A debate over the proposed Nord Stream 2 twin natural gas pipelines, which would stretch about 745 miles across the Baltic Sea from Russia to Germany alongside the existing Nord Stream system, quickly centered on whether the project would undermine European energy security or simply enhance its efforts to diversify sources.
“Commercial and political issues mix all the time in all sorts of areas,” observed Richard Morningstar, founding director and chairman of the Global Energy Center at the Atlantic Council, where the Apr. 1 debate took place. “There’s going to continue to be a huge stream of Russian gas to Europe. But Russia has done bad things the last couple of years. The politics are just wrong now for the European Union to approve this pipeline when so many of its members are against it.”
But another panelist argued that Russia should be allowed to compete as European nations try to diversify their gas supply sources. “On what grounds should Nord Stream 2 be prevented? How is it different from pipelines from Algeria or Azerbaijan?” asked Friedbert Pfluger, a nonresident senior fellow at the AC’s Global Energy Center who worked in West Germany’s government in the 1980s and was a member of its parliament from 1990 to 2006.
“The German government says this is a pipeline from Russia to Germany, not a European issue,” Pfluger said. “Let’s have competition, but recognize that politics exist in more than one case. Let’s start with business questions, and discuss politics later.”
A third panelist, Tim Boersma, who is acting director at the Brookings Institution’s Energy Security and Climate Initiative, noted: “This project’s timing is curious, to put it mildly. I’m not even sure it’s needed in the short term. Europe’s gas market integration successes should not be underestimated. We have to appreciate a more liberalized market. In the last 2 years, 20 [billion cu m] of Netherlands gas left that market unnoticed.”
A fourth panelist, Anders Aslund, a nonresident senior fellow at the AC’s Dinu Patriciu Eurasia Center who teaches at Georgetown University and has been an economic advisor to both the Russian and Ukrainian governments, said, “It’s an economic issue of supply, demand, and efficiency. Not all the existing pipeline capacity is being used. Diversification has been a big blow to Gazprom, which has seen its value fall to $51 million from $360 million a few years ago.
Under Kremlin control
“It’s accountable only to the Kremlin,” Aslund said. “This is an odious company that should be treated as an organized crime syndicate. Yet five Western companies want to build this project with it, which I find odious.” Gazprom’s partners in Nord Stream 2 are the multinational Royal Dutch Shell PLC, OMV AG in Austria, French utility Engie, and Germany’s E.On SE and Wintershall Holding GMBH.
Pfluger conceded that Gazprom is a Russian state entity, but added that it acted more like a commercial firm when it canceled the proposed South Stream gas pipeline project and satisfactorily met most of Europe’s gas needs from 1991 to 2006. “We Germans are Atlanticists who are loyal to Europe,” he said. “But we also recognized that Russia was a reliable supplier through the Cold War. The EU needs to build an infrastructure that’s so effective and efficient that countries aren’t threatened by a dominant supplier.”
Speakers disagreed over whether Gazprom has eliminated or simply eased a destination clause preventing its European customers from reselling gas they import. More than 30 bcm was exported from Germany to neighboring countries in 2015, according to Boersma. Pfluger said those companies might find it more beneficial to work to eliminate using intermediate countries like Ukraine so they would not have to pay transit fees.
Ukraine’s government has serious administrative problems it needs to address, the panelists generally indicated. “If market proponents want to help Ukraine, it makes no sense to hang onto a model that hasn’t worked for 20 years,” Boersma said. “There’s been some concern in Eastern Europe about the role Germany would play, but I think this is overblown. Other Central European countries would be involved too.”
Gazprom still needs to overcome blows to its reputation when the Russian government ordered it to stop supplying Ukraine twice in recent years, Boersma said. “I think this matters,” he said. “I don’t know of any country besides Germany which thinks building Nord Stream 2 is a good idea. Yet companies keep returning to returning to Gazprom. I don’t think political concerns matter much to them.”
Morningstar concluded: “You can’t separate political and commercial issues in these projects. I don’t think there’s a commercial basis for Nord Stream 2. I think those companies want to maintain commercial relationships with Gazprom, and don’t want to be burdened with Ukraine’s problems. We also need to keep Nord Stream 2 in perspective. It’s important to people concerned with European energy security, but looks minor overall compared to dealing with ISIS and the war in Syria.”
Contact Nick Snow at email@example.com.