Nord Stream 2: 'Necessary, Safe, Economic and Legal.'

(Amends quote in paragraph 5 and clarifies finance structure in paras 8-9)

Despite encountering several political obstacles, the Russian-backed gas pipeline Nord Stream 2 (NS 2) is needed in the European Union and it will be completed by its original goal of 2019, said its representatives at the European Business Summit in Brussels May 23.

NS 2 is the second, 55bn m³/yr line that will run from northern Russia to Greifswald in northeast Germany, following the already-functioning Nord Stream 1 for much of the way. From its landfall, capacity bookings on the Prisma cross-border trading platform show that most of the gas will flow through a yet to be built pipeline, Eugal, which flows south towards Gazprom's contractual delivery point of Baumgarten, in Austria, where much of it flows onwards to Italy, central Germany and France and some other customers in the Balkans.

The project is deeply unpopular in several eastern European countries, as it deprives them of transit revenues and is seen also as not contributing to European diversity of supply, as the new infrastructure is not going to carry new gas to Europe, but reroute supplies that now go through Ukraine.

According to NS 2 spokesman Sebastian Sass, “however the future may evolve, the EU does need the extra gas capacity,” and "the whole argument that the project would be exploiting loopholes in EU law is absolute nonsense."

Opponents claim that EU gas demand is decreasing, so the project has no reason to exist. On the contrary, domestic EU gas production will decrease at a faster pace than demand, said Sass and his colleague Alex Barnes, a former representative of Gazprom Marketing & Trading in London, Sass said German petrochemical giant BASF uses twice as much gas as the whole of Denmark.

Nord Stream 1 surfaces in Greifswald (Credit: Nord Stream)

Nord Stream 2 gas will be price-competitive and enjoy state-of-the-art technology, they argue. Existing infrastructure allows for gas to flow freely between countries, and internal market rules on third-party access ensure that Russia would not be able to abuse its power position, as anybody is allowed to bid on unused capacity in intra-day auctions. “The EU internal market actually works,” Barnes added.

However a member of the audience remarked that if a gas cut were to happen for political reasons, purchasing from other suppliers would prove more expensive than Russian gas, so the leverage is still there, albeit less severe than in the past, when there were fewer interconnections and alternative supply routes.

Gazprom's partners foot part of the bill

The Nord Stream 2 company, 100% subsidiary of Russian Gazprom, still has the support of the five European companies that abandoned the attempt to form a more financially efficient joint venture last summer in the face of questioning by Poland's anti-trust authorities. Nonetheless, Sass stated that these companies “support the project not only on paper”, and they have committed to financing up to 50% of the total cost.

The aim is still to finance the project 30% through equity and 70% debt, as they expected to do if the creation of a six-way joint venture had been approved. Sass said that €4bn ($4.48bn) have already been spent of the total budget of €9.5bn (€8bn being capital expenditure, the rest being financing costs).

Despite these companies’ apparent faith in the project, political authorities remain on guard. The European Commission is supposedly toying with the idea of requesting a mandate from EU countries to negotiate a separate legal agreement that would apply only to Russian energy infrastructure projects. Sebastian Sass said that he only learned about this through the media, and that he considers it “completely unnecessary.”

Although there is nothing the partners can do if the mandate is given, it would not stop the project from progressing. Danish authorities were also reportedly considering about including a “foreign affairs” criterion in their permit procedure, but again Sass dismissed concerns arguing that the Danish ministry has already stated that the existing legal framework would be applied, and added that they “fully trust permitting authorities, specially from Nordic countries.”

Eugal is not Opal

While the operator of the new pipeline is not seeking exemption from third party access rules, Nord Stream 1's onshore component, Opal, successfully did. However that approval was made conditional on a gas release programme which Gazprom did not carry out, and so gas flows through Opal were halved, after regulatory intervention from the European Commission. Nord Stream 1 has been running at about 70-80% of capacity for much of its life as a consequence of the ceiling on Opal.

An unexpected decision at the EC level last October to allow Gazprom to use more of Opal led to greater month-ahead capacity bookings for January 2017; but a successful Polish legal appeal of that decision came shortly after, and it ended that brief surge from the start of February onwards. A German court is still considering the legality of the EC decision, and Nord Stream and Opal are back to their earlier operating regime.

Sara Vargas, William Powell