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    Editorial: Ordeal by pipeline [NGW Magazine]


Europe’s gas business should be about competitive trade, not politics. [NGW Magazine Volume 5, Issue 10]

by: NGW

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Editorial: Ordeal by pipeline [NGW Magazine]

The impact of lockdowns and the pandemic’s broader economic fallout has taken some attention away from Russia’s embattled Nord Stream 2 (NS2) project. Gazprom still has 6% left to finish and the project will be over a year late.

Gazprom faced further legal humiliations in Europe this month, and its options for completing and operating the line by next year are shrinking. On the positive side, at least there is no shortage of gas at Europe’s hubs. Indeed, Gazprom can take a crumb of comfort from the fact that prospects of making money from gas sales in Europe are no brighter for US ‘liberty gas’ exports, now facing shut-ins and loss-making on a cash basis. How much worse it would be, if NS2 were also running.

But that does not solve the problem: Gazprom must comply with the EU rules, even if that means renting out capacity transparently to third parties, if the line is to be filled. But as its monopoly on pipeline exports has been overtaken by events, might this be the time for a reset? Novatek’s LNG sales create at least some competition for Gazprom in Europe, and other state companies and their partners – Rosneft and the UK major BP – have long been calling for access.

The headache for Gazprom has been EU’s amended gas directive, which came into force in May last year. It extends bloc rules on unbundling transmission from supply and ensuring third-party access to capacity to pipelines from third countries. It was aimed squarely at NS2.

Gazprom had hoped to annul the imposition of EU gas market rules on NS2, just after German regulator BNetzA, with Polish support, rejected the plea for waiver from those changes. However, the EU’s General Court ruled on May 20 that the amendments did not directly impact NS2 and its investment case. Germany, it concluded, was the one to transpose and apply the legislation, so Gazprom should sue for justice there.

The Russian firm argued in Germany that the pipeline should be treated as having been completed before May 23, 2019, as most of its investments had been spent and construction was well underway by this point. This would have given it grounds for a waiver. But BNetzA, after consulting with EU member states, took the term “completion” in a literal sense.

What steps Gazprom will take next are unclear. NS2 has told NGW it is analysing the EU court ruling and has two months in which to appeal. In its verdict, the court said NS2 would be able to challenge the BNetzA decision in a German court. But that court would then have to revert back to the EU Court of Justice, the only EU court higher than the general court. All roads lead back to Brussels, it seems.

To meet ownership requirements, Mitch Jennings at Moscow-based Sova Capital suggests Gazprom could transfer NS2’s German subsea section to Gascade, its joint venture with BASF that manages the Eugal pipeline receiving its gas. It may also transfer the Russian part to a 100% subsidiary, an unbundling approach recognised in EU law and seen in some countries such as Poland where both are state-owned. “That might technically work under the letter of the law but not the spirit of the law,” Jennings says.

Gazprom could even hold “ghost auctions,” Jennings suggests, offering up NS2’s capacity to other Russian suppliers even though they are barred from using it under Russian law. It has done something similar in the past, where it had to offer capacity in the Opal onshore line: some entry points had no bids as only Gazprom had the gas.

Gazprom still has the task of finishing the pipeline. It sent its own pipelaying vessel, the Akademik Cherskiy, from the Far East and it is now stationed at the German port of Mukran where Gazprom has been storing NS2’s pipes.

Akademic Cherskiy is understood to now be equipped with a dynamic positioning system (DPS) required to work at the NS2 construction site under Danish law, according to Jennings. But its crane can only lift 32-inch pipes, whereas NS2’s concrete-coated pipes are at least 48-in.

To finish the job, Gazprom could couple Fortuna, a pipelaying barge with a larger crane, to Akademik Cherskiy. But this could render Akademik Cherskiy’s DPS unusable, so it would need anchoring.

This in turn would require another permit from Denmark, owing to the suspected presence of large amounts of World War II explosives and older materiel dumped on the seabed. Gazprom might be reluctant to take this option, given Denmark’s record delay in issuing permits last year.

Even after NS2 comes on stream, it could take time to ramp up to full capacity. The intent behind the pipeline was to divert flows away from Ukraine. But Gazprom’s ship-or-pay transit contract signed last December requires it to pay for 65bn m3 in 2020, and 40bn m3/yr in 2021-2024 regardless.

At the same time, Gazprom will want to continue using Ukraine as a transit route even after its current contract expires, Dmitry Marinchenko at Fitch Ratings tells NGW, to prevent the pipeline system from being decommissioned. Ukraine gives Gazprom the option to expand gas sales to Europe at a later stage, if gas demand is bullish.

From today’s market viewpoint that looks unlikely: but if Moscow’s relationship with China keeps improving, it would be inefficient for Gazprom to keep hogging capacity westwards. Russian gas might also be seen in a better light if it were branded differently, and that would have benefits for gas generally.