- Europe's debate over Nord Stream II will lead to lengthy delays in the pipeline's construction, but will not result in its cancellation.
- The Ukraine conflict will push the project back even further, perhaps by as much as a decade.
- Despite these delays, Western Europe's support for Nord Stream II will ultimately guarantee its success, and Eastern Europe will be forced to rely on EU regulations for protection from Gazprom.
Editor's Note: Stratfor closely monitors the ebbs and flows of world energy. Aside from production, the transportation of crude oil, natural gas and petroleum products is of paramount concern for oil-producing nations. For energy consumers, transit routes are indispensible lifelines. A huge amount of the world's energy is transited through pipelines, across the Eurasian landmass in particular. In this periodic series we will examine some of the most geopolitically significant pipelines running through Europe and Asia. In this installment, Stratfor examines Europe's response to the proposed Nord Stream II pipeline.
Russia is pushing forward with its new European natural gas strategy, dividing its neighbors to the west in the process. Gazprom's controversial Nord Stream II pipeline is a key component of that strategy, and if constructed, it would boost Russia's ability to send natural gas directly to Germany. Differences among European states over the project have torn a rift down the center of the Continent, reopening the Iron Curtain divide between East and West.
Europe's debate is hardly new; the first Nord Stream proposal encountered many of the same arguments for and against it. Eastern Europe is largely opposed to the project, arguing that it would undermine the Continent's unity on energy security as well as the status of key transit states such as Ukraine, Poland, Slovakia and the Czech Republic. Western Europe — and its major energy firms — is generally supportive of the pipeline and has countered Eastern European concerns with the argument that it needs to increase its intake of Russian natural gas to meet future demand.
This time, though, the debate is taking place within a highly charged geopolitical environment. Though the dispute probably will not scuttle the pipeline entirely, it will likely result in lengthy delays of a decade or more. But as long as Gazprom continues to pursue Nord Stream II within the European Union's current and future regulations, Brussels will not stand in the way of the pipeline's construction, and the fissures between Eastern and Western Europe will linger.
Western Europe: The Quest for a More Mature Natural Gas Market
Unlike its neighbors to the east, Western Europe has never fully relied on Russian natural gas. Even Germany, Russia's largest customer, imports the bulk of its natural gas from the North Sea. Consequently, countries in Western Europe have fewer objections to boosting their consumption of Russian natural gas. In fact, many see Russian energy exports as a way to offset natural declines in the North Sea's annual output, which is expected to fall by as much as 50 billion cubic meters between now and 2035. Since a similar decline in demand is unlikely, Western Europe must find natural gas from other sources to supplement North Sea supplies.
One obvious alternative source is Ukraine, where extensive pipeline infrastructure already exists. However, Ukraine's pricing disputes with Russia have disrupted natural gas flows to the rest of Europe before, and with no end to the Ukraine crisis in sight, the threat of another, potentially lengthy natural gas cutoff is a serious concern to Western Europe. Even if flows continue uninterrupted, Ukrainian pipelines have a relatively low capacity to deliver supplies to certain parts of Europe, including the northwest.
For these reasons, major Western European energy firms such as Royal Dutch/Shell, Germany's E.On and BASF/Wintershall, France's Engie and Austria's OMV have shown great interest in the Nord Stream II pipeline. Their support has generated more financial, corporate and political support for Nord Stream II than for other pipeline routes such as TurkStream. TurkStream itself does not feed into the same markets, instead hitting places such as Greece, Hungary and perhaps even Slovakia. As a result, Gazprom is quite confident — and for good reason — that it will eventually be able to reach a settlement with European regulators that will clear the path for Nord Stream II's construction. However, Ukraine's crisis has temporarily made this negotiation much more difficult for Russia, and it could push back Gazprom's progress on talks by a decade or so, until there is a more pressing need in Europe for the pipeline's development.
For Germany and Austria, the transition to natural gas hubs only increases their incentive to support Nord Stream II. If Gazprom moves toward short-term contracts with spot pricing, as the European Union is encouraging, and if Nord Stream II comes online, a higher, more stable volume of natural gas would flow through the natural gas hubs. This would make the trading markets more viable in the long run. Since Austria's Central European Gas Hub is already one of the Continent's most active trading hubs, it stands to gain from the addition of Nord Stream II supplies. Germany, for its part, is Europe's largest natural gas consumer and has long been seen as a potential site for a Continental natural gas hub. It currently has two hubs that have split the German natural gas market between north and south, but in the long term a unified market — and a natural gas hub to supply it — seems inevitable.
Eastern Europe: Resisting Russian Influence
Eastern Europe's response to the proposed pipeline has been much less encouraging for Gazprom. Polish President Andrzej Duda has said Nord Stream II undermines EU unity on natural gas issues, while Czech Prime Minister Bohuslav Sobotka has described the European Commission's position on the pipeline as "incomprehensible." Meanwhile, former European Council President Mirek Topolanek has cautioned that the construction of Nord Stream II is not in Europe's best interests, geopolitically.
Of course, none of these concerns are new. They largely echo the debate that surrounded the first Nord Stream — a pipeline that Polish Foreign Minister Radoslaw Sikorski has compared to the 1939 Molotov-Ribbentrop agreement between Nazi Germany and the Soviet Union. Unlike their western neighbors, Russian natural gas consumers in the former Soviet bloc have long dealt with Russia's energy dominance, and more recently have been the primary targets of Moscow's attempts to use its natural gas supplies to gain political leverage.
Historically, Poland has been the most vocal advocate of Europe's attempts to present a united front in its dealings with Gazprom. In March 2014, then-Prime Minister Donald Tusk called for an "Energy Union," in which the European Union would negotiate with the Russian energy giant on natural gas supplies as a bloc. Now, as president of the European Council, Tusk is pushing for the EU regulatory package that would increase transparency in European energy markets and promote unity within the European Union. Poland, home to the Yamal-Europe pipeline, is an important transit country that stands to lose if Gazprom chooses to divert some of its supplies through the new Nord Stream II route.
Slovakia and its transit company, Eustream, share similar concerns. Slovakia is the entry point of the massive Urengoy-Pomary-Uzhgorod pipeline system, which transports Russian natural gas through Ukraine and onward to Central and Western Europe. If Russia begins transporting natural gas to Europe by other means, Slovakia could find itself the terminal point of its pipeline route, likely resulting in more expensive natural gas and fewer revenues from transit fees paid by European consumers. Slovakia will therefore throw its support behind alternative pipeline projects that traverse its borders, such as TurkStream and its natural Slovak connector, Eastring, while opposing those that circumvent it, such as Nord Stream II.
Ukraine's position on Nord Stream II is, not surprisingly, even more negative. With the new pipeline's construction, Ukraine could lose an estimated $2 billion in transit fee revenues. As the primary target of Moscow's natural gas cutoffs, Ukraine would also be more vulnerable to disruptions in supply if Russia had an alternative pipeline through which to continue supplying its other European consumers. But Brussels has no intention of abandoning Ukraine, and it has been attempting to counter Kiev's concerns by bringing Ukraine into the EU-led Energy Community. By doing so, Brussels is extending the umbrella of EU law, including its Third Energy Package, to cover Ukraine and the Baltic states. Brussels' strategy is to integrate Ukraine into the European natural gas market to ensure its access to natural gas supplies and limit Russia's ability to block flows to Ukraine.
Stalling the Inevitable
With the European Union's help, Ukraine has been able to break Gazprom's monopolistic hold over its energy supplies. In less than three years, interconnectors between Poland, Hungary, Slovakia and Ukraine have raised their capacity from 1.2 billion cubic meters per year at the beginning of 2013 to 21.9 billion cubic meters per year today. Additional plans are already underway to further boost that figure to 28 billion cubic meters within the next six months. As a result, Gazprom has been forced to lower its prices for Ukraine.
Despite these efforts, the rift between Eastern and Western Europe shows no signs of healing anytime soon. The two sides will not be able to agree on how much natural gas Russia should supply to the Continent until Europe's natural gas market is truly integrated, allowing natural gas to flow easily from one country to the next. In the meantime, Eastern Europe's options for blocking the Nord Stream II pipeline will remain limited. Gazprom already has the backing of Germany and Austria, and the company needs only to secure construction permits from Sweden, Finland, Germany and Denmark — countries that readily granted Gazprom permits for the first Nord Stream pipeline. Instead, Eastern Europe will have to rely on Brussels' regulations and lengthy delays to erode Gazprom's political clout over time.