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The Nord Stream 2 saga from Central and Eastern Europe

The construction of the Nord Stream 2 pipeline set off a full-fledged geopolitical wrestling match, with the United States on one side and Russia on the other while the EU is divided in the middle sending out mixed messages. The highly controversial Nord Stream 2 will transport natural gas from Russia to Germany under the Baltic Sea, doubling the capacity of an existing pipeline. Although the construction of the 9.5 billion euros pipeline is well advanced – only 148 of the 1,230 kilometres are left to be completed –  the long-running story of the controversial project is still surrounded by many twists and turns which can shape the already complex energy landscape of Central and Eastern Europe as well.

Nord Stream 2 has prompted criticism ever since 2015, when Russian state-owned energy company Gazprom and five European energy firms formed a consortium to lay a new pipeline, pumping an extra 55 billion cubic metres (bcm) of gas every year from Russia to the EU for at least 50 years. Opponents argue that the new project will tighten Russia’s already firm grip on the European gas market and goes against the continent’s core strategic and economic interests in light of declining gas consumption and the EU’s long-term climate goals.

nord stream
Nord Stream 2.

Meanwhile, proponents of Nord Stream 2 consider the project and natural gas more broadly a bridging fuel to a carbon-neutral energy mix. The idea is spearheaded by Germany, which views the new pipeline as a means to stabilise its markets while pursuing its broader Energiewende policy, aiming to phase out nuclear power as a way to pursue renewable energy supply.

“These renewable sources are highly subsidised and the cost of energy in Germany skyrocketed as Berlin began pursuing the Energiewende policy,” Matthew Thomas, an analyst at Baltic Security Foundation tells CEENERGYNEWS. “Thus, Nord Stream and Nord Stream 2 fill in the gap with natural gas to ease the burden on German households.”

He adds that the construction of the new pipeline would help Germany to become a central transit hub for Russian gas brought directly there without intermediaries and that favourable relations between Berlin and Moscow would facilitate cheap prices for Germany, which then translates to a profitable position for Germany as a seller of Russian gas to Western Europe.

As the completion of the new subsea gas pipeline would directly link Russian production with one of the largest European gas-consuming markets, Nord Stream 2 would also enable Russia to achieve one of the most important components of its energy strategy for diversification, reducing the dependence on Ukrainian transit.

Getting rid of the gatekeeper

Ukraine acts as the gatekeeper in the transfer of natural gas from Russia to Europe, but the completion of Nord Stream 2 would enable Russia to bypass Ukrainian land, providing a painful blow to Ukraine’s economy.

“In terms of physical capacities, if it runs at full capacity, Nord Stream 2 would deprive the Ukrainian gas transportation system (GTS) by 55 bcm per year,” says Dmytro Naumenko, Senior Analyst at the Ukrainian Centre for European Policy. The total gas transit via Ukraine to Europe was 55.8 bcm in 2020.

“Given the remaining Southern gas transit corridor of Ukrainian GTS (to Croatia, Serbia and Hungary), Ukrainian GTS would be pumping approximately 15 bcm of gas annually, plus a possible 5-10 bcm per year of transit at winter peak months, so the volumes will not exceed 30 bcm,” explains Mr Naumenko.

Russia aims to circumvent Ukraine not only from the North but also from the South. Once the second stream of the Turkish Stream pipeline (via Bulgaria and Serbia) is commissioned, Gazprom would obtain the technical possibility to de facto leave Ukraine’s GTS without Russian transit gas flows.

It would cost Ukraine about 2 billion euros of gas transit revenues or approximately 1.5 per cent of its GDP.

Dmytro Naumenko

However, this will not happen immediately as Ukraine has a take-or-pay type gas transit contract with Gazprom until 2024 that guarantees payments to Ukraine for booked capacities.

Therefore, Ukraine has time at least until 2024 to clarify the externalities related to the future utilisation of its gas transport system. Diminishing volumes of Russian gas transit raises a problem of technical reconstruction of GTS as without Russian gas inflow from the East (and subsequent pressure), it will serve mainly domestic consumers (gas reverse from the EU and supply of domestic consumers) and balancing CEE gas markets with underground gas storages at the Western border.

“Regarding even more long-term prospects, Ukrainian GTS may receive a second wind for exporting to the EU the so-called green gases, such as biomethane and mix of green hydrogen with natural gas to serve the needs of European Green Deal,” points out Mr Naumenko, however, he adds, that this option is still a black box as it requires resolving a bunch of technical, technological, legal and economic issues to be resolved.

Poland worries about energy security in CEE

Ukraine is not alone with its adverse feelings towards the construction of Nord Stream 2. Warsaw shares the concerns of its Eastern neighbour and warned several times against the potential backlash of growing Russian influence on the European energy market. In October 2020, Poland’s anti-trust regulator has ordered Russia’s Gazprom to pay a 6.5 billion euros fine over the construction of the Nord Stream 2 pipeline.

“We support the approach that does not aim at sanctioning anyone but rather to level the playing field across energy suppliers in Europe,” Tomasz Kijewski, President of the Warsaw Institute tells CEENERGYNEWS, adding that true opposition to Nord Stream 2 is not about anti-Russian policy but it is a fight for fairness and competition on the European energy market.

Europe is currently over-reliant on Russia when it comes to energy supply, granting Kremlin unnecessary strategic, political, and economic leverage over European governments. Nord Stream 2 and Turk Stream pipeline projects are explicit attempts to destabilise Ukraine by diminishing its role in the transit of Russian gas. Poland was an early recogniser of that fact.

Tomasz Kijewski

Poland has long been opposing the project considering it a geopolitical threat for the energy security of Central and Eastern Europe.

“The need to search for alternative sources gas supplies to Europe seems economically unreasonable, yet, concerns of Warsaw arise from the potential inability to negotiate prices with a supplier, which may become a monopolist that has a proper infrastructure to limit gas supplies to Central Europe without doing so to consumers in Western Europe,” underlines Mr Kijewski.

Political and economic interests are inherently linked in the construction of the new Russian pipeline deepening rifts between EU member states. Although a few weeks ago the European Parliament adopted a resolution calling to halt the Nord Stream 2, the decision was not unequivocally supported by Germany and Chancellor Angela Merkel clarified that she would not abandon the completion of the pipeline, saying it is a commercial project, not a political one.

“Nord Stream 2 is not about the energy security of Germany,” wrote recently Polish Foreign Minister Zbigniew Rau together with his Ukrainian counterpart, Dmytro Kuleba in a joint article published on Politico.

“We respect Germany’s right to express their point of view. But we also strongly believe that these kinds of projects cannot be viewed narrowly through the lens of bilateral relations, but should instead be approached from a broader perspective of Europe’s interests and security as a whole,” they said. The two ministers appealed to US President Joe Biden to prevent the completion of the Nord Stream 2, which they called a “dangerous, divisive project.”

The Nord Stream 2 pipeline is one of the first tests for the Biden administration to balance its geopolitical interests on Europe’s energy map while also shoring up America’s alliance with Germany. The Biden administration seems to allow the project to continue for the time being without levelling any new sanctions on companies involved, despite bipartisan congressional backing to impose additional measures against the Russian pipeline.

“It is a real regret that the project has been shaping the German and European/American relationship in a way that it shouldn’t have,” said Niels Annen, Minister of State at the German Federal Foreign Office speaking at CERAWeek by IHS Markit. “The context must be taken into consideration: we are in the middle of the energy transition and we are making progress concerning renewables, but gas is still the obvious choice as a bridge.”

Long-term impact on EU unity and transatlantic relations

The arrest of and prison sentence of Russian opposition leader Alexey Navalny has brought yet another dimension to the fight over Nord Stream 2 as many opponents urged to halt the project in retaliation. This added another layer to the already complex policy dispute and highlighted the different perspectives on the separation of political and economic considerations.

Lithuania’s foreign affairs minister, Gabrielius Landsbergis was one of those who urged to pause the project in response. He pointed out that Europe cannot reward Russia with gas contracts for repressing the opposition, as it doesn’t send the right signal to Russia and fragments European unity.

The Baltic countries have been long opposing the construction of Nord Stream 2 alongside Poland and Ukraine.

“Historically, Russia’s Gazprom had a monopoly on gas supply in the Baltics, but this has been broken by infrastructural development and deepening integration into the Nordic and broader European markets,” says Matthew Thomas. “A number of gas interconnector projects and other infrastructural investments have brought Lithuania, Latvia, and Estonia out of their former isolation in the gas market and opened the way for the diversification of sources.”

Opening up to the global liquified natural gas (LNG) market via the Klaipėda LNG terminal in Lithuania, which has the capacity to serve all three Baltic states, has been a crucial step to pivot away from Russian dependence by diversifying supply sources. Besides these countries are all members of the Three Seas Initiative, which seeks to correct the imbalance of East-West infrastructure by investing in North-South connections.

According to Mr Thomas, the construction of the Nord Stream 2 pipelines concerns the Baltics on the foreign policy front, as they have a great deal of solidarity with Ukraine and close cooperation with Poland and other like-minded Central European allies.

For the Baltics, the intensified division within Europe is worrisome as it can negatively influence the Transatlantic alliance. As Mr Thomas explains part and parcel of the political problem of Nord Stream 2 for NATO (and the EU as well) is the concept of state capture, meaning that by dominating one or more powerful sectors of the economy, Russia seeks to influence the decisions of government in other countries.

By undermining the German political system, Russia seeks to weaken the foundations of NATO and the EU as key institutions of the West. As the Baltics rely on these institutions for their political, economic, and military security, this subversion is of deep concern.

Matthew Thomas

Although Nord Stream 2 is a much-debated issue from the start, the pipeline is now almost finished. Opposition within and outside of the EU can possibly delay the completion of the project, however, it is unlikely that Germany will pull the plug on a billion-euros worth investment, thus Central and Eastern Europe should prepare to see the pieces of its energy puzzle being reshuffled once again.

Photo: Ilkka Kemppinen/Yle

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