Russia To Lay Last Nord Stream 2 Pipe in August as US, Germany Seek New Role for Ukraine
The second of Nord Stream 2’s twin pipelines is scheduled for completion in August, with the first line having been finished and prepped for filling earlier this month. Politically, Nord Stream 2 has been nothing less than a high-stakes poker game among nations to achieve geopolitical goals.
The second of Nord Stream 2’s twin pipelines is scheduled for completion in August, with the first line having been finished and prepped for filling earlier this month.
Some analysts are looking forward to what effect the eventual commissioning of the beleaguered project will have on European energy security. The answer, say analysts who understand that the European gas market has evolved in the last decade to diminish the importance of Russian pipeline gas in the energy mix, is “not that much.” Politically, though, Nord Stream 2 has been nothing less than a high-stakes poker game among nations to achieve geopolitical goals.
Operated by Russia’s Gazprom, the $11 billion Nord Stream 2 doubles the capacity of the original Nord Stream export line, which went into service in 2011. It traverses 1,230 km across the Baltic Sea, linking Narva Bay in Russia’s Leningrad region with the northern German coastal town of Lubmin, near Greifswald.
Russia’s Gazprom leads the Nord Stream 2 consortium, which includes Germany’s Uniper, BASF’s Wintershall Dea, Anglo-Dutch Shell, Austria’s OMV, and Engie.
Germany and Russia have long considered Nord Stream 2 to be a commercial venture, while the US has seen the pipeline as political and raises the alarm that its completion would deprive Ukraine of transit revenue while also further chaining Europe to Russian gas supplies.
German media reported in February that the US had offered to end its sanctions threat if Germany would bulletproof Ukraine from any negative effects should Russia push it out of the European gas delivery system. The US also wanted Germany to help Ukraine expand its gas infrastructure for the transport of hydrogen.
Proof that negotiations between the US and Germany had borne fruit came in May when the US State Department announced it was waiving sanctions against the Swiss-registered company owned by Gazprom that is building Nord Stream 2 and its chief executive, Matthias Warnig. To not waive these sanctions would damage US national interests, the State Department said.
In other words, US President Joe Biden had to avoid a rift with Germany at a time when he was reaching out to European allies and planning his first trip as president to the region.
The US would continue to sanction Russian pipe-laying vessels involved in construction, the State Department said. But, as a practical matter, that hardly affected the outcome.
On 4 June, Russian President Vladimir Putin announced the inevitable at the St. Petersburg International Economic Forum. “I’m happy to say that, today, two and half hours ago, the pipelaying for the first line of the Nord Stream 2 gas pipeline was successfully completed,” Putin told the annual gathering that has been likened to a Russian Davos, adding that Gazprom would begin filling the first line in 10 days and that the second line would be completed by August.
Meanwhile, German Chancellor Angela Merkel sent a high-ranking negotiation team to Washington to continue talks about the project. In a separate move, Biden invited Ukrainian President Volodymyr Zelensky to visit the White House in July.
So, to what extent does Europe depend on Russian gas, and is Ukraine really a victim?
In a podcast posted in May by IHS Markit, Laurent Ruseckas, the energy consultancy’s executive director for gas covering Europe, the Middle East, and Africa, argued that Russia’s influence over the European gas market has actually diminished significantly over the past 10 to 15 years.
Liquefied natural gas (LNG) plays a major role. Lithuania is building regasification capacity; Poland has a plant and already imports LNG from the US while it also builds a pipeline direct from Norway; and Germany is itself giving in to US pressure (which began during Donald Trump’s administration) to build regasification plants to buy even more US LNG.
In addition, as Ruseckas put it, “There are a lot more interconnections that cross borders and reverse flow. There are also rules that mandate third-party access to pipelines, and there are fair and published tariffs.”
Most significantly, the EU’s antimonopoly authority began investigating Gazprom in 2016 and concluded that it had used its dominance in some European markets to unfairly price its gas. Faced with possible fines, Gazprom granted Poland and Bulgaria huge price reductions and is following EU guidelines.
“So (Russia represents) no risk from a market point of view, but that doesn’t stop people from saying that there is,” Ruseckas said.
Domestically, Ukraine doesn’t depend at all on Russia. “Ukraine, in 2015, stopped buying gas directly from Gazprom. It produces two-thirds of the gas it needs and imports about a third,” Ruseckas said. “These imports come from Poland, Slovakia, and Hungary by reverse flow. They are Russian molecules, but they are purchased on the market from traders.”
What is true, however, is that Kiev will lose transit revenue if Nord Stream 2 does eventually divert European-bound gas deliveries from Ukraine’s export pipeline. But that can’t happen before 2024 as Gazprom is obliged under a 5-year contract signed in 2019 to ship significant export volumes via Ukraine.
This gives Ukraine roughly 4 years to find alternative sources of revenue, and the US has been less than subtle in wielding the threat of sanctions (pushed in congress by the Ukrainian lobby) to maneuver Germany into helping Kiev.
One way is by offering gas storage.
Though Ukraine is not an EU member, it does belong to the European Energy Community, which is an EU institution with its own rules and regulations. In early 2020, Ukraine unbundled its gas transmission company and removed it from the control of the state oil and gas company Naftogas.
By doing so, Ukraine streamlined procedures that made entering and exiting Ukrainian gas storage a customs-free transaction with favorable tariffs.
“That became a big source of additional storage in 2020, and, actually, in the summer of 2020, the European gas market needed storage as never before. LNG was coming into Europe from all parts of the world, and there was no place to put the gas,” Ruseckas said. “This (availability of new storage) was huge for the European gas market and really integrated Ukraine much more firmly, and it increased Ukraine’s gas security.”
Tariffs from storage, however, won’t be enough, which is why developing Ukraine’s capacity to export hydrogen has also come up in US/German talks.
US sanctions delayed construction of Nord Stream 2 for most of 2019 and, by some estimates, have added roughly $1 billion to the cost of building the twin pipelines. The threat of imposing additional sanctions in the first half of this year caused numerous international companies to flee the project.
The withdrawal of Norwegian pipeline safety and technical verification company DNV GL in January was of particular significance, given its role in ultimately commissioning the pipeline. In all, as many as 120 companies from 12 countries are involved in the project, according to Reuters.