Nord Stream 2: Much Ado About Nothing so far…

The Danish Energy Agency issued on 6 July a new construction permit for the completion of the Russia-backed 55bn m³/yr Nord Stream 2 gas pipeline. The permit allows the remaining 75 km of offshore pipe to be laid using less-advanced ships that use anchors, rather than propellers, to remain in position: only specialist companies such as AllSeas have the latter type and Allseas abandoned the project in December 2019 because of US sanctions. The Danish government's approval meant one step forward, but then the project had to take...

Two steps backward

As we could expect following the Danish green light, on July 15 the US increased sanctions on Nord Stream 2 to a level that is just unbearable to any of the European investors. If those five companies had just read the Polish Office of Competition and Consumers Protection (UOKiK) July 2016 objections to a concentration as it might lead to restriction of competition, they would have understood that investing/lending $1bn each was bound to fail. And finally on August 5, three US senators warned the German Mukran Port, a logistics site for Nord Stream 2 linepipe, of “crushing” sanctions. Whatever people think about the legality of those sanctions, the same wording in December vis-a-vis AllSeas forced the company to stop laying pipes immediately and it therefore looks unlikely that Mukran can avoid following the US “advice.”

One step on the right and then on the left

In July, Nord Stream 2 appealed to the EU court on the grounds that the 2019 EU gas rules are unlawfully discriminatory. The EU court has now 12 months to make a decision on this claim.

On August 3,  Poland's anti-trust authority UOKiK[1]  imposed a penalty of about €50mn on Gazprom for failure to co-operate in investigation conducted in relation to construction of NS 2. After Engie challenged the earlier UOKiK fine, no doubt Gazprom will as well but this will take time (and money). UOKiK is now “coming closer to the end of unprecedented proceedings regarding the creation of a consortium responsible for financing NS 2 without obtaining consent of the authority. For violating the prohibition against concentration, the companies are liable to a fine equal of up to 10% of their annual turnover. In addition, if the concentration was implemented and it is no longer possible to restore competition on the market, the authority may order the total or partial disposal of the company’s assets and shares granting control over the company, and even the dissolution of the company over which the companies concerned hold control.”

What’s next?

After the renewed US sanctions and the US decision to pull 12,000 troops out of Germany to make a strong political point against an ally[2], my 2018 fictional saga looks now over-optimistic; the pipe is not going to be used in the foreseeable future and Gazprom doesn’t need it anyway until the end of the 2020-2024 Ukrainian transit contract. From 2021, Gazprom has only a 40bn m³/y transit or pay contract of $1.3bn via Ukraine and can book directly with the operator Gas Transmission System Operator of Ukraine (GTSOU) for a lower fee additional capacities[3]. With this Ukrainian transit contract and plenty of supply, the actual situation with Nord Stream 2 not in operation is de facto acceptable by all parties:

• The US managed to stop construction;
• The EU never managed to speak with a united voice against this project and wants now to focus on its Green Deal;
• Ukraine will continue to be a vital transit link;
• Germany cannot alienate any further the US and needs to focus on its hydrogen strategy;
• Russia/Gazprom will use this pause to implement a new strategy as it did back with SouthStream/TurkStream and
• Most of the five western companies will not only impair their $1bn loan at a time of major low-prices impairments, but will leave completely the project that is no longer in line with their new green strategy. As I’ve alluded back in 2018, this movement could start with Engie and Uniper, which is now the subsidiary of the Finnish state Fortum. Uniper is now discussing with Fortum their strategic alignment, but may have to write off the loan if the line is incomplete.
• The only loser could be Mukran Port that has been singled out by the US senators. It will now stand in the spotlight and will have to answer questions regarding its Russian and Chinese links and its EU funding.

It therefore looks as if this project is not going to go ahead anytime soon. But there is perhaps a way out in 2025. If Russia is able to produce clean hydrogen[4] it would then offer to use this new pipe[5] to help the EU implement its clean hydrogen strategy as the Ukrainian grid might not be ready to accept large percentage of hydrogen. If the EU is desperate to reach its over-optimistic EU Green Deal hydrogen target, it could then label this “new hydrogen” pipe as “strategic” and the US sanctions would become much less relevant as long as all trades in hydrogen are in euros and not in dollars. And as this could be an EU “strategic green decision”, Gazprom could even be allowed to use this pipe at full capacity….

The saga is not over and ironically the EU that has been very slow to find any common position and allowed the US, Denmark and Poland to fight against this project, holds the key for a 2025 solution! The EU would then need to fight against the US for what could be the first hydrogen import pipe from Russia…. Stay tuned for a few more years!

Thierry Bros

August 12, 2020

Advisory Board Member Natural Gas World