GGP: Nord Stream 2 can wait

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The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.

This article was originally published by Bruegel on July 13, 2017

Gazprom is pushing ahead with plans to build a second gas pipeline under the Baltic sea, straight from Russia to Germany. Supporters claim that Ukraine cannot be relied on as a transit partner, and that Europe will need more gas in the future. Georg Zachmann is unconvinced, and argues that the project should wait.

Gazprom wants to build a second gas pipeline under the Baltic straight from Russia to Germany. Nord Stream 2, as the project is called, has provoked controversy in Europe – but the pipeline is planned to be in use as soon as 2019. Supporters of Nord Stream 2 make two bold claims: Ukraine is apparently an untrustworthy partner for gas transit, and Europe supposedly needs more Russian gas. Both arguments are questionable, and there are good reasons to put the project on ice.

First of all, transporting gas through Ukraine is not a major supply risk for Europe. It is almost impossible to imagine that today’s Ukraine would even consider interrupting the flow of gas to the EU. After all, Ukraine benefits greatly from the EU’s political and economic support. Kiev would not want to jeopardise that. Moreover, any break in gas transit would provoke the building of a pipeline avoiding Ukraine, and thereby actually endanger Ukraine’s own gas supply. This is because Ukraine gets a third of its gas supplies from the EU, in the form of reimports from Slovakia.

On the other hand, Ukraine would be sure to see the building of Nord Stream 2 as a clear sign of distrust from Europe. Indeed, Ukraine has redoubled its efforts to reform its gas sector, and the changes are already bearing fruit. The state-owned gas company needs much less public subsidy, and gas consumption is massively reduced. Western gas companies are setting up in the Ukrainian market, and there is justified hope that in some years Ukraine will be able to meet all its own gas needs from domestic production.

Without gas transit through Ukraine, EU countries would not really have enough gas to supply Ukraine from the west. These supplies consist overwhelmingly of gas that originally flowed into Slovakia through Ukraine. Therefore, bypassing Ukraine with Nord Stream 2 would force Kiev to return to buying gas directly from Gazprom. This dependant relationship would probably be more than just economic in nature. Is that really a situation that the EU wants to encourage?

The second main argument for Nord Stream 2 is that falling gas production in north-west Europe makes additional infrastructure for Russian imports necessary. But increasing needs can be met for at least the next decade using existing pipelines: in 2014 there was 100 billion m3of unused capacity from Russia. What’s more, renewable energies and improvements in energy efficiency offer hope that gas demand might actually fall. Even if the need for imports does suddenly shoot up, Europe is still in no danger of a gas supply crisis. Necessary extra gas can easily be imported from overseas at any time using the existing liquid gas terminals.

In fact, Nord Stream 2 could weaken Europe’s resolve to find alternatives to Russian gas. Gazprom would surely try to use the new pipeline at full capacity, and the constant stream of gas could be flexibly priced to react to any competition. This would make the development of other supplies and energy sources difficult over the coming decades.

Nord Stream 2 is of strategic importance for Russia and the EU, in terms of both energy and geopolitics. But the interests of the two partners do not neatly overlap. Building the pipeline too soon would leave Ukraine dependent on direct Russian gas exports, and hinder the search for alternative supplies in Europe. In any case, risks around transit or demand over the next 5-10 years seem to be manageable with the existing infrastructure.

So the best idea is simply to wait on making the decision. If it becomes clear that a route bypassing Ukraine is needed, or additional imports become necessary, the plan can always be taken back down from the shelf. But for the moment the project would do the EU more harm than good.

Georg Zachmann

The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.