Gazprom Soldiers on With Nord Stream II
A Series of Hurdles
Despite the uncertainty surrounding the project, Gazprom has prioritized Nord Stream II, diverting money toward it even at the expense of other projects, such as the extension of the Power of Siberia pipeline into China. The company must now decide whether to proceed with the pipeline project on its own or try to build another consortium with a different structure to implement it. In the meantime, it has been moving forward, issuing tenders for pipe and discussing financing options internally and with the Kremlin. (Nord Stream II AG was likely planning to fund about 30 percent of the project by itself, borrowing the rest from financial institutions.)
Even if it does not find other partners quickly, Gazprom can afford to keep going with the project on its own for now. Though pipe deliveries are set to begin in September, construction on the two pipelines that will form Nord Stream II is not scheduled to start until 2018. By then, Gazprom's resolve to build Nord Stream II may have wavered, depending on whether it feels that other projects — for instance, the TurkStream pipeline — are more important. The recent reconciliation between Turkish President Recep Erdogan and Russian President Vladimir Putin has revived talks over TurkStream, which were derailed in late 2015 when Turkey downed a Russian fighter jet.
As big an obstacle as Poland's UOKiK has been for Gazprom, the company faces even greater obstacles. The European Commission is currently deciding whether offshore pipelines fall under the Third Energy Package regulations, which prohibit companies from owning the pipeline through which they transmit and sell their own natural gas. The German government, Gazprom and its former Western partners have all argued that the existing legislation does not apply to offshore pipelines, but the European Commission has no official position (it was supposed to make a ruling in July). If the commission decides that that the Third Energy Package regulations apply to Nord Stream II, the project will be even more difficult to advance. (Germany will likely continue to pressure the European Commission to avoid such an outcome.) Securing downstream infrastructure to support Nord Stream II will also pose a challenge. The Nord Stream I pipeline, which follows roughly the same route, is currently limited to roughly 75 percent capacity because of the Third Energy Package and similar regulations.
Risks Worth the Reward
These complications stand to stymie Russia's efforts in Northern and Central Europe. New supplies from global liquid natural gas markets, including Central Asia, and EU regulators' success in preventing monopolies from developing in any single country have made the European natural gas market more competitive. Facing growing competition, Gazprom is working to improve its capacity to deliver natural gas to Europe at a lower cost and with more flexibility than it has now with the Ukrainian pipeline. Much of Nord Stream II's intent was to supply Germany and its neighbors with natural gas using a more direct, and potentially cheaper, route than the one through Ukraine.
Beyond its economic benefits, the proposed pipeline has political implications, too. Now that Ukraine can source nearly all of its natural gas from European countries, Moscow no longer enjoys the power that it once had over Kiev (though, ultimately, the natural gas is still Russian). Russia does not want to do any favors for a Ukrainian government that is not under its influence. Unless Gazprom builds an alternative pipeline to Europe, Ukraine can use the existing route as leverage in negotiating with Russia. This is a political and financial vulnerability that neither Moscow nor Gazprom can afford.
Poland has fought long and hard against Nord Stream II. And though its competition regulations have driven Gazprom's Western partners out of the deal, it appears that progress on the pipeline will continue, for now. For Gazprom, the project's difficulties are just another in a series of challenges that it has faced in the past decade as it tries to shed its reputation as Moscow's political pawn in Europe.
Natural Gas Europe is pleased to provide this article in cooperation with Stratfor, a Natural Gas Europe Knowledge Partner. For more visit www.stratfor.com Follow Stratfor: @stratfor on Twitter | Stratfor on Facebook