Wednesday

22nd Aug 2018

Column / Crude World

Why Europe should fight Nord Stream II

  • Part of the first Nord Stream pipeline being laid off the coast of Swedish Gotland island. Risks to the Baltic Sea region should not be underestimated. (Photo: Nord Stream)

Last week the European Commission published its long awaited gas package. The usefulness of the proposed measures on security of supply and oversight on bilateral energy agreements notwithstanding, it was interesting to see the biggest elephant in the room being notably absent from any of the proposals.

The one development that threatens to unravel the entire Energy Union – the Nord Stream II pipeline – did not feature at all. Despite differences of opinion on whether or not EU law applies to the project, the risk that Nord Stream II confines the Energy Union to the dustbin is too high. For that reason, the commission would do well to not give ground and let the courts decide whether the project is in line with the law.

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Proponents of Nord Stream II claim that the project is strictly commercial. However, upon closer examination the project’s business credentials are dubious at best. At an estimated cost of €10 billion at a time when oil prices are at rock bottom, the consortium led by Russian state-owned gas company Gazprom would expand pipeline capacity when half of the existing transit capacity from Russia to the EU is in fact unused.

Also, gas demand in Europe has gone down due to the competition from renewables and coal. Convincing business case, huh? The real goal is geopolitical. The project is to circumvent Ukraine, which the Kremlin views as an unreliable transit state and interfering with its desire for control of its strategic markets. If the pipeline is built, the Ukrainian route would pretty much cease to exist.

Politics, not business

The existing supply route through Poland could similarly be at risk. Kiev would lose over $2 billion a year in transit revenues; a death-blow to its fragile economy and Poland could find itself at the mercy of Gazprom and Russia. Through Nord Stream II Gazprom’s market share in Germany would increase from 40 percent to 60 percent, at a time when Brussels actually wants to lessen its dependence on Russian gas.

What is more, with the Ukrainian route gone, as much as 80 percent of all Russian gas exports to Europe would flow via Nord Stream. Although the European Commission views destination clauses (i.e. contractual clauses that forbid the resale of imported gas to other countries) as illegal, it is not unimaginable that Gazprom will pump just enough gas through the pipes to supply Germany and perhaps a few other EU states, but not enough so that significant reverse-flow capacity would be available to Ukraine. This would mean that Kiev again has to knock on Putin’s door. Strictly business? I think not.

European Unity and Security at Risk

At a time when Europe buckles under the refugee crisis, Nord Stream II is an additional threat to the fragile unity that holds the EU together. The pipeline has alienated Germany from the Baltic States, Poland and other Central European countries. The German position, and particularly Angela Merkel’s support for the project, is downright peculiar given Merkel’s tough stance on Vladimir Putin over Russia’s aggression in Ukraine.

You cannot push other EU Member States to stay firm on sanctions, yet strike a pipeline deal with the Kremlin at the same time. Italy’s Matteo Renzi was right in pointing out Germany’s double standards. Worse, the project directly contradicts every political goal agreed upon at European level concerning EU energy policy. Germany’s Ostpolitik handling of Nord Stream II is doing no favours for Berlin or Europe.

Interestingly, hard security aspects appear wholly absent from the discussions at the EU level, despite the fact that naval movement in the Baltic Sea will be affected by the construction work throughout the whole building period.

The transport of pipes will disrupt maritime traffic above and below the sea level across the whole length of the Baltic Sea, from Northwest Russia in the Finnish, Swedish, German and Danish exclusive economic zones, and right off the coast of Poland, and the three Baltic States.

In light of the ongoing tensions with Russia, and the fact that building Nord Stream II will take many months and involves construction bases on Nato and EU territory, this is a factor to consider when assessing the broader security ramifications of the project. Perhaps this sheds a different light on why the Russian exclave of Kaliningrad is not used as a base for construction.

A scenario of Russian area denial tactics under the cover of pipeline construction poses a risk to lightly defended areas such as the Swedish island of Gotland which will not see the return of troops stationed there until 2018. Worse, area denial vis-a-vis non-Nato member states Sweden and Finland would render the defence of the three Baltic States – if required in the event of a few "little green men" paying a quasi-permanent visit – even more complicated than it already is.

These risks set aside, upon completion of the pipeline, you can expect the Russian navy to increase its presence in the area to "protect" Nord Stream II.

See you in court

According to the European Commission’s energy directorate general EU competition regulations apply to the whole project, including the offshore section. This would mean Gazprom has a problem, as it cannot simultaneously own the infrastructure, as well as supply the gas.

However, the European Commission’s legal service in a recent opinion claimed EU energy market rules in fact do not apply. Finding a conclusive answer to this question is essential to determine whether Nord Stream II can be built.

The European Court of Justice is an excellent place to settle disputes like these. Sure, you run the risk of losing the case, but the stakes are simply too high to rely on a political settlement which would likely undermine the Energy Union anyhow.

Moreover, from a security point of view, the risks to the Baltic Sea region should not be underestimated. Germany, which has acted as the custodian of the Minsk II agreement, really should know better than to engage in such harmful deals with Russia.

The new 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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