Tuesday

24th Oct 2017

Column / Crude World

Nord Stream 2: The elephant in the room

  • No mention of Nord Stream 2 in the commission's State of the Energy Union report. (Photo: nord-stream.com)

Last week the European Commission released its second ‘State of the Energy Union’. According to the Commission the EU remains well on track to reach its 2020 targets for reducing greenhouse gas emissions, energy efficiency and renewables.

In the area of security of supply, the Commission highlighted achievements in building natural gas interconnectors, the fact that new liquid gas (LNG) terminals entered into operation and that work had begun on parts of the Southern Gas Corridor, a gas pipeline project in the Caspian region.

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  • Gazprom’s board of directors agreed on Friday (3 February) to acquire another 50 percent of the shares of Nord Stream 2 AG, the company behind the pipeline project. (Photo: Mitya Aleshkovsky)

Notwithstanding this progress, the State of the Energy Union failed to make a single mention of the biggest issue that threatens to derail much of the work: the planned Nord Stream 2 natural gas pipeline between Russia and Germany.

The silence was simply deafening.

It is high time the Commission takes its responsibility and drafts a thorough impact assessment of the project in legal, environmental and economic terms.

Energy (dis)Union?

When launched the Energy Union emphasised the need to diversify energy sources, suppliers and routes to ensure secure and resilient energy supplies. Upon closer inspection, the Nord Stream 2 pipeline in fact does the opposite.

The project only contributes to route diversification for the Russian state-owed gas company Gazprom as it seeks ways to reduce its dependence on Ukraine and cements the company’s dominance in the German gas market by raising its market share to over 50 percent.

More worrying perhaps, it would concentrate 80 percent of Russian gas imports into a single supply route. This could hardly have been the Energy Union’s intention when it was first presented.

Alternative Shipping Facts

On Monday (30 January) news emerged that the local council in Karlshamn, a town in Southern Sweden, would rent out part of its harbour to the Nord Stream 2 consortium to facilitate the construction of the pipeline.

The decision is controversial as the Swedish government repeatedly voiced its concerns over doing so out of security reasons.

In December last year, the Swedish island of Gotland rejected a similar request after a negative assessment by the Swedish defence and foreign ministries, given the island’s strategic importance.

Karlshamn emphasised the commercial value of the deal as it would create jobs and generate 100 million Swedish crowns in revenue.

In pleading its case, the authorities frequently invoked the arrival of some 700 ships with Russian crews per year; a volume of maritime traffic they were keen to expand.

In doing so it appeared the Karlshamn authorities were relying on what is now known in the US as "alternative facts" - disinformation.

Research undertaken by Swedish blogger Lars Wilderaeng quickly demonstrated that this was a grossly inflated number.

What is worrying about this episode is the ease with which Gazprom was able to win over Swedish local authorities on the basis of bogus claims and the lure of money and that the national government ultimately chose to look the other way, thus putting the security of the Baltic Sea region at risk.

Kaliningrad

Proponents of Nord Stream 2 emphasise that the project is a strictly commercial endeavour. However, one has to acknowledge that from a business perspective, over-investment in new pipeline projects seems outdated in the context of the decline in gas demand in Europe combined with the growing volume of LNG trade.

This does not even mention the fact that Europe instead wishes to increase the Union’s share of renewable energy.

An interesting question to ask in this context is that if the Nord Stream 2 pipeline is indeed purely commercial, then why is the consortium so keen to rent Swedish harbours?

Strangely, the Russian exclave of Kaliningrad, where labour and storage costs are much lower than they are in Sweden is not being used.

From a market perspective it would make sense to do this as it would undoubtedly lower project costs. What is more, doing so would fit neatly in the Russian government’s strategy of stimulating local production. After all, it’s purely business right?

Europe’s responsibility

On Friday (3 February) Gazprom’s board of directors agreed to acquire another 50 percent of the shares of Nord Stream 2 AG, the company behind the pipeline project.

This means that Gazprom is now both 100 percent owner, and the sole supplier.

Legally this raises important questions about the compatibility of the project with EU rules on ownership unbundling and third party access, and about how the pipeline affects competition within the EU internal energy market.

The Energy Union’s aim is to propel the EU towards a low-carbon economy and diversify sources of supply.

In light of this, investments in capital intensive infrastructure projects that are likely to remain with us for decades warrant a thorough assessment of the compatibility with the goals and ambitions of the Energy Union and the risk of creating future "stranded assets".

Just last week I took part in a public hearing in the European Parliament on the Nord Stream 2 pipeline.

What struck me was that there is an ample number of MEPs that wish to see such an assessment take place.

Rather than beating around the bush, it is high time the European Commission to take its responsibility as guardian of the Treaties and to provides an all-round assessment of the implications of Nord Stream 2.

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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