Europe without Nord Stream 2

Nord Stream 2 is a solution in search of a problem. This unfinished Baltic Sea pipeline would contribute precisely nothing to European energy security. Indeed, if Nord Stream 2 is not stopped now, the risk of interruptions to the East-West gas flows will only increase. Unquestionably, Europe, Germany, Ukraine, and even Russia will be better off without it. 

It is a small wonder that Poland’s antitrust watchdog recognized the dangers it poses to market competition andfined Gazprom €6.5bn. On the other side of the Atlantic, the opposition to this perilous project is a matter of bipartisan consensus in the U.S. Congress, which is currently contemplating new sanctions to be included in the 2021National Defense Authorization Act. And even in Germany the sentiment shifted when headlines in September read “Merkel doesn’t rule out Nord Stream fallout over Navalny” 

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Looking at the 2020-2030 decade, Gazprom estimated its annual sales to Europe at ~200 bcm per year. Coronavirus outbreak has already dampened those projections, but even if we stay with this optimistic scenario, shouldn't we question the necessity of additional gas infrastructure when the existing transit capacity is 270 bcm per year? 

The natural gas of Western Siberia reaches Europe via four major routes: land pipelines through Ukraine and Belarus, plus submarine pipelines in the Baltic and Black Seas. When the latter came online - NordStream1 in 2012 and TurkStream just a few months ago - gas flows shifted away from Ukraine. So, at this very time, our transit network is operating half empty. If yet another diversionary pipeline is added to bring the same gas to the same customers, how could we justify GTSOU's operational expenses?

The problem with the current discourse around Nord Stream 2 is that 146 bcm of Ukraine's transit capacity is taken for granted. All too often, the defenders of the Russian streams forget to mention the order of magnitude difference in the risk factor for subsea infrastructure. 

“offshore natural gas pipelines have been associated with several disastrous accidents. The explosion of the Piper Alpha production platform in the North Sea in July 1988 cost 167 lives, the worst offshore accident in history. It was the natural gas from subsea pipelines that caused the massive explosions leading to the catastrophic failure of the platform”

A seminal study by the Jackson School of Geosciences, The University of Texas at Austin, that looked at hundreds of gas pipeline accidents found that the chance of leakage is a whopping 234 times higher for offshore infrastructure. 

Germany and Europe face a stark choice. Either we keep a robust and diversified gas transit network inclusive of overland and undersea routes, or we gradually shift towards a system heavily reliant on high-risk submarine pipelines. 

"Repairing a land pipeline, of course, it depends on the kind of damage, takes 3 or 4 days, and according to estimates repairing an offshore pipeline takes weeks." This is how a German energy analyst, Dr. Frank Umbach, described his concerns with Nord Stream 2 in an interview. 

But let's put aside the immense risks of technical failure, leak, or rupture, that characterize subsea pipelines and look instead at basic operational requirements. Year after year, Nord Stream 1 suspends operations for regular maintenance that lasts ten days on average. The gas consumers in Europe never felt a thing, as the Ukrainian transit system picked up the slack. How will this work in the future, especially in the scenario where the vast majority of Russian gas reaches Europe via undersea pipelines, and on-land infrastructure is scaled back? 

Surely, our system isn't immune to incidents and scheduled repairs. The important difference, however, is that Ukraine's 146 bcm “pipe” is actually a multiplex grid of 4 pipelines with numerous interconnections and exit points. We have proven the reliability of transit through Ukraine time and again. Multiple redundancies in our transit network are the best guarantee of uninterrupted gas supplies to Europe. 

The proponents of Nord Stream 2 often point to the age of our infrastructure, implying a link with reliability. During the 40 years of transit, we never suspended flow to Europe for technical reasons. Multiple network redundancies complemented by the largest gas storage in Europe are the best guarantee of uninterrupted supplies.  

To maintain and further strengthen our operational capabilities, we are not looking for handouts. What we need is a solid justification to maintain and improve our physical assets. And there can be no better assurances of continued transit through Ukraine than the cancelation of the Nord Stream 2.

The proponents of Nord Stream 2 often talk about the cost savings. Even if this pans out for Germany, gas prices will likely increase inEastern Europe,Italy, and the other EU Member States. No matter what models we use in forecasting, it is clear that a dominant market player's calculus points towards higher prices over time. How much negotiating power will European customers have after Gazprom owns and operates every supply route, and the vendor lock-in takes hold?

The only credible check on monopolistic behavior is the competitive pressure from other suppliers. The EU must prioritize diversification of energy sources, not routes. "Gazprom remains the sole entity with the right to sell natural gas [via pipelines] to markets beyond Russia" states the report onRussia's market manipulation published by the European Commission on October 23rd. Meanwhile, hundreds of Russia's own gas producers, including giants such as Navatek, Rosneft, and Lukoil, are shut out of the pipelined gas exports to the EU. The gas producers from Central Asia, which supplied Europe in the early 2000's, could contribute significantly to the continent's energy security if Gazprom didn't block their access to pipelines. 

If the lower gas prices were the objective, Nord Stream 2 is most certainly not the answer. However, the larger problem with this ill-fated project is not the flimsy commercial justification but a wide range of negative externalities, from theelevated environmental risk tofurther politicization of energy. No cost savings could compensate for the damage to European unity, the moral hazard of exemptions to fair competition, and theweakened regional security.

Thankfully, a framework that guarantees fairness and transparency in the gas market has already been invented. It's called the Third Energy Package, and it underwrites Europe's energy security, especially when applied to all gas suppliers uniformly and enforced consistently.  Before the Revolution of Dignity in Ukraine, our energy market was opaque and dysfunctional at best. And we must admit that hesitations about transit through Ukraine had some merit.  But since 2015, we have worked hard to unbundle transit from gas trading and production. Our legislative framework is now fully aligned with European practices. When Nord Stream 2 was first proposed, it didn't make much sense, and it makes even less sense now that Ukraine's gas market has been liberalized. 

Russia has been championing new pipelines and protecting Gazprom from European regulation.  While this might have delivered some short-term tactical advantages, this approach undermines Russia's long-term competitiveness as a significant gas supplier to Europe. Gazprom is our trading partner, and we must say, as counterintuitive as it may sound, the cancelation of Nord Stream 2 might be in Russia's and Gazprom's interest too. 

The shift from well-tested on-land infrastructure over to the risky undersea pipelines threatens Gazprom's most valuable asset - the trust of its customers. And the refusal to accept the Third Energy Package may allow Gazprom to leverage its dominant position for the time being. But it is not sustainable in the long term, given Europe's commitment to fair competition in the energy trade. 

With the existing transit capacity of 270 bcm per year and the projected transit volume of 200 bcm per year for the decade to come, we should be looking at system optimization rather than wasting resources on a superfluous and geopolitically untenable new infrastructure. Nord Stream 2 makes zero economic sense, zero geopolitical sense, and zero environmental sense.  Canceling it, on the other hand, will be a boon for European unity.  Indeed, if we stop digging now, Germany, the EU, Ukraine, and Russia will all be better off. 

Abbreviated version of this article was published on Euractiv.

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