Nord Stream 2 comes on stream: good business or bad geopolitics?

Last Friday, an announcement from Gazprom headquarters in Moscow informed us that the trans-Baltic gas pipeline, Nord Stream 2, has finally been completed. Russian pipe-laying ships completed the final 150km stretch of pipeline between the coasts of northern Germany and Denmark thereby finishing a 1,200km long project that has taken five years to build at a cost of US$11bn. Gazprom has co-financed the pipeline with a number of European energy companies, notably BASF-Wintershall, Uniper, Anglo-Dutch Shell, Engie, and OMV. Nord Stream 2 complements an already existing trans-Baltic pipeline, Nord Stream 1, and doubles its gas transit capacity from Russia to western Europe from 55 to 110 bcms each year.

For the European Union’s energy companies, and their gas consumers in millions of homes and factories across the continent, the completion of Nord Stream 2 comes just in the nick of time. Gas prices are at an all-time high and stocks are low as Europeans head into winter. Together, the Nord Stream pipelines will account for 40% of the Russian natural gas imported into the EU. Unsurprisingly, given Moscow’s reliance on its fossil fuel export revenues, Gazprom and the Russian government are keen to get the pipeline into operation as soon as possible.

Gazprom’s chief executive, Alexei Miller, has said that Nord Stream 2 “could send gas by the end of the year and during the heating season”. He has suggested that the pipeline could bring an extra 5.6 bcms of gas into the EU before Christmas, knowing full well that Russian gas remains one of the cheapest and most reliable sources of energy supply for the European countries. An extensive pipeline infrastructure is already in place, and Russia has also recently added to it by opening up a southern gas corridor into the Balkans and Italy based on the TurkStream pipeline. After all, if Europe needs to buy, Russia needs to sell. Already 40% of the EU’s gas supply comes from Russia. The percentage is due to rise still higher if Nord Stream 2 becomes fully operational in the near future.

Yet, what seems to many energy companies as sound business has upset many other players in the transatlantic security community.

First, the United States. Many in Congress, whether Republicans or Democrats, are worried that Nord Stream 2 will increase Europe’s dependency on Russian gas to dangerous levels. Russia could use the gas lever as a form of pressure or even to blackmail individual countries in a crisis. In the past, Russia has not hesitated to use the energy instrument to undermine Ukraine or force Belarus back into line by denying it cheap unrefined oil. Europe experienced a taste of this back in 2010 when a Russian-Ukrainian dispute over unpaid bills and pipeline transit fees led Gazprom to shut down supplies, switching off cookers and radiators in the Baltic states and Bulgaria in the middle of winter.

US concerns regarding Russian energy blackmail go back to the 1980s, when the Reagan administration strongly opposed the construction of the Trans-Siberian oil pipeline, arguing that European purchases of Soviet oil would only subsidise a rickety Soviet economy and stave off its collapse. Europeans, on the other hand, were badly singed by OPEC’s quadrupling of the oil price in the 1970s and saw Russian oil as a hedge against further punitive measures by the Arab and Gulf producers. The US argument was recently reprised by the Trump administration which castigated Germany for hosting the Nord Stream European terminals and buying more Russian gas when it was still a long way from meeting its NATO commitment to spend 2% of its GDP on defence. In 2019, Trump consequently put sanctions on the Swiss company, Allseas, that was laying the pipeline, forcing it to withdraw from the project and halting it for several months before Russian vessels were able to complete the work.

In second place is Ukraine which has lobbied hard against Nord Stream 2, both in Washington and Brussels. Ukraine has been bypassed by the Nord Stream pipelines, and a key Russian argument for an energy connection that goes directly from Russia to Germany is that it will cut out the middle men or transit countries that could interfere with supplies or put politics above business. Ukraine is set to lose the billions in transit fees which it received in the past when the main Russian Friendship pipeline to Europe crossed its territory. Ukraine used these fees to offset the higher, world market prices that it had to pay for Russian gas after it became independent in 1991 and refused to reintegrate into the Russian sphere, by joining Putin’s Eurasian Union for instance. The current transit fee agreement between Russia and Ukraine is set to expire in 2024. Putin has made clear that Kiev “has to show good will” if a new transit agreement is to be negotiated.

Finally, in third place are the eastern European states, or at least Poland, the Baltic states, and Romania. They have suffered directly from Russian supply disruptions in the past and have made great efforts to wean themselves off their traditional dependency on Russian-built nuclear power plants and fossil fuel supplies. Poland and Lithuania have both built liquefied natural gas (LNG) terminals for what a US congressman has called “the molecules of freedom”. They have also increased their imports of Norwegian gas. Thus, they watch with anxiety as their Western allies increase their dependency on Russia at precisely the moment when they are lowering it. Russian military pressures on their borders, as evidenced in this week’s massive Zapad-21 exercise in Russia and Belarus, as well as suspicions that Russia is secretly encouraging President Lukashenko of Belarus to push ever greater numbers of illegal migrants across their borders, only add to their sense that any form of dependency on Moscow carries unacceptable risks. They have thus encouraged the US and Ukraine to make Nord Stream 2 into a security issue and put it on the NATO agenda where economic issues rarely feature.

The Biden administration has decided not to impose sanctions on the Swiss based company, Nord Stream 2 AG, which is managing the pipeline project. The US concession reflected the fact that the CDU ruling party in Germany – otherwise strongly pro-NATO and transatlanticist – supported Nord Stream 2 on commercial grounds and Biden was seeking to improve US-German relations after the battering of the Trump years. Yet this move will not make the multiple objections to the pipeline fade away any time soon, particularly as Nord Stream 2 has not yet been certified by the EU as meeting all the necessary environmental, safety, and technical standards and has not yet undergone compliance testing. This process will take time despite Kremlin spokesman, Dmitry Peskov, saying that “everyone has a shared interest in certifying the pipeline as soon as possible”. That time could be put to good use by the EU and its member states to implement three guarantees that might help to reassure and placate the critics of Nord Stream 2 on both sides of the Atlantic.

The first is unbundling. This is a policy agreed by the EU in its Third Energy Package. It stipulates that the owners and operators of pipelines supplying EU countries cannot at the same time have a monopoly of the gas or oil carried by those pipelines. The pipelines have to be available to transport fuel from other suppliers and to flow in reverse directions. Unbundling prevents certain companies from achieving dominant market positions and promotes diversity of supply within the EU and a more competitive energy market. As this is EU policy, the Commission must ensure that the Nord Stream 2 consortium respects the rules and presents a plan to divest itself of certain areas of pipeline operations, for instance opening up to bids from other companies for percentages of pipeline use or access, offering participation stakes in pipeline ownership, collection of fees or operations and maintenance, or control of pipeline spurs.

A second priority concerns Ukraine. During her farewell visit to Kiev a few days ago, Chancellor Merkel assured President Zelensky that Germany would continue to fight for Ukraine’s energy interests, both vis-a-vis Moscow and within the EU. She gave a guarantee that the EU would insist that Moscow must transport a significant volume of its gas to Europe through Ukraine after 2024. The EU has supported Ukraine in recent years by establishing inter-connectors between its territory, namely Czech Republic and Hungary, and Ukraine to permit gas to be sent eastwards in the event of a Russian cut-off or other disruption. The EU has been advising Kiev and its principal energy supplier, Naftogaz, on how to restructure the domestic energy market to reduce the power of the oligarchs and make its commercial transactions more competitive and transparent.

The EU has also encouraged Kiev to develop its own domestic energy resources, particularly gas and hydroelectric power generation, as well as renewables from wind and solar. This has included the security of its electrical grid against cyber-attacks after Russian hackers shut down the grid of western Ukraine in the notorious Black Energy cyber-attack in 2015. As Nord Stream 2 comes into operation, no matter how gradually, the EU should step up these efforts to help Ukraine improve its self-sufficiency and integrate fully into the EU energy market.

The EU’s requirement for additional Russian gas is also a cause for concern. The Third Energy Package was all about achieving greater energy efficiency through the diversification of supply but also building more inter-connectors, more energy-efficient buildings, and storing enough gas in a US-style strategic reserve to last at least a year. Yet, there are always difficult trade-offs in this area.

If Germany decides to exit nuclear power, inevitably it needs to burn more gas or coal. If more wind farms are built on land or offshore, they need to be connected to smart grids and storage facilities if the EU is to move electricity from north to south and from west to east. Greening the economy with electric cars, working with more IT or installing more air conditioners to cope with hotter summers brought about by climate change will not reduce the demand for electricity. Quite the opposite. So, Nord Stream 2 is an urgent opportunity for the EU to revisit the Third Energy Package and evaluate its progress in achieving energy efficiency and autonomy in the light of its strategic and security interests.

Finally, the EU could reassure its eastern member states, as well as the US, if it can agree on a set of parameters to govern the operation of Nord Stream 2. For instance, shutting down the pipeline or sharply curtailing gas imports as a sanction against Russia if it continues to put military pressure on NATO’s eastern flanks or engages in hybrid warfare campaigns against NATO or EU countries. The EU should define which Russian action would elicit which EU response in the energy field and make sure that it has all the legal and administrative steps in place to act quickly if Moscow oversteps the line. The Biden administration and the German government have already discussed informally such a code of conduct. It would be helpful if the EU could now adopt formally a similar set of understandings and criteria before giving Nord Stream 2 its license to operate. This would be an important deterrent to Moscow in an economic area that, unlike sanctions on individual Russian officials for human rights violations, would certainly weigh heavily on Moscow’s decision-making.

In sum, Nord Stream 2 places the EU at the nexus of foreign and domestic policy, commercial and strategic interests, relations between western and eastern Europe, as well as between Washington and Brussels. It is also a key element in the credibility of its Eastern Partnership and dealing more decisively with a disruptive Russia. Finding a way through this nexus will be a good test of the EU’s maturity and unity in the months ahead.