Mar 7, 2018 | 00:11 GMT

4 mins read

EU: Russia Wins a Battle in Its War of Pipelines

The Big Picture

In Stratfor's 2018 Annual Forecast, we said that in retaliation for sanctions Russia would exploit all of the tools at its disposal try to widen divisions among EU member states — including the flow of energy through its network of pipelines. A divided European Union is advantageous for Russia as it works against European sanctions. The European Union, for its part, says it will lift sanctions on Russia only if Moscow fully complies with the Ukraine peace deal. The recent leak from the EU Council of Ministers connects to both Ukraine and deeper energy issues.

The Nord Stream 2 offshore natural gas pipeline project — of which Russia's Gazprom is the sole shareholder — is the most politically divisive pipeline for Europe. In fact, several European Union member states have been calling for it to either be stopped altogether or at least heavily regulated. According to new information, it appears that their calls will not be met. A leaked opinion issued by the legal department of the EU Council of Ministers says that the bloc's regulations do not extend to pipelines in exclusive economic zones off the coasts of EU member states. The opinion will ruffle feathers across the Continent, which Russia will surely welcome, given that it sees such internal conflict as useful in Moscow's bid to rid itself of EU sanctions.

The opinion, dated March 1, argues that a European Commission proposal last year to extend energy regulations to pipelines in member states' offshore exclusive economic zones violates the U.N. Convention on the Law of the Sea (UNCLOS). In short, the European Commission does not have the right to regulate Nord Stream 2, because it only passes through European exclusive economic zones but does not contribute to their economic development. For now, the memo is just an opinion, and Nord Stream 2 could face EU regulation in the future. But there is no denying the leak for what it is — a win for Russia and European proponents of Nord Stream 2.

Even if Nord Stream 2 is not rendered uneconomical by future EU regulations, it is likely to face enough opposition to delay its construction past next year, when Gazprom's natural gas contract with Ukraine ends.

Opponents of Nord Stream 2 — most notably Slovakia and Poland — allege that the pipeline will undermine Europe's overall energy security by enabling Gazprom to deliver natural gas directly to Germany without sending it through Ukraine and eastern European countries first. Gazprom counters that because most of its newest natural gas projects are located in Russia's far north, as opposed to the historic fields in Western Siberia, it makes more sense to build a new conduit — Nord Stream 2 — than to repair its existing pipeline to Europe, which traverses Ukraine. Germany, an advocate of the plan, argues that the new pipeline would not lead to energy insecurity and that other connectors could be built through Europe to move natural gas from its planned entry point in Germany to eastern Europe.

Despite today's positive news for Russian energy, supporters of Nord Stream 2 cannot claim a full victory yet. Even if the pipeline is not rendered uneconomical by future EU regulations, it is likely to face enough opposition to delay its construction past next year, when Gazprom's natural gas contract with Ukraine ends. This will likely force Gazprom to negotiate a short-term energy contract with Ukraine, which will be difficult to do under the shadow of the Nord Stream 2 pipeline. (Last week, a Swedish court ordered Gazprom to pay $2.56 billion to Ukraine's Naftogaz because of violations related to their transit contract. This only heightened Gazprom's desire to end the contract.) For Europe, no matter how the dispute eventually gets settled, it will serve to widen existing regional fissures, contributing to the union's eventual undoing.

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