Conflicting priorities split western allies over Nord Stream 2; Ukrainian transit

• Date: 01 July 2019
• DOI: http://doi.org/10.1111/oet.12718
• Published date: 01 July 2019

GAS AND POWER

Conflicting priorities split western allies over Nord Stream 2;

Ukrainian transit

Some EU states, along with the United States and Ukraine,

are still trying to stallthe half-built Nord Stream 2 (NS2) pipe-

line, although Russian pipeline export monopoly, Gazprom,

said June 19th it was still on track to meet its end-2019 start

date. Any delay would strengthen Ukraine's hand in on-going

gas transit talks with Russia, and—with the help of liquefied

natural gas (LNG) from the international market—may help

reduce the continent's growing dependence on Russian gas.

Talks resumed in June between the EU, Russia, and

Ukraine over gas transit through Ukraine from the end of this

year, when the current agreement expires. But completion of

NS2 (see Figure 1) could undermine Ukraine's bargaining

position: Russia has said it is likely to send only around 10 to

15 bcm/y via Ukraine after 2019 (and NS2 completion) to

Europe, down dramatically from 87 bcm in 2018—and then

only if the transit tariffs are competitive. The ex-Soviet

republic has warned the new route also threatens its strategic

position with respect to Russia—including in the ongoing

civil conflict with Russian-backed forces in eastern Ukraine.

The United States has proposed sanctions on companies

involved in NS2, with Poland, Baltic states and some other

east European countries, very much infavor on national secu-

rity grounds and because they wish to reduce dependence on

Russian energy supplies. Germany, however, appears keen to

see the pipeline completed, primarily on commercial grounds,

but also to enhance security of supply—in that it will not be

vulnerable to interruption in transit countries.

After heavy lobbying from the Ukrainians in Washington,

the United States has already filed a bipartisan bill that would

impose sanctions on vessels used to build NS2 and has

lined up permission for the President to act on project

partners/financiers. President Trump criticized German Chan-

cellor Merkel in early June, warning that Germany would

become overly dependent on Russia, while boosting the flow

of hard currency and weakening Ukraine's position.

The situation could result in reduced gas flow from Russia

this winter, although high European storage levels and a

well-supplied LNG market should help offset any shortfalls.

Despite the opposition and threat of sanctions, companies

involved appear keen to press on. Gazprom is financing half

the €9.5-bn ($10.6-bn) project, with Germany's Wintershall

and Uniper, Royal-Dutch Shell, France's Engie and Austria's

OMV funding the other half. There is a valid commercial

rational for NS2, with potential customers claiming it will

help secure Europe's rising gas needs at lower prices, being

2000 km shorter than the Ukraine route.

Gazprom is also pushing ahead with the development of

its giant Bovanenkovo field on the Yamal Peninsula in

Russia's Arctic north, which is slated to boost supply to

NS2. But, even without sanctions, NS2 may not be running

by the end of the year as planned, due to Denmark's unwill-

ingness to issue a permit for the pipeline to cross its waters

(the pipe passes close to the eastern Danish Baltic island of

Bornholm—although the route could be changed). In addi-

tion, sanctions on specialist firms like pipelayers Allseas

Group and Saipem could slow things considerably.

Gazprom may also find it difficult to cope with the new

commercial rules, with the EU this spring extending EU

market rules (regulated tariffs) to apply to offshore gas links,

as well as onshore ones. (There are waivers for existing

lines, including NS1 and links from North Africa.)

There is also a trade element to the dispute in that the

United States would benefit from a more receptive market in

Europe for rising US LNG exports if Russian pipeline gas

supply is hampered in any way. Alongside the threat of

sanctions, the United States is marketing its gas as “freedom

gas”as an alternative to Russian supply, with willing takers

including Poland and Lithuania—and, this spring, German

utility Uniper signed its first deal.

However, LNG supply to Europe may also become domi-

nated by Russian supply, given that Arctic LNG has to pass

through northwest Europe before it can move into international

trading routes in the Atlantic. However, this is not controlled

by state-owned Gazprom, which does not have a monopoly on

nonpipeline exports and has been slow to build LNG export

capacity. Gazprom is now rushing to catch up, including accel-

erating completion of its delayed Baltic LNG complex.

Some European companies have enjoyed reliable and

essential gas supply from Russia for decades and are keen to

maintain close ties. For example, Gazprom and Austrian

OMV (which has LNG regasification capacity in the

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