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    Critical Months Ahead for Nord Stream 2 [Global Gas Perspectives]

Summary

Although it is true that the pipe-laying stage of the Nord Stream 2 project is already about three quarters complete, this does not mean that the rest of the line will be built in the next few months.

by: Agata Łoskot-Strachota, Mateusz Kubiak

Posted in:

Complimentary, Natural Gas & LNG News, Europe, Global Gas Perspectives, Corporate, Import/Export, Political, Ministries, Regulation, Infrastructure, , Nord Stream Pipeline, Nord Stream 2, News By Country, EU, Russia, United States

Critical Months Ahead for Nord Stream 2 [Global Gas Perspectives]

Nord Stream 2 is nearing completion, but how events in the next few months pan out – and these are beyond its control – will be critical to its future.

The pending applications for the route through Danish waters mean that the final route, some 300 km long, is still an unknown; and the chances for Nord Stream 2 to launch before the end of this year are rapidly decreasing. What's more, the risk of American sanctions is becoming more and more real. Should they be adopted and enter into force, these sanctions might become an additional factor slowing down the construction work on Nord Stream 2.

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Status of construction works

Based on available data as of mid-August, the work has been completed in German and Finnish waters. At the same time construction is still progressing in the Swedish (ca. 200 km) and Russian (ca. 120 km) sections and is only to begin in the future in the Danish exclusive economic zone.

Work on the Russian section has been divided between the general contractor, Allseas, and Russian MRTS, with the latter being responsible for about 25 km of the pipeline and it is progressing much more slowly. The pipeline construction in Sweden was suspended during the summer season owing to environmental restrictions. According to the schedule, it will be resumed only in early September. The most interesting case is, however, Denmark, which has not yet issued a permit for Nord Stream 2 within its EEZ or even decided on the exact route of the pipeline. No decisions have been reached despite the fact that Nord Stream 2 submitted its initial application for the relevant permit as early as April 2017.

Waiting for Danish permit

This delay is sometimes interpreted as deliberate obstruction of the project. Recently though Copenhagen has appeared to be running out of options. Because Nord Stream 2 AG has withdrawn the initial application for construction within Danish territorial waters, the current permit procedure now only concerns activities within Denmark’s EEZ, where pipelines and cables can be laid freely as long as safety and environmental standards are maintained.

The Danish Energy Agency is assessing two proposed variants of the Nord Stream 2 route: north-western (along the TSS Bornholmsgat transport corridor and Nature 2000 area of Rønne Banke) and south-eastern (crossing areas littered with World War 2 chemical weapons and along the recently agreed maritime border between the Danish and Polish EEZs). However, in practice the review of documentation concerning the first is almost finished and for the second, final consultations with the interested parties are ongoing. This was made possible by Russia, who clandestinely conducted the necessary surveys of the south-eastern route and prepared the required reports a year before the Danish authorities officially requested them.

As a result it can be expected that – barring additional issues such as the need for extensive additional documentation from NS2 AG – the Danish Energy Agency will have to issue a decision within the next few months. However, even if they do that in the next few weeks, it would be extremely difficult to actually start the gas transmission through the pipeline before the end of 2019. Even the commissioning of just a single line of the pipeline (which would reduce construction period by 1-2 months) by the end of 2019 seems unrealistic.

Based on the timeframe for the south-eastern route published by the investor, construction of the missing section of Nord Stream 2 in Danish waters (pipe laying and accompanying tasks such as rock placement) should take about four months – and that is only if specific conditions are met, including favourable weather conditions. These are unlikely in the Baltic Sea during autumn and winter. Commissioning the new infrastructure will also take time. It is revealing that in its April letter to Danish Energy Agency (published by Reuters), Nord Stream 2 AG admitted that the permitting process for the new south-eastern route could result in an eight-month delay and up to €660mn of additional costs.

Separately, NS2 told NGW: “A delay of several months could lead to additional costs of several hundred millions euros but we cannot quantify because the final impacts depend on the timing of permit decision of the responsible authorities.” 

Increasing probability of US sanctions

In recent months the likelihood of US passing sanctions against Nord Stream has also risen. Two virtually identical bills (S.1441 and H.R.3206) are before Congress and focus on companies supplying or facilitating the delivery of specialised pipe-laying vessels, as well as on their majority owners and management personnel. Both projects were practically unanimously approved by the relevant foreign affairs committees (HR 3206 at the end of June unanimously by the House of Representatives' foreign affairs committee, while S.1441 by a majority of 20 to 2 votes at the end of July by an analogous committee of the Senate). It proves there’s bipartisan support from a large part of Congress for sanctions against Nord Stream 2 . More advanced is the S.1441 project, sponsored by the American senator Ted Cruz (along with, inter alia, the democratic senator Jeanne Shaheen). It will be discussed by the Senate and the House of Representatives after summer. If Congress really wanted to rapidly adopt sanctions, work on them could be resumed as early as September. To avoid reconciliation process of both projects, after one passes the Senate, the other could be withdrawn.

Of course, there are also opponents to sanctions among American politicians - who are sceptical of such instruments and wary of their effects on transatlantic relations. There is also strong lobbying against such a bill by companies and countries interested in implementing Nord Stream 2 (including Germany). And despite its traditionally critical stance towards Nord Stream 2, representatives of the European Commission have also argued against unilateral actions by the US that would impact European gas pipeline projects and markets. At the same time, however, the dynamics of work on the bill is growing more and more influenced by internal political issues. In the case of some key politicians their attitude towards sanctions is sometimes presented as a test of overall attitude towards Russia (as was the case for of the US senate majority leader, accused of too close relations with Russia ). Thus, the discussion about Nord Stream 2 and sanctions has become part of the ongoing US election campaign. The electoral context will also limit President Trump's room for manoeuvre. Although his position has not been obvious, it would not be politically easy for him to veto the bill, especially if it enjoys the strong support of Congress.

So it is conceivable that the US, notwithstanding resistance from some of the political elite and the possible negative side effects for relations with some key EU countries, will decide to adopt sanctions that hit Nord Stream 2 as early as September-October. And the time is crucial here - the application of the currently proposed provisions would significantly hinder the use of services of highly specialised vessels for pipe laying, which would hurt only if construction work on the Baltic seabed is ongoing. Such vessels are owned and operated by a limited number of non-Russian companies: Russia has much less advanced vessels at its disposal, requiring modernisation and western know-how. Consequently swift implementation of US sanctions (as those proposed currently) would increase costs of completing Nord Stream 2 as well as would prolong the duration of its construction, or even lead to temporary halt of the pipe-laying works.

Conclusions:

The pace of construction of Nord Stream 2 in the coming months will be determined by factors independent of Nord Stream 2 AG: the timing of the permit to build the pipeline in Danish waters, and whether, when and in what form American sanctions against the project will enter into force. In the best scenario for Nord Stream 2 promoters Denmark would make up its mind quickly (within a few weeks) and sanctions would not be adopted or at least get delayed / seriously blurred. Even in this scenario, however, Nord Stream would not be launched earlier than in the first half of 2020. In the worst-case scenario for Nord Stream 2, Denmark will only complete the permitted process after US sanctions are passed. This would temporarily halt the pipe laying process, which would postpone the launch of Nord Stream 2 by at least some more months.

The perspective of de facto a certain delay in Nord Stream 2 completion increases the room for maneuver not only of Ukraine but also of the EU side. It could be used for both the negotiations regarding the future of transit via Ukraine and for the new European Commission being able to ensure careful implementation of the amended gas directive in the case of the Nord Stream 2.

The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.