Russian pipe dream hits raw European nerve | Business| Economy and finance news from a German perspective | DW | 09.05.2018
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Russian pipe dream hits raw European nerve

Even if it falls apart, a planned Russian-German gas pipeline has already succeeded in one Kremlin objective: sowing discord in the West. But some believe commercial concerns will win out and the pipeline will go ahead.

The Nord Stream II gas pipeline would concentrate almost all Russian exports to the EU into one route, doubling the amount of gas transported from Russia to Germany to 55 billion cubic meters (bcm) a year.

The cost of the 1,200-km (746-mile) pipeline has been estimated at €9.5 billion ($10.3 billion) and construction along the seabed is scheduled to begin in 2019.

Construction of the German terminal began in the city of Lubmin on the Baltic Sea coast on May 3.

Read moreRussia-Ukraine gas dispute: Is Europe under threat?

But the pipeline has polarized debate in the EU, and between the bloc and the US, while adding to already confused EU-Russian relations.

"I've never seen a commercial project so intensely debated at the highest levels of European politics," Maros Sefcovic, the European Commission's vice president for energy matters, said recently.

The Nord Stream pipeline

The Nord Stream pipeline

A symbiotic relationship

Both Brussels and Moscow realize that despite their recent spats over Syria and Ukraine, they need each other. Russia needs a market for most of its oil and gas exports; Europe needs cheap and reliable sources of energy to replenish its own depleting sources.

Gazprom accounts for over 60 percent of European gas imports and plans to increase its exports to Europe to 200 bcm. In 2017, Gazprom's gas exports were at an all-time record of 194.4 bcm. Moscow is also planning a pipeline via Turkey to southern Europe, TurkStream, but it would only transport 16 bcm, hence the significance of Nord Stream II.

The Netherlands' huge Groningen gas field is furthermore seen lowering its production, with operations at the field falling to 12 bcm by 2022, and will be terminated by 2030.

Gazprom CEO Alexei Miller, Russian President Dmitry Medvedev and ex-German Chancellor Gerhard Schroeder (AP)

Gazprom CEO Alexei Miller, Russian Prime Minister Dmitry Medvedev and ex-German Chancellor Gerhard Schroeder

Berlin's 360-degree pivot

Nord Stream II — which received all the necessary construction permits from the German supervisory authorities earlier this year —was one of most controversial projects of Germany's grand coalition of Christian Democrats (CDU) and Social Democrats (SPD), which ended after four years in September and was recreated this March.

The project was driven by Foreign Minister Sigmar Gabriel (SPD), and ex-Chancellor Gerhard Schröder (also of the SPD) is the CEO of Nord Stream II.

Both were apparently less concerned to protect Ukraine's fragile economy than Germany's need for reliable long-term gas imports.

But this seemed to change when Merkel acknowledged the importance of protecting Ukraine's Russian gas supplies when the current long-term supply agreement expires at the end of 2019.

"This is not just an economic project, but [its] … political factors must also be taken into account," Merkel told Ukrainian President Petro Poroshenko in Berlin in April.

Ukraine's future role as a physical middleman in Russia-Europe energy trade worth $1 billion (€900 million) a year in transit fees is a sensitive issue.

With ties between Moscow and Kyiv strained after Russia's 2014 annexation of Crimea and the pro-Russian insurgency in eastern Ukraine, Russia wants to reduce dependence on Ukraine as a gas transit route.

"I do not think that Merkel has changed her position regarding Nord Stream II. While it is surely true that the project is, also in Germany, not uncontroversial, and Merkel's tone a couple of weeks ago was different than in the past, the message was not," Tim Boersma, the director of Global Natural Gas Markets at Columbia University, told DW.

"The position of the German government with regards to the Nord Stream II project and a future role of transit through Ukraine has been known since the project's inception in 2015," Nord Stream spokesman Jens Müller said.

Russian President Vladimir Putin is also now reportedly considering continuing to ship Russian gas across Ukraine, rather than bypassing the country entirely by the end of next year. If this means Nord Stream II gets the green light. 

Gerhard Schröder (r) congratules Vladimir Putin on winning the recent Russian presidential election (picture-alliance/AP/SPUTNIK KREMLIN/A. Druzhinin)

Gerhard Schröder (r) congratules Vladimir Putin on winning the recent Russian presidential election

Financial hurdles

Two German companies, BASF subsidiary Wintershall and Uniper, are slated to provide €950 million a piece to cofinance the project, although the bulk of the financing would be borne by Gazprom, which would also supply the gas.

And this complicates matters. Existing EU legislation — the Third Energy Package — applies to the pipeline, stating that companies can't majority-own supply and distribution assets and must give competitors access to their pipelines.

Leading Russian banks are also hampered from raising capital on international markets due to EU and US sanctions and Gazprom has also become a less attractive borrower — the firm's market value has shrunk from over $350 billion in 2008 to $50 billion due to low energy prices.

"I don't think the pipeline will be completed any time soon. Banks will be hesitant to provide funding," said Julia Pfeil, a lawyer at Dentons, told German business daily Handelsblatt.

A pipeline in the waiting(picture alliance/dpa/J. Büttner)

A pipeline in the waiting

Opponents of the pipeline

Furthermore, the majority of the EU states and the EU Commission consider the project politically harmful.

The project is opposed by Poland, Ukraine and the Baltic States on the grounds it would increase Europe's dependence on Russian gas. At times of political tension, such as in 2006 and from 2008 to 2009, Russia cut off gas shipments to Ukraine, they note.

Poroshenko has urged Germany to abandon plans to build Nord Stream II, saying it would amount to an "economic and energy blockade" of his country.

"Without transit through Ukrainian territory, the likelihood of a large-scale conflict between Russia and Ukraine increases," Juri Witrenko, managing director of the Ukrainian energy company Naftogaz, said.

Poland's ex-foreign minister, Witold Waszczykowski, hinted in 2017 that the pipeline was another way for Brussels and Berlin to punish his country for its insubordination.

In Germany, senior politicians from the CDU, FDP and Greens have also said they want Berlin to rethink Nord Stream II. Germany is the EU's largest importer of Russian gas.

Germany's approval of the project has also irritated US President Donald Trump. "Germany is pumping billions into Russia," Trump said recently at a meeting with Baltic leaders. 

A bipartisan group of US lawmakers recently wrote to Trump to urge his administration to block Nord Stream II by hitting the companies behind it with financial penalties. 

The fines would hit the five EU energy firms - Engie, OMV, Shell, Uniper and Wintershall.

"We are against the pipeline, we would prefer it if it were not built," said Sandra Oudkirk, an energy official from the US State Department.

Wilbur Ross, the US commerce secretary, has suggested Europe correct the transatlantic trade balance by buying more US liquid natural gas (LNG).

Asked if Washington was exploiting the difficulties to further US interests, Boersma said: "I know that this is a storyline that is popular in parts of Europe, but frankly I am not convinced there is much truth to them."

"Concerns about Russian gas predate the current administration and so that position has in fact been pretty consistent. In that context I would argue that recent statements from State Department officials explicitly linking these two goals were perhaps a little clumsy, in that they make concerns from US officials seem self serving, whereas I think some of those concerns are genuine," Boersma said. 

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The state of Denmark: To be or not to be?

Sweden and Finland have yet to issue permits for the pipeline through their exclusive economic zone, which is regulated by UN law. Germany did so earlier this year. But only in Denmark would the undersea pipe pass through sovereign territorial waters.

Sweden and Denmark have expressed concern about damage to flora in the Baltic Sea, but Danish officials have said they are loath to take sides and don't want to rush the decision.

The Nord Stream II consortium has said it is carrying out surveys for an alternative route north of the Danish island of Bornholm outside Denmark's territorial limits, but it would cost time and money.

Pipeline contractor Allseas has said a change of route would add less than 5 percent to total costs, Reuters reported.

Commercial sense

Despite all the difficulties, many believe the pipeline project makes commercial sense. 

Professor Brenda Shaffer, a Russia expert at Georgetown University, told DW the pipeline is needed for three main reasons.

"One, it means cleaner energy for Germany. Berlin talks the talk, but doesn't walk the walk on emissions. Without more gas in its energy mix, Germany will remain over-dependent on coal, especially after the next round of closure of nuclear plants. Two, for Germany, the relationship with Russia is extremely important and gas trade is seen as a positive component in their cooperation. And three, transiting gas all the way down to Ukraine and back up to Germany is set to become way more expensive after Russia starts producing in the Arctic north," she said.

Some countries in Eastern Europe, she went on, many of which have been vocal critics of the pipeline, could have even better security of supply through Germany.

"Forcing Ukraine off its dependence on Russia energy transit fees is also not a bad thing and it is good to get Russian entities out of a major role in the Ukrainian economy," Shaffer added.

What will Berlin do?

In mid-April, Germany's Europe minister called for a new policy of easing tensions with Russia.

Michael Roth, a member of the SPD, was echoing comments by President Frank-Walter Steinmeier, a fellow Social Democrat, that "too much is at stake" for Germany to cast Russia as an enemy.

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