Nord Stream 2: The Poles Again Helped Russia and Hurt Ukraine

On October 30th Denmark approved the construction of the “Nord Stream-2” gas pipeline. There are now no obstacles in front of this project’s completion. Why was there hesitation and will this event have time to help us in trading gas with Ukraine? Let’s understand.

The Baltic Sea is relatively narrow, so pipelines there will in any case lie either in territorial waters (approximately 22km zone) or in the exclusive economic zone (about 370 km from territorial waters) of one of the coastal countries. Recall that the original version of the route through Denmark assumed that the gas pipeline would pass through its territorial waters (like the first “Nord Stream”). But Copenhagen did not grant permission for such a route, the process was delayed, and as a result this option was withdrawn by the project participants and replaced with a proposal to lay a pipe in Denmark’s exclusive economic zone. The difference is fundamental. Here, unlike territorial waters, according to the Convention on the Law of the Sea, a country cannot simply take and refuse to lay a gas pipeline. However, no one cancelled the consideration of environmental risks and other factors. Especially since there were two alternative routes as a result. In short, Denmark played for time, didn’t refuse, but did not advance in its decision.

And here it is accepted, the gas pipeline will pass almost along the border of territorial waters, south of Bornholm Island.

At the same time, from the very beginning, it was clear that the “Nord Stream-2” gas pipeline would be built. Too many funds have already been invested, including by Gazprom‘s Western partners. It would be too useful to have an additional gas corridor in the current realities, when there are no large-scale investments at least in the repair of the Ukrainian gas transportation system.

Why did they delay the permit earlier and why did they now agree?

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Here we briefly enter the realm of narratives. Apparently, the lack of progress in the construction of the “Nord Stream-2” gas pipeline in Europe was seen as a possibility to put pressure on Gazprom so that the conditions under the new transit agreements with Kiev (and these agreements – to some extent – will still be necessary, the issue is only in the volume of this transit) are as profitable and comfortable for Ukraine as possible.

Why reach an agreement now? It’s difficult to say. Maybe there has been an understanding that their own energy security is more important. Perhaps the attitude of the current American leadership towards both Ukraine and Europe itself played a role, which changed the traditional relations in the US-EU-Ukraine and US-EU-Russia triangles.

In addition, there is another circumstance here. Warsaw is currently planning the construction of the Baltic Pipe gas pipeline, which will deliver Norwegian gas to Poland. The last section of this gas pipeline will start just in Denmark and go to Poland. As you can see when you look at the map, it will cross our “Nord Stream” and “Nord Stream-2”. And without solving the situation with the Russian gas pipeline, the beginning of the construction of a pipe to Poland would not make sense. At the same time, Warsaw would like to complete the project by 2022 (the end of the contract with Gazprom), i.e., there is not much time left. (In parentheses, the total volume of Norwegian gas exports will not grow, but will only be redistributed towards Poland at the expense of other European importers, so the total demand for Russian gas in the EU will not be affected by this pipe.)

Thus, the “anti-Russian” Polish gas pipeline indirectly helps Gazprom to build “Nord Stream-2” faster.

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Will “Nord Stream-2” be completed before the end of the current transit contract (December 31st 2019)? Let’s risk to assume not. Earlier Gazprom’s leadership reported that the gas pipeline is more than 80% ready, and the remaining site can be completed in five weeks. But there are only two months left, and nevertheless there are still some organisational issues. And, of course, commissioning work, filling the pipe with gas, and gradually reaching the design capacity remain. In short, if it is possible to complete the gas pipeline in time, it will be a symbolic but formal event, rather than a route ready for transportation bypassing Ukraine.

In addition, it is necessary to see at what stage the construction of the land extension of “Nord Stream-2” on the territory of Germany (EUGAL gas pipeline) is at. It was previously reported that by January 1st 2020, regardless of the success of “Nord Stream-2”, only one of the two lines of this continuation will be completed.

Despite all this, the permit for the construction of “Nord Stream-2” appeared very much on time. Precisely because, again, this significantly strengthens Gazprom’s bargaining position with Naftogaz. Especially since the Russian monopoly can agree to almost any reasonable price conditions (on a short interval it is not so important), if only to conclude a contract for no more than one year. In these circumstances, Naftogaz’s demands (a long-term contract only) will be discordant with the new pan-European practices. The closure of the valve is still worth considering as an unlikely scenario. Is it necessary to quarrel with Europe in the absence of past support from overseas?

At the same time, it should be understood that Russia’s gas relations with Ukraine have the right to exist even when all transit gas pipelines are launched. A simple calculation shows (pay attention – it is when all pipes will be completed): 110 billion cubic meters per year – the capacity of two “Nord Streams”; up to 38 billion – pipes through Belarus; 31.5 billion – two lines of “Turkish Stream”; 16 billion – Blue Stream. In total – 196 billion cubic meters. This is four billion less than the “target” exports to Europe of 200 billion (as was the case last year, this will be smaller). However, the volume of exports to Europe now includes gas, which as a result goes to Ukraine “in reverse flow”.

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But this is in the case of equal loading. In fact, there will be irregularities, repair works on gas pipelines, and Gazprom would like to increase the volume of exports. All of this will require keeping the Ukrainian corridor within reasonable limits. But it is one thing to negotiate transit for the export of additional volumes and another when it comes to the implementation of export contracts.

Currently we still do not have a land extension of the second line of “Turkish Stream” through Europe and “Nord Stream-2” has not been completed. This means that in 2020 the reduction of transit through Ukraine will be insignificant (primarily due to a direct pipeline to Turkey). Naftogaz will be able to earn another two billion.

But in general, the picture for all three forthcoming gas pipeline projects of Gazprom is extremely successful. In the east, the gas pipeline “Power of Siberia” is filled with fuel, and the first gas that will go along it will go to China in December. In the south, the first line of “Turkish Stream” will deliver gas to Turkey next year, bypassing Ukraine. In the north, it is a few months before “Nord Stream-2” is completed. Gazprom’s exchange quotations yesterday reached values last recorded in 2008.


Aleksandr Sobko

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