in October 2012 to explore building a fourth leg of Nord Stream to the United Kingdom.
In six months, the three companies will likely hold meetings to discuss their findings and then possibly move forward with the projects. If these expansions took place, they would bring large amounts of Russian natural gas to Western Europe at a time when the region is in decline and some of Russia's Central and Eastern European customers are diversifying their options.
Analysis
The Nord Stream pipeline project was initially designed by the Russians to bypass transit states to supply Russian natural gas directly to Germany, its largest European market. In the mid-to-late 2000s, Russia had a series of energy and political spats with states that its oil and natural gas transited to reach greater Europe, leading to energy cut-offs and intentional pipeline breaks. So Gazprom, in consortium with Gasunie, Germany's E.ON and Wintershall and France's GDF, built two lines from the Russian coast at Vyborg under the Baltic Sea to the German coast at Greifswald.
Once on German soil, Nord Stream's natural gas supplies split into two systems. The first goes through the OPAL pipeline system that supplies eastern Germany and connects to Slovakia and the Czech Republic. The other spur goes through the NEL pipeline system to enter the Rehden-Hamburg and the MIDAL natural gas pipeline systems in northern and eastern Germany. Currently, the first two legs of Nord Stream have a shared capacity of 55 billion cubic meters, though it carried only 28 billion cubic meters in 2012, since the second leg was unfinished. The 2012 exports also were intended mostly for German consumption.
Though the primary reason for Nord Stream was to link Russia directly to Germany, Moscow has long had further plans for the pipeline system. Since Nord Stream 1 and 2 were conceived, two more legs -- Nord Stream 3 and 4 -- have been considered.
Nord Stream 3 would expand Nord Stream 1 and 2 under the Baltic Sea to Germany. Then, a few upgrades would be made to transit Russian natural gas through Germany to the Netherlands. Russian supplies would travel along the Bunde-Den Helder pipeline system that currently carries natural gas from the North Sea through the Netherlands to Germany, rather than the other direction. But this line operates under capacity -- and will continue to do so in the future -- since North Sea supplies are in rapid decline.
Initially, Russia was not interested in supplying the Dutch market because the Netherlands is Europe's second largest producer and exporter of natural gas behind Norway. The Netherlands exported (and re-exported from the North Sea British and Norwegian supplies) 50 billion cubic meters in 2011, and has two liquefied natural gas import terminals with a total capacity of 16 billion cubic meters. Based on some estimates, Norwegian production will decline by 11 percent, British production by 32 percent and Dutch production by 17 percent in the North Sea by 2020, though each country is attempting to prolong its fields' lives.
Russia is looking to fill that void in the Netherlands' vast export networks. Gasunie owns one of the largest natural gas pipeline grids in Europe, with a capacity of 125 billion cubic meters and 15,000 kilometers (9,320 miles) of pipeline going into Germany, Belgium, France, the United Kingdom and the rest of Northern and Central Europe. Of all Gasunie's networks, Russia is most interested in the British market. This is where Nord Stream 3 provides a means of advancing Nord Stream 4, which would connect Russian supplies through the Dutch export networks to the United Kingdom. The Netherlands exports natural gas to the United Kingdom via the Balgzand-Bacton underwater interconnector pipeline (with a capacity of 16 billion cubic meters) and via Belgium along the Belgium-U.K. underwater interconnector (with a capacity of 25.5 billion cubic meters).
Gazprom has said that preliminarily it would like to export an additional 40 billion cubic meters along Nord Stream 3 and 4 to the United Kingdom -- something BP said it is interested in discussing. The two interconnectors could technically handle this capacity, but there would not be capacity enough for any competitors to use the lines. In preparation for such a deal, Gazprom has the option to obtain a 9 percent stake in the Balgzand-Bacton interconnector between the United Kingdom and the Netherlands -- a deal it made with Gasunie when Nord Steam 1 was being built.
Strategic Views of Nord Stream 3 and 4
With only an expansion of the Baltic Sea legs of Nord Stream, light modernization to current Northern European infrastructure and a reversal of one pipeline, the expansion to include the Netherlands and beyond seems technically feasible. But the political implications may still be an impediment. Moscow has a string of reasons to reintroduce a plan for Nord Stream 3 and 4 to the Netherlands and the United Kingdom. Previously, Russia was mostly interested in Nord Stream 3 and 4 to satisfy the British natural gas demand. Russia is now also interested in supplying the Dutch market in the future -- or at least those markets that the Netherlands supplies. Russia is also interested in the political connections that such supplies could foster. This all comes as Russia's foothold in Central and Eastern Europe is still uncertain.
The Dutch View
The Netherlands has been open to Nord Stream 3 and 4 for mostly commercial reasons. An expansion would increase the Netherlands' transit position within Northern Europe. But there are now more reasons for the Netherlands' interest. Because the natural gas that the Netherlands produces and transits from states like Norway and the United Kingdom is in sharp decline, the country's transit system is beginning to empty without another source of supplies.
While Dutch production will be able to supply domestic consumption, the Netherlands needs more natural gas sources to satisfy demand for its exports and re-exports around Northern Europe. Increasing liquefied natural gas imports will help meet the demand by increasing capacity by 16 billion cubic meters. This still leaves much room for other sources from which the Netherlands can re-export.
The British View
According to most estimates, the majority of British production in the North Sea will cease by the end of the decade. The United Kingdom has already started increasing its capacity to import liquefied natural gas, which now accounts for 50 percent of British natural gas imports. Liquefied natural gas import capacity has doubled in the past two years to 50 billion cubic meters annually. But British liquefied natural gas imports are extremely volatile. Because liquefied natural gas prices are driven by East Asian demand, they have increased to nearly $600 per thousand cubic meters in 2012 (more than 30 percent higher than the average price for piped natural gas in the European Union).
Due to this price increase, London has entertained the idea of importing Russian natural gas over the past decade. If Nord Stream 3 and 4 are completed, Russia could send 40 billion cubic meters to the United Kingdom. However, there are political ramifications of tying another major European power -- particularly one that has traditionally been hostile to Moscow -- to Russian natural gas supplies. This is one of the chief reasons London has been loath to even consider such an arrangement.
This brings any agreement on Nord Stream 3 and 4 into the political realm. Two political shifts between the United Kingdom and Russia make such considerations more palatable for London and Moscow.
First, Russia has been giving large concessions on energy prices, contracting on deals with other European players, to ensure that it can maintain existing market share in Europe as well as expand to Western Europe. This gives the consumer of Russian natural gas a degree of leverage that it did not have previously because Russia used to be one of the only options in Europe. Now, diversification options via the Caucasus or North Africa, as well as alternative energy sources like shale and liquefied natural gas, are competitors. So the United Kingdom may feel more comfortable knowing that if it needs to cut off its energy links to Russia for political reasons, it may do so (even if at a financial cost). There is also the possibility that the United Kingdom could be more comfortable keeping Russian political designs at bay if liquefied natural gas prices decrease in the future once more supplies hit the market.
Second, Russia and the United Kingdom have reinvigorated energy ties in the past year. BP has had a rocky past operating in Russia; it was formerly entangled in a Russian oligarch joint venture (TNK-BP) and lost licenses and opportunities along with most Western energy firms in the early 2000s. Such relations were intertwined with the overall Moscow-London tensions over issues with the United States, spy scandals and more. However, in the past year, Russia has been more serious about involving foreign firms in its new energy projects -- mostly to gain access to Western technology. So BP has had its oligarch energy dealings resolved, been allowed access to large Arctic projects, swapped assets to gain a piece of Russian state energy firm Rosneft and even has its own board members (who are notoriously anti-Russian) on Rosneft's board.
The Russian View
The Russian motives for pushing Nord Stream 3 and 4 are more complex. Russia is facing resistance from many states in its traditional customer market in Central and Eastern Europe. Russian natural gas exports to Europe are down nearly 8 percent in 2012 compared to 2011. This has prompted Moscow to shift strategies to strike long-term energy deals at a lower locked price with many of its consumers.
Now Russia is looking to other consumer markets where it can export natural gas to maintain current export levels, such as East Asia in the future and other Northern European markets now, like the United Kingdom and the Netherlands.
Linking economically into the Netherlands and the United Kingdom has an added political potential for Moscow. The Netherlands is a close ally to Russia's primary trade partner, Germany. Berlin traditionally listens closely to the Dutch, as does France, another European power with whom Russia has occasionally grown close. The Netherlands is also one of the core European countries behind the strategy to move the Continent out of the financial crisis -- something that has had a great impact on Russia. Russia already has a strong relationship with the European Union's first and fourth largest economies, Germany and Italy. If Moscow deepens relations with Europe's third and seventh largest, the Netherlands and the United Kingdom, Moscow's political weight in Europe could grow at a time when Europe is vulnerable to influence.
While the European dynamics are currently shifting, Russia has sought to ensure that its primary European partner, Germany, is still close at hand. Moscow historically has reached out to other European majors to ensure it can shape European dynamics or at least protect Russian interests in the region. Having the added connection with a large economic foundation between Russia and the United Kingdom is in Moscow's interest -- though London will continue to be wary of such ties. Thus, although Moscow will want to exploit the political benefits of expanded links into Northern Europe, it will still have the impediments of a region that does not look on Russia with a trusting eye.
Natural Gas Europe is pleased to provide this article in cooperation with Stratfor. For more visit http://www.stratfor.com/