Nord Stream 2: Business unusual

But none of this has discouraged five EU firms from investing billions in an unusual project to redraw the map of Russian gas supplies to Europe - Nord Stream 2.

If things go to plan, in September they will start taking delivery of pipes that will, by 2020, lie on the Baltic Sea bed ready to convey 55 billion cubic metres of gas a year from Russia to Germany.

They would lie alongside an existing 55 billion cubic metre pipeline known as Nord Stream 1.

Together, they would account for two out of every 10 drops of gas burned in EU homes and factories, or seven out of every 10 sold by Russia to the EU.

Energy champions

The firms building Nord Stream 2 are Germany's BASF and E.ON, Engie (France), OMV (Austria) and Shell (Anglo-Dutch) together with Gazprom, the Russian energy champion which has the majority stake.

The venture is unusual in several ways.

It risks being blocked by sanctions, by EU law or by politics. It risks lack of demand. It is pricier than alternative options. It also ties the EU firms more closely to a partner, Gazprom, that is controlled by Russian security services and that is bleeding value at a rapid rate.

For Jens Mueller, a Swiss PR man who works for Nord Stream 2 – the consortium is based in the Swiss town of Zug – the EU sanctions do not pose a problem. Mueller told EUobserver that the sanctions were designed to let Nord Stream 2 go ahead. "Gas projects between the EU and Russia are out of scope of the sanctions regime," he said.

Vera Surzhenko, a Shell PR woman, went further. She said the project was also in line with the "spirit" of EU policy on Russia. "All Nord Stream 2 discussions have carefully followed both the spirit and letter of sanctions requirements," she said.

They are equally confident that EU law will not stand in their way.

South Stream deja vu?

The European Commission is studying if Nord Stream 2 complies with EU energy market legislation. It blocked a previous EU-Russia pipeline, South Stream, on legal grounds.

Mueller believes the new study cannot say No. "The third energy package [EU energy laws]… does not apply outside the internal market," he said.

Nord Stream 2 is "completely different" to South Stream, he said, because that project was planned to run from Bulgaria to Austria, but Nord Stream 2 would lie mostly in international waters and end in Germany. That would mean only "connecting pipelines within the [EU] internal market that will transport gas from Nord Stream 2 onwards across Europe will be subject to all EU energy legislation".

One senior EU source agreed. "Lawyers are warning that the EU study might produce a result that those critical of Nord Stream 2 don't expect," the source said.

But Nord Stream 2 also faces political opposition.

Nine EU states, mostly from central Europe, have said it would harm energy security and impoverish Ukraine. They said it would let Russia cut off supplies to its EU critics while protecting Germany and that it would divert gas from Ukraine's transit network.

Good for Germany, bad for Europe

British experts, such as Jonathan Eyal for the Rusi think tank in London, agree. "This project will make Germany more secure and central Europe less secure. It's so self-evident that it makes me laugh when I hear people try to contradict that," Eyal said.

Mykola Tochytskyi, Ukraine's ambassador to the EU, told this website: "Nord Stream 2 is a purely politica­l and not a commercial project".

Slovakia, one of the nine Nord Stream 2 critics, will oversee EU energy policy when it takes up the EU presidency in July. Maros Sefcovic, the Slovak EU energy commissioner, is critical of the project.

Slovak diplomats admit there is little they can do to stop the project. But the US is also opposed, while Denmark, Finland, and Sweden - all of which are building closer US ties due to Russia's aggressive behaviour - will have to give permission for the pipeline to go through their territorial waters.

Whatever EU sanctions say, US policy has a global reach and the US is serious about enforcing the "spirit" of the measures. Last year, the US introduced new sanctions to block a Shell-Gazprom deal on exploiting a new gas field.

The Danish foreign ministry, for one, told this website: "Danish authorities have not received a formal application with regard to the Nord Stream 2 project. If such an application is received, it will be assessed according to all relevant rules and Denmark's international obligations".

With the spotlight on Denmark, Finland, Germany and Sweden, Mueller said: "Authorisation of the construction of infrastructure projects … is clearly a competence of [EU] member states".

No opposition in Berlin

There is no political opposition in Germany. Nord Stream 2's main lobbyist in Berlin is the Russia-friendly SPD party in chancellor Angela Merkel's coalition. But Merkel also defends it - in one incident at an EU summit in December she told Italian PM Matteo Renzi that Nord Stream 2 was none of his business.

Despite this, Mueller and his colleagues are not taking chances.

According to the European Commission register in Brussels, Nord Stream 2 firms work with at least four big PR companies - Brunswick, Edelman, Fleishman-Hillard, and G-Plus. Mueller said Nord Stream 2's own people travel from Zug to the EU capital for some four days each month to talk to press and EU staff.

Commission records show that firms linked to the Nord Stream 2 consortium have held 62 meetings with the two energy commissioners, Sefcovic and Augustin Canete, with commission president Jean-Claude Juncker, or with their cabinet staff.

Some of the talks are at a high level. Matthias Warnig, the CEO of the Nord Stream 2 consortium and a close associate of Russian leader Vladimir Putin, met Canete in April. Etienne Davignon, an advisor to Engie's boss and a former EU commissioner, met Juncker or Juncker's chief aide four times last year.

There are no lobbyist registries in Denmark, Finland, Germany or Sweden. But Mueller said: "We get support from different agencies in different countries according to the concrete needs for translations, media monitoring etc. and depending on the expertise of the agency".

The lobbyists work alongside Russian embassies. There are 138 accredited Russian diplomats in the EU capital and 110 in Berlin. There are 92 in Copenhagen, 53 in Helsinki and 35 in Stockholm.

"Russian embassies are informed about the project development, as well as embassies from other shareholder or permitting countries," Mueller said.

Not enough demand

Nord Stream 2 critics have said the pipeline makes no business sense because there is not enough demand for gas.

Demand is so low that Nord Stream 1 last year worked at 70 percent of capacity and the Ukraine transit network at less than 50 percent. Gas prices have fallen by more than half since Nord Stream 1 started operations in 2011.

The International Energy Agency in Paris recently slashed its forecast for EU demand in 2030 by 30 percent to 526 bcm. The EU commission says it could be just 370 billion cubic metres.

Demand might recover as EU economies return to growth. But low oil prices, competition from liquid and shale gas and EU targets to cut CO2 emissions are expected to stay for the long term.

Nord Stream 2 lobbyists have said it is needed because Norwegian and UK gas production will fall by more than 100 billion cubic metres as fields deplete.

Its critics countered that the private sector could increase the capacity of Ukraine pipelines for a fraction of the price of Nord Stream 2 even if the extra demand for Russian gas materialised.

The private sector, such as UK firm Platts, which analyses energy markets, has said the dip in Norwegian and UK output would create, at best, a "limited window to earn money" for Nord Stream 2 before the long-term trends on low demand take hold.

Meanwhile, Gazprom itself is an unusual partner.

Gazoviki

In Russia, they call some of the firm's top men the "gazoviki" by reference to the "siloviki", a clan of Putin-loyal former spies.

Five of its senior managers - Andrei Akimov, Valeriy Golubiev, Alexandr Kozlov, Sergei Khomyakov and Alexandr Medvedev - have links, like Putin, with the Russian intelligence service, the FSB. Warnig, the chief of the Nord Stream 2 consortium, used to spy in former West Berlin for the former East German secret service, the Stasi.

The names indicate that Gazprom mixes security and commercial objectives. It is also widely associated with graft and mismanagement.

A contact working with Alexei Navalny, a Russian anti-corruption activist, told EUobserver it's "one of the most corrupt companies in the world."

It did not help the firm's image when anti-trust regulators raided its offices in 10 European countries five years ago. If the EU Commission finds it guilty of abuse in a case due to mature any time now, it could end in a multi-billion euro fine

Nord Stream 2's Mueller declined to comment on Gazprom's reputation.

Shell also declined to comment on whether Nord Stream 2 poses a reputational risk. It said politics does not play a role in its decisions. "We are a business entity. We take decisions based on best commercial interests", the firm's Surzhenko said.

Markets have commented on Gazprom, however.

The company was worth $369 billion (€330bn) in 2008. It owns more gas than any other firm in the world. But the gazovikis' failure to adapt to market developments and Gazprom's political exposure have seen its value, or market capitalisation, fall to some $50 billion today.

If it were to keep shrinking at that rate, BASF, E.ON, Engie, OMV and Shell might see it vanish before Nord Stream 2 is built.

This story was originally published in EUobserver's 2016 Business in Europe Magazine.

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