Europe Embraces Nord Stream Expansion

European countries, including the Netherlands, Finland and the United Kingdom expressed their interest in the expansion of Nord Stream. The third and fourth strings of the pipeline enjoy the highest level of political support in Europe. As a result Nord Stream will be the cornerstone of European energy security in the decades to come.

Nord Stream expansion rumors have been circulating in various business papers for more than a year. Following Putin-Merkel talks, this project gained necessary political dimension. In her official statement in November, 2012 Chancellor of Germany Angela Merkel praised it as "a major success". Since then many things have changed. Gazprom commissioned the second string of the pipeline and aims for the third and fourth section. This month Nord Stream AG has published the Project Information Document (PID) on the extension project. Many European countries, including the Netherlands, Finland and the United Kingdom expressed their interest in the expansion of the pipeline. Finally, the Netherlands’ Gasunie made a first step and inked a document exploring the possibilities for further energy cooperation with Russia. Chances are good that with such business background Nord Stream extension may become a matter of common interest for many players with different geopolitical orientation.

As usual, energy matters are closely intertwined with foreign policy. Although sometimes it resembles an old children's game of hide and seek. For instance, the European Union set up a bulky bureaucratic firewall, called “third energy package” and tried to impose it on the Russians, but to no avail. Gazprom responded with a new cunning scheme of restructuring its assets in Europe. Instead of changing the rules of the game in the crisis-hit Eurozone, the EU authorities should have concentrated on economic growth, not on politically charged red tape. Otherwise by the time Russian strategic commodity finally arrives in Europe, the industrial sector of the continent will be in bad condition. These political divisions, however, seem to be off the table. Now the sovereign European states are competing with each other to take part in Nord Stream. Project scenario analysis reveals specific interests of pipeline’s stakeholders and shows potential benefits for its future contractors.

Russia’s Gazprom wants to mitigate transit risks in the unstable Ukraine and establish a new regional line of natural gas supplies to Europe. Such innovative project will undoubtedly strengthen Gazprom’s position on the global market, challenged by the media hype about recent shale bubble in the US. Besides, Nord Stream development will provide the Russian economy with contracts and jobs - major industrial players NLMK and Severstal are planning to supply pipes for it. Russian company has reasons to maintain positive outlook. The second string was successfully commissioned in October, 2012 with total design capacity of 55 billion cubic meters. It happened just before the outbreak of exceptionally cold winter in Europe. At the same time Nord Stream AG consortium, founded by Gazprom, Germany's Wintershall Holding and E.ON Ruhrgas, the Dutch Gasunie and France's GDF Suez examined the preliminary results of the feasibility studies for the construction of the third and fourth strings and came to the conclusion that their construction was economically and technically feasible. European LNG shortages in March, 2013 proved the validity of this statement.

In April, 2013 Gazprom announced that there are two possible routes for Russian natural gas: a separate pipeline extension to Central Europe via Poland or further expansion of the existing Nord Stream network. According to the company’s statement, Nord Stream shareholders have decided not to sign any legally binding agreements on construction of the third and fourth lines within the next six months. "Until October, 2013 a feasibility study for the Yamal-Europe 2 [gas pipeline] is to be completed, which will provide clarity on technical and economic viability of the project," the statement said quoting Russian company’s CEO Alexei Miller. Can Russian gas giant really repeat its breakthrough into the Western Europe and Scandinavia with the third and the fourth string of the pipeline? It will depend on the course of talks with potential contractors.

Last month William Hague, British foreign secretary, effectively discussed with his Russian colleague Sergei Lavrov the possibility of Nord Stream’s extension to the United Kingdom. “Russia is a vital energy supplier for Europe”, said Hague. One can see here a clear contradiction between the political rhetoric of the Foreign Office and economic reality. Cold bilateral relations cannot change the simple fact: Great Britain needs Russian gas by 2020, as the North Sea output declines. “The UK welcomes new sources of gas, including potentially from Russia,” said Chris Barton, head of energy supply security at the UK's Department of Energy and Climate Change in fall, 2012.

According to EIA data, natural gas production in the UK has been falling since 2000, while the level of consumption has remained more or less the same. Despite the evident industrial downturn in the British economy, natural gas still plays a very important role in the overall energy balance of the UK (see Overall data tables in “Energy consumption in the UK”-2012 report). In the mid-term Nord Stream supplies may become one of the pillars of the UK’s low-carbon energy strategy. Natural gas is a "perfect partner" for economies like Britain's, which needs reliable supplies for a low-carbon future, thinks Paul Van Gelder, president of state-owned Dutch energy company Gasunie. The chief partner of the project from the British side might be BP: this oil and gas supermajor has necessary competence and commitment to working in Russia. BP has made clear that it "maintains an interest in the project, but a final decision on participation is pending."

Germany has been a long-time supporter of natural gas supplies from the East, because of its unhesitating and respectworthy choice of environmentally safe fuel. In Germany nuclear energy use is banned and fracking technology is strictly limited. Nevertheless, natural gas remains a reliable energy source, which makes it an obvious sustainable choice. "If Europe wants to assert itself in global competition, this won't work without Russian gas in particular," said Former German Chancellor Schröder during the opening ceremony of the second string of the pipeline. Chancellor Merkel also highlighted the strategic importance of this project: “Nord Stream has strikingly shown that the state and the private sector can form a constructive and productive unit across several national borders. We can be proud of this truly European collaboration”. It should be noted that the German market can be viewed as a gateway to the gas consumers in Denmark, Sweden and France.

In April, 2012 Finland granted Nord Stream AG consortium permission to study the Baltic Sea bed in its sovereign economic zone for the possible extension of the subsea gas line (the Finnish route section will be 230 miles long). The current Environmental Impact Assessment (EIA) examines water quality and ship traffic. The Baltic States, however, turned down all preliminary offers. In December, 2012 Estonian officials again denied permission for Nord Stream expansion studies. The government rejected a similar request in 2007. Even German participation in the project couldn’t break the deadlock in negotiations. Such obstructionist position of the Baltic States is especially regrettable, if we consider that their final contracted energy demand cannot be met without Russian gas (see data in a 2010 working paper on Gas Supply Security in the Baltic States by Cambridge University’s EPRG).

The Netherlandshas ambitions to develop its natural gas infrastructure (for example, the LNG-facility in Rotterdam) and become a pan-European gas hub. That’s why in the Netherlands Nord Stream enjoys the highest level of political support. Earlier in April Gazprom and Gasunie inked a memorandum of agreement in the presence of Vladimir Putin, President of the Russian Federation and Mark Rutte, Prime Minister of the Netherlands. In the opinion of the Dutch side, natural gas infrastructure have unique properties enabling to maintain the balance between energy consumption on one hand and unpredictable supplies of renewable energy sources on the other hand.

We can see now why Nord Stream project is backed up by influential players in the European energy sector. Most probably the third and the fourth sections of the pipeline will be implemented, despite some negative political signals from the Baltic Region. However, strict environmental compliance procedures demanded by the Scandinavian countries might cause some minor delays. The future of Nord Stream extension also depends on the ongoing feasibility study of the second leg of the Yamal-Europe 2 project, which runs from Russia via Belarus and Poland to the Polish-German border. But in any case Nord Stream will be the cornerstone of European energy security in the decades to come.

Read the first part of our research on the South Stream project in the Eastern Europe.

Nord Stream Fact Sheet

• Nord Stream is a twin pipeline system through the Baltic Sea transporting natural gas from Russia to Europe;
• It runs across the Baltic Sea waters from the Portovaya Bay (near Vyborg) to the German coast (near Greifswald) stretching over 1224 kilometers;
• The third and fourth lines are planned for annual capacities of 27.5 billion cubic meters each;
• The stakes in Nord Stream AG are distributed as follows: Gazprom holds 51%, Wintershall Holding and E.ON Ruhrgas – 15.5% each, Gasunie and GDF Suez – 9% each;
• Nord Stream will export gas from the Yuzhno-Russkoye oil and gas field, the Yamal Peninsula, Ob and Taz Bays and in perspective Shtokman field;
• The cost of construction of the first two sections was $7.4 billion.

Igor Alexeev is a Russian journalist and blogger for Strategic Culture Foundation and Route Magazine. He writes on the oil and gas sector, Eurasian energy security and shipping industries in the Arctic.