Tuesday

24th Jan 2017

Column / Crude World

Is Nord Stream II dead?

  • Nord Stream II would serve to strengthen Gazprom’s already dominant position in the European gas market (Photo: Nord Stream)

On 12 August, the five Western firms which had planned to build the Nord Stream II gas pipeline from Russia to Germany pulled out of a joint venture with Russia’s Gazprom putting the project in doubt.

The shock decision came after the Polish Office of Competition and Consumer Protection (UOKiK) raised concerns over the initiative.

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  • Russia and Turkey leaders met in St Petersburg on 9 August, agreeing to revive the multi-billion dollar Turkish Stream project (Photo: Kremlin)

Gazprom was quick to say that construction would go ahead, while its European partners considered alternative legal models to participate.

But with the Russian firm now simultaneously engaged in costly plans to build gas pipelines to north-west Europe, Turkey and south-east Europe, and China something has got to give.

Polish regulator

The Polish regulator had a say in the matter even though Nord Stream II is not set to cross its territory because the Western firms in the joint venture had assets in Poland.

The firms feared that Poland was dragging out the antitrust proceedings due to its political and strategic objections to the Russian project.

But the UOKiK regulator had a point when it said Nord Stream II would strengthen Gazprom’s dominant position in the European market.

It would concentrate 80 percent of Russian exports to the EU in one route and make EU-backed projects for access to liquid natural gas markets less viable.

So if Gazprom and some or all of its former partners still wish to complete the pipeline, what new legal form could it take?

It is hard to say at this point, but it is even harder to say where the money for the pipeline would come from.

The Western firms were meant to cover a third of the project’s financing through equity and raise the remainder on international financial markets.

With the partners gone, Gazprom will have to increase its stake and try to attract market capital on its own.

That will be no easy feat as Russia reels under financial sanctions, both EU and US, designed specifically to curb access to borrowing.

EU elephant

But the biggest elephant in the room remains compliance with EU competition law as enshrined in the so-called Third Energy Package (TEP).

Gazprom was trying to circumvent the EU rules by not taking a majority share in the consortium.

Nice try, but the rules are pretty straightforward.

Under TEP, pipeline owners must be independent of gas suppliers and must ensure equal access to any supplier that wishes to use their infrastructure.

Given that the project was 50 percent owned by Gazprom, and is now 100 percent Gazprom, this problem just got bigger.

It may well be that Gazprom’s Western partners saw the writing on the wall even before the Polish regulator had weighed in.

Bosphorus romance

The problems with Nord Stream II could mean that Russia will now double down on Turkish Stream instead.

That project became defunct when Turkey shot down a Russian jet last year, but now it appears back on after Turkish president Recep Tayyip Erdogan and Russian president Vladimir Putin rekindled their romance in St Petersburg on 9 August.

It also has practical advantages over Nord Stream II.

Parts of the Turkish Stream pipeline have already been manufactured and delivered - they were lying around in Bulgaria because they had been meant to be used in the now-defunct South Stream pipeline.

Constructing the first of the projected two strings of Turkish Stream may enable Gazprom to salvage some sunk costs.

Doing so would give Gazprom a chance to limit the risks it associates with the Ukrainian transit network by shipping gas directly to Turkey.

If it were to build a second Turkish Stream string it could also sell more gas into Turkey and undermine EU efforts to reduce dependence on Russia.

The EU, as part of its “southern corridor” supports the construction of a number of pipelines to bring in gas from Azerbaijan and, possibly, in the longer term, Iran.

But Russia is keen to hook up its Turkish Stream pipeline to the so-called Italy-Turkey-Greece Interconnector (ITGI) pipeline (part of the southern corridor) in a bid to limit the room for non-Russian supplies.

Since ITGI has a 25-year exemption from the EU’s third party access rules, Gazprom could become its sole user.

That said, this is also where the Putin-Erdogan romance might begin to crack.

Turkey is keen on becoming a gas hub that sees multiple pipelines connecting numerous suppliers to Europe; not to be just another Russian platform.

Erdogan knows that Gazprom is the most viable short-term supplier, but he does not want to become too dependent on Putin.

The road ahead

Amid the recent fuss over Nord Stream II, one could almost forget that Gazprom is also planning to build a major pipeline to China - the so-called Power of Siberia.

But gas pipelines represent one of the critical areas where Russia’s Asia pivot has so far failed to deliver.

In an ominous sign, Gazprom omitted the original start-up date (2018) for the Power of Siberia pipeline in its second quarter report for 2016.

So what will happen now?

Most likely, Gazprom will soldier on with Nord Stream II, try to find a legal way around the defunct joint venture and simultaneously proceed with Turkish Stream.

Despite the issues plaguing Nord Stream II, Putin has good political reasons not to abandon the project at this stage.

At a time when Moscow is lobbying EU capitals to relax the sanctions regime, the mere prospect of a lucrative energy project, even if it might never be built, helps Russia to gain traction with business lobbies in Germany and beyond.

At a time when Moscow is also trying to forge a new alliance with Turkey, with the potential to harm Nato solidarity and EU enlargement policy, the prospect of a Turkish project holds similar appeal.

No matter the challenges that lie ahead, pipeline projects are trump cards to be played in Russia’s game to divide and demoralise the Western bloc.

The Crude World monthly column on Eurasian (energy) security and power politics in Europe’s eastern neighbourhood is written by Sijbren de Jong, a strategic analyst with The Hague Centre for Strategic Studies (HCSS), specialised in Eurasian (energy) security and the EU’s relations with Russia and the former Soviet Union

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