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A coalition against Nord Stream? Who are the possible allies and foes?

22.10.2017 | By Serhii Yershov

The Nord Stream 2 is an extremely controversial issue that deepens the polarisation of the EU. The main group of actors, which is in favour of the Nord Stream 2 (NS2) is small but powerful. However, the foes to the idea of the NS2 consolidated themselves in a large and more diverse alliance. The latter group arguing that the project is against the goals and aims of the EU’s strategy to develop the Energy Union. Thus, we face another major division in the EU between West and East of Europe.

Since many years in the EU, power speaks with a strong German accent. Especially nowadays, when the UK is about to leave the European Union and France is still economically fragile, Germany is undoubtedly a dominant player in the EU’s political life. It is difficult to deny that Berlin is enjoying significant power in Brussels. According to the latest result from Pew study, Germany is considered to have too much power in Europe, especially in the Southern Europe where the German Chancellor, Ms Merkel is blamed for imposing painful austerity measures. Unfortunately, from a leadership perspective, Germany has recently made a few mistakes with highly costly consequences for the whole EU. Starting from the unilateral invitation of migrants, without prior consultation with other member states, plus triggering a massive refugee crisis in Europe, finally, finishing with conducting negotiation with Russia regarding the NS2, again without taking into consideration concerns of all member states of the EU. Thus, the NS2 issue elevated the disenchantment with the German leadership to completely a new level, especially for the Central and Eastern European (CEE) member states, since the new pipeline significantly jeopardizes the security of their national energy sector.

In order to have a comprehensive understanding of the issue, it is important to bear in mind that each actor (Germany, CEE, the EU, Russia, and even the USA) has its own geopolitical and economic motivation regarding the Nord Stream 2.

In Germany, the Nord Stream 2 is perceived as a product of the Social Democratic Party, particularly of the former Germany Chancellor Gerhard Schroder, who is the chairman of the project. In fact, Mrs Merkel would win respect in the top levels of the US administration and Congress, who are looking for support against Russian behaviour in Ukraine, Syrian, and alleged interference in the US election. However, due to Merkel’s comment in Bavaria, where she said that “The era in which we could fully rely on others is over to some extent”, meaning the alliance with the USA, indicates that Germany will try to play even more independently from any external influence. Such a controversial play on both sides, with the EU and with Russia, can backfire since it raises a number of questions regarding the German’s role in the Normandy Format that led to a peace settlement between Russia and Ukraine.

A possible political solution could be to allow the European Commission to get fully in charge of the issue and therefore, ensure a better representation of all European interests and not only Germany’s. Some noteworthy solutions are provided by professor Allan Riles.

According to the former Polish Prime Minister Jerzy Buzek, now Chair of the Committee on Industry, Research and Energy of the European Parliament, the NS2 and the Energy union cannot coexist. Thirteen member states of the EU have expressed their opposition and concerns regarding the NS2 project, arguing that it will shift trade and transit revenues from Central and Eastern European states (and Italy, a major southern player, who is a victim of the Commission report which stated that the South Stream did not fully comply with the EU energy legislation.) to Germany. In addition, they stated that it will only increase European dependence on Russian gas, which is already high. For the sake of objectivity, it is important to emphasise that currently, Russian accounts for less than 30% of EU gas consumption. The rest comes from EU’s domestic production and imports from Norway and other countries. Nevertheless, Gazprom’s dependence on Europe is much greater. At the same time, Russian gas industry relies on Europe for approximately 2/3 of its sales revenue and half of its sales volume (according to the first half of 2016). Even despite Gazprom’s activity in Asia, Europe will continue to be the largest market for the Russian state-owned company for next decades to come.

The main requirement of foes of the NS2 is that they want the European Commission to be in charge of negotiations of the project. Consequently, to take it away from Germany and to establish gas trade in accordance with the concept of the Energy Union, an idea that has been agreed on in 2014, however, has never been implemented properly. The main purpose of the Energy Union is to diversify sources of supply and build a pan-European infrastructure to secure reliable supplies. Importantly, most of the 13 foes of NS2 are former members of the USSR’s sphere of influence and remain extremely dependent on Russia’s gas supply.

It was an unexpected surprise for many actors, when Russia’s Gazprom and its five European partners (BASF, E.ON, Engie, OMV, and Shell) signed a declaration to build two new pipelines through the Baltic Sea (the Nord Stream 2) in September 2015. From the Russian perspective, it is not only the size of the European energy market which is important but also the necessity to avoid gas transit through Ukraine territory. Also, for Russia, the Baltic Sea seems the most secure and safe route to its most important market – Europe. Especially, after the South Stream to Bulgaria in 2014 was abolished and negotiation with Turkey, which is so far, on hold, the Nord Stream 2 for Russia is a paramount deal.

In Berlin, the official explanation is that the NS2 is just a purely commercial venture in which neither the EU nor the US should interfere. Undoubtedly, that $10bn project does not only ensure facilitation of a sensitive relationship between Berlin and Moscow but also makes Germany a cornerstone in the European gas market, therefore, replacing the declining Dutch and British gas production from the North Sea.

On the one hand, from the Russian perspective on the NS2, the calculations are simple. The country is still heavily dependent on oil and gas revenue which provided, even with plumped prices, approximately half of its total export revenues in 2016. Besides, with full control of oil prices, Russia has to maximise its profits from gas sales and has to maintain its position in the European gas market, for whatever it takes.

On the other hand, from the EU perspective, the benefits of the NS2 are not that evident. With current approximately 30% of Russian supply, the NS2 will be able to provide up to 40%, therefore, the project will undermine the concept of diversification of energy supply.

There is no doubt that from the geopolitical perspective, the NS2 poses a threat not only to Germany but to the EU as a whole, especially to the CEE. Because the Central and Eastern European members receive gas flows from Belarus and Ukraine. Only then gas eventually reaches the large Western European gas markets. That flow ensures that the CEE member states have a certain level of security and confidence, since Gazprom cannot cut off the CEE for a long period of time without also cutting off the Western European member states. And it is exactly that reason that raises an alarm for the CEE, because of the fear that Germany, which is already perceived as too powerful a player in the EU, will have an additional leverage on the CEE EU member states. Besides, arguments that there is no real threat are false. Except the 2006 and 2009 gas cut offs, the EU indicated over 40 politically motivated cut offs in the CEE and Baltic states between 1991 and 2004. Consequently, one of the main arguments that come from Warsaw, Budapest, Bratislava, Prague, Vilnius, Riga and Tallinn is that the NS2 will significantly decrease the additional security that these member states gained from seeking membership in the EU. Furthermore, in case of a disruption, the supply to Western Europe would be maintained and the CEE would be left in isolation. Thus, all these threats and uncertainties about future German’s actions drive the CEE (namely Poland and the Baltic States) countries to cooperate closely with the US, as they see such an option as an escape from Russia’s influence, even despite the price issue.

Surprisingly, the USA plays also an active role in the NS2 issue. President Trump signed into law new sanctions on Russia. The US Congress initiated it exclusively based on its internal political considerations. Furthermore, by a majority of 97 to 2, it was decided to impose sanctions on the companies engaged in funding the Russian pipeline project – the Nord Stream 2, the most controversial energy project involving Russia.

Therefore, another important aspect that is going to play a crucial role in the energy politics of the EU is Liquid Natural Gas (LNG). Recently, Poland received its first ever LNG cargo from the USA, as a result of a one-off transaction. Despite open debates about possible profits of the US exports to the EU, from a political perspective the game is worth the candle. For instance, Poland is eager to accept non-Russian gas wherever it can get it. In recent weeks, Warsaw signed a gas contract with Qatar and announced plans to increase its capacity to import liquefied natural gas by about 50 percent.

When it comes to the US government, it has been active in supporting the EU’s energy diversification plan. Especially, its active opposition to the NS2 pipeline by imposing unilateral sanctions on Russia. According to Charif Souki, head of energy group Tellurian, LNG was not meant to be a complete replacement for pipeline supplies as it could not meet the demands of the European market on its own. He thinks, that “LNG provides flexibility to the market. Gas can now move where you need it in the world. That’s the biggest challenge for a company like Gazprom”. Moreover, he added that “Russia clearly does have the option to undercut the US LNG price to ensure it keeps its share of its key European markets and could flood the market with cheap gas. But what is sure is that US LNG is coming to Europe”. Thus, even in case of success of CEE and the US joint efforts, they cannot provide free flow of US LNG to the EU market. However, developing capabilities that will grant access to the market by any non-Russian supplier will provide an effective check on Russia’s pricing policy and the influence that Russians have enjoyed from its monopoly over the CEE market.

In conclusion, with the Nord Stream 2 project, Germany undermined its political credibility. Since Berlin consulted the Russian government before starting discussions with the Central and Eastern European member states or at least the European Commission. Moreover, the American presence in European energy market is expected to be more prominent. Especially, with the development and recent success of the first delivery of LNG to Poland, it makes a shift in the balance of power. Thus, at the end of the day, the EU can end up of being a winner. Meaning by having both the Nord Stream 2, where Russia will try to maintain its presence in the European market with cheaper prices and LNG that significantly can downscale Russian influence in the region.

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