[Premium] Nord Stream 2: 'Bad Politically, OK Commercially'

Nord Stream 2 (NS2) is "commercially okay, it's neither an improvement or a threat for security of supply, but is probably not a good idea politically," concludes  a former Austrian energy regulator, Walter Boltz, at a discussion hosted by the Energy Post in Brussels on November 28. "Its downsides are that the new pipeline will further increase the market share of Gazprom and probably reduce the motivation of Russia to have a constructive relation with Ukraine," he argues.

Nord Stream 2 is entirely owned by Gazprom, with five European partners each contributing a fifth to its costs, and is bitterly opposed by the US as well as by former Soviet satellites or republics in central and eastern Europe. But it is not clear what sanctions, if any, the US will decide to apply to the five companies that co-operate with Gazprom, as their application to energy export projects is vague, being classed as a 'may' rather than a 'shall' in the text of the sanctions law.

Nord Stream 1 (pictured above, at Greifswald, Germany) had a different ownership structure and its construction predates the war in eastern Ukraine and the seizure of Crimea that nearly all countries regard as illegal, Syria and North Korea being among the exceptions.

Boltz was joined in the panel by NS2 CFO Paul Corcoran; Eucers (King's College London) research director Frank Umbach; and Michael Stoppard, chief strategist for global gas at economic consultancy IHS Energy

According to research by think-tank ewi Research Scenarios done for the German Federal Foreign Office, the profitability of NS2 is highly dependent on Ukrainian transit fees. NS2 CEO Paul Corcoran told NGW before the event that "Ukrainian tariffs are 10 to 20% higher than our tariffs... and I believe they propose to virtually double that after 2020, to €4.3/1000 m³/100 km."

However, this contradicts recent declarations by Ukrainian state-owned Naftogaz that it will, on the contrary, reduce tariffs dramatically after current contracts with Gazprom expire in 2019. If Naftogaz does follow its announced plan of reducing tariffs to up to 10% of current levels after 2020, this transit route would be economically more attractive, although it is not certain that Gazprom would use it for strategic and political reasons.

If the European Commission does manage to get a mandate for negotiating conditions on NS2 – currently a 50/50 chance, believes Boltz –Gazprom should not fret however. The project will probably go ahead anyway, and in the long run a negotiation with the EC would result in increased legal certainty, he says.

Additionally, another ewi study (commissioned by NS2) suggests that additional Russian gas flowing into the European market pushes LNG prices down globally, which means that each and every European country (and any LNG-importing country in the world) would benefit from lower LNG prices.

Nonetheless, “cheap Russian gas” is a notion that we should forget altogether, argues Umbach. Gazprom’s cheap gas from its mature fields in Western Siberia is rapidly dwindling, he says, while output from the new gas fields in the Yamal peninsula must be heavily subsidised to offset higher production and transport costs, owing to severe weather conditions on sites and transportation over 4,000 km to reach Germany. “LNG is cheaper for gas exports that have to travel beyond 3,000 km,” he argues; and if Gazprom had to cover full investment costs, new pipeline infrastructure would not seem as attractive anymore.

Partly agreeing with him, Michael Stoppard, Chief Strategist at economic consultancy IHS Energy addss that "Europe, thanks to its privileged geographical location, may still offer lower prices for LNG than Asia, and still attract US LNG."

Russia's perspective

Russia as a sovereign state argues it is free to deliver gas to customers through whichever route it likes, and it can with justification point to the historic losses of gas transited across Ukraine that make its product less reliable. Ukraine's pipelines need replacement or upgrading, which will cost perhaps $3bn according to some independent consultants.

Nord Stream 2 also points out that there is no obligation to buy Russian gas and it is for the market to decide whether to import LNG instead, or find alternatives to gas.

Russia has long been looking for routes to market that avoid Ukraine, with Blue Stream – the sub-sea line to Turkey – one of the pioneering projects. Early Gazprom maps of what is now Nord Stream included a dotted line under the Baltic and North Seas from Russia almost as far as the UK, angering the Polish gas company in the early years of last decade as it had expected its  32bn m³/yr Yamal-Europe line to be expanded. However the route now follows Nord Stream 1 and the related Opal line, with most of its gas flowing into central Europe through Eugal and very little going to northwest Europe, where output is declining.

On November 30, the Danish parliament approved amendments to its law on the continental shelf, which now means that the government can prevent Nord Stream 2 entering its waters on grounds of defence or foreign policy. This had been foreseen by Nord Stream 2, but observers say it could make the 2019 planned start-up impossible, given the limited windows for pipelaying and the slightly longer route if the government decides to apply the law.