CommUnity Post

Ambitious EU energy policy versus the Nordstream 2 reality -Nordstream 2 underlines the mismatch between EU policy aims and the reality of the European market

Blog Post created by CommUnity Post Partner on 30-Sep-2018

Context

Gazprom, a Russian state-owned natural gas company, is currently constructing a second pair of pipelines to transport gas from Russia, through the Baltic sea, to Germany (“Nord Stream 2,” 2017). Nordstream 2, as the twin pipelines are called, are the younger siblings of the Nordstream 1 pipelines, which became operational in 2011 and 2012 (Erbach, 2016a)(Butler, 2017). Nordstream 2 will have the capacity to transport 55 billion cubic metres of natural gas each year, thereby doubling the capacity of the existing pipes (Erbach, 2016a).

With the decline of domestic European energy sources such as the extraction of natural gas in Groningen, Netherlands, and a continued demand for gas, the pipelines will find a welcoming European market (Riley, 2017) (“World Energy Perspectives the role of natural gas,” n.d.). The European Union’s Energy Security Strategy aims to ensure a reliable supply of energy for EU countries. The construction of Nordstream 2 could make a great contribution to this strategic aim. However, at the same time, the EU imposed sanctions on Russia, partly because of gas disputes between Russia and Ukraine (European Commission, n.d.). This puts the EU in a diplomatic dilemma: does the EU favor energy security over diplomacy?

Meanwhile, the European Union presented its clean energy package, describing measures that aim to achieve world leadership in the energy transition. Focusing on improved efficiency and increased use of renewables are just two of the described pathways to achieve this goal (European Commission, 2016). Also, the European Commission presented a proposal on security of gas supply that explicitly aims for diversification of gas sources (European Commission, 2016) (European Commission, 2017). Currently, Russia is already supplying 34% of European gas; with Nordstream 2 this might rise to more than 40% (Butler, 2017). Thus, while EU policies promote clean and more efficient energy, the market still demands gas imports as domestic supply of gas or renewables is not sufficient.

In other words, Nordstream 2 harshly underlines the current mismatch between what the policy aims of the European Union say and what the European market dictates. Whereas policy conveys a message that points towards fewer fossil fuels and a greater diversification of sources for them, the European market is ready for Nordstream 2 -- a project that implies more gas, from a single source. Where does this mismatch arise from?

The EU’s money is not where its policy is

The largest shareholder of the project, Gazprom, is owned by the Russian state. The other approximately 50% of the project is being financed by European energy companies: the Austrian OMV AG, Royal Dutch Shell, French Engie and two German companies, Uniper and Wintershall, as is shown in Fig. 1 below (Erbach, 2016)(ANP, 2017) (Sputnik, n.d.)(“Nord Stream 2,” 2017).

Figure 1 Shareholders Nordstream 2

Figure 1: Shareholders Nordstream 2

Gazprom’s revenues thus essentially subsidise the Russian government. Interestingly, Russian state expenditures currently include fighting a war in Ukraine, a country that used to benefit from the transit of Russian gas (Polak, 2005)(Riley, 2017). Whereas Russia can directly align their investments with their interests, the exact opposite is happening in Europe. As mentioned, at the level of the European Commission, it has been decided that security of supply is to be attained through diversification of sources, among other measures (European Commission, 2017). At the level of the European market, however, the investing companies seem to have faith in the consolidated supply that is provided by Nordstream 2, not diversification. Upon further examination, security of supply has a different interpretation at the business and policy levels. For natural gas companies and suppliers at the commercial level, security of supply turns out to be mostly a matter of securing large amounts of gas at a low price. At a political level, security of supply is a matter of political (in)dependence for a sovereign state. If the interpretations of security of supply are not aligned, how can we expect the execution of policy aims to be?

Figure 2 Location of Nordstream II (Erbach, 2016b)

Unaligned interests of European member states

There is a disparity between the interests of individual EU member states  and the EU as a whole. On the one hand, thirteen EU member states have protested against the project, most of which are Central and Eastern European countries who used to benefit from trade and transit revenues of natural gas from Russia to Western Europe (Butler, 2017). Nordstream 2 allows Russia to bypass existing pipelines in Ukraine, depriving the Ukrainians of the opportunity to charge transit fees (Charlemagne, 2017). One can only wonder if this should be called a coincidence now that Russia is using its money to fight a war in this region.

On the other hand, Germany leads a group of Nordstream 2 lobbyists who claim that Nordstream 2 is a purely commercial, not a geopolitical project, and will supply Europe with gas it can no longer produce domestically (Clingendael, n.d.). According to Germany, EU institutions have no business intruding in a purely commercial enterprise (Butler, 2017). This conflict between national and  supra-national interests within the European Union make it a complex matter to take a stance on.

Local legal power in a superpower issue

Figure 2 depicts the planned route of the pipelines, reaching from Russia’s Baltic coast to the German coast near Greifswald (Erbach, 2016a). It passes through both territorial and exclusive economic zones (EEZ), of several countries, including Denmark, Finland, Germany and Sweden (Sputnik, n.d.) (UN, 1982). These are zones over which these countries own rights with regards to the exploration and use of resources.

Thus, although the pipes avoid territorial zones for the majority of the route, there are some regions where a nation state could refuse to grant environmental permits (Erbach, 2016b). This provides the EU with some legal power to influence the project through the rights of individual member states. The countries involved find themselves in a difficult position however. On the one hand, Sweden, Finland and Denmark feel pressure from the United States and several Central and Eastern European countries to impede or delay the project. The United States sees the pipelines as a means for Russia to make Europe more dependent on them and several Central and Eastern European countries oppose the project out of fear that Russia will no longer rely on them for land-based gas transportation (Charlemagne, 2017). On the other hand, the Germans and Russians clearly want the project to proceed as quickly as possible. (Gotkowska & Szymanski, 2016). Russia claims that Nordstream 2 is a purely commercial project that provides Europe with the gas it needs now that European production is declining (Polak, 2005) (“Nord Stream 2,” 2017). The official standpoint of Germany echoes this claim, arguing that neither the EU nor the US should interfere in this commercial project (Butler, 2017).

As a result, the governments in Stockholm, Helsinki and Copenhagen want the European Commission to get involved and take a stance on whether the project is in line with the EU’s energy strategy, so that they are not left alone to deal with this delicate issue (Charlemagne, 2017) (Gotkowska & Szymanski, 2016).

Conclusion

Nordstream 2 clearly shows that there is a significant gap between the policy aims of the European Union and what the European market is ready for. The current European energy mix still requires gas to meet peak demand and balance intermittent renewable power outputs.  The EU aims for fewer fossil fuels and more diverse fossil fuel supplies, but in the European market there is demand for pipelines that provide Europe with more gas from Russia. It can hardly be called surprising that projects will be chosen exclusively based on economic considerations if it is left to commercial parties to invest in gas pipelines. European energy policy is not in accordance with reality.  Especially given the diversity of interests of individual EU member states, energy policy should be more tailored to the current situation in Europe. If the topic is more than a purely commercial project, then perhaps the EU should treat it as such.

Author: Davine Janssen

In collaboration with The CommUnity Post

References

Butler, N. (2017). Nord Stream 2: a test of German power. Retrieved December 3, 2017, from https://www.ft.com/content/4875c9ff-0868-3798-8f66-4efa667eb5ba

Charlemagne. (2017). Germany’s Russian gas pipeline smells funny to America. Retrieved November 14, 2017, from https://www.economist.com/news/europe/21723822-angela-merkel-says-nord-stream-2-no-ones-business-germanys-germanys-russian-gas-pipeline

Clingendael. (n.d.). Nordstream 2 will divide europe but US sanctions will do more harm than good.

Erbach, G. (2016a). At a glance Gazprom's controversial Nord Stream 2 pipeline. European Parliament, (April).

Erbach, G. (2016b). The Nord Stream 2 pipeline project, (April), 2016.

European Commission. (n.d.). EU sanctions against Russia over Ukraine crisis. Retrieved December 12, 2017, from https://europa.eu/newsroom/highlights/special-coverage/eu-sanctions-against-russia-over-ukraine-crisis_en

European Commission. (2016). Clean Energy For All Europeans. Communication from The Commission to The European Parliament, The Council, The European Economic and Social Committee and The Committee of The Regions, COM(2016)(860 final).

European Commission. (2017). Regulation (EU) 2017/1938 concerning measures to safeguard the security of gas supply and repealing Regulation (EU) No 994/2010. https://doi.org/http://eur-lex.europa.eu/pri/en/oj/dat/2003/l_285/l_28520031101en00330037.pdf

Gotkowska, J., & Szymanski, P. (2016). The Nordic Countries on Nord Stream 2: Between Skepticism and Neutrality. The Energy Collective, (223), 1–7. Retrieved from http://www.theenergycollective.com/energy-post/2392427/the-nordic-countries-on-nord-stream-2-between-skepticism-and-neutrality%5Cnpapers3://publication/uuid/75587016-0454-49B9-9820-318E1EF2E8A8

Nord Stream 2. (2017). Retrieved from https://www.nord-stream2.com/

Polak, B. P. (2005). The Trouble With Nord Stream 2.

Riley, A. (2017). Smoke and mirrors: Russian disinformation meets pipeline politics | CEPA. Retrieved December 3, 2017, from http://cepa.org/EuropesEdge/Russian_Disinformation_meets_Pipeline_Politics

Sputnik. (n.d.). Nord Stream 2: Why Denmark Wants to Derail the Project. Retrieved December 3, 2017, from https://sputniknews.com/europe/201709031057041692-denmark-us-nord-stream-pipeline/

  1. (1982). Preamble to the united nations convention on the law of the sea. Retrieved December 3, 2017, from https://www.un.org/depts/los/convention_agreements/texts/unclos/part5.htm

World Energy Perspectives the role of natural gas. (n.d.). Retrieved from https://www.worldenergy.org/wp-content/uploads/2017/11/WEC-PERSPECTIVES-Word-Gas-Report-WEB.pdf

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