Following the Ukrainian gas crises of 2006 and 2009, securing a reliable gas supply for Russia’s biggest client has been at the top of Moscow’s energy agenda. While Russian-Ukrainian relationship has significantly deteriorated, the EU has always been a privileged neighbor and partner for Moscow. Nabucco, Nord Stream, South Stream, Nord Stream 2, Turk Stream; the number of projects proposed by the Kremlin to supply the EU, bypassing regions that could potentially alter the supply, is only growing, thus showing Moscow’s commitment to keeping its long established partnership with the EU.
On one side, Ukraine, Poland and the Baltic states have taken a strong stand against such projects, arguing their loss of transit fees as well as Russia’s giant energy supplier strengthening its grip over the EU market. On the other side, the EU’s largest members have a strong economic interest in keeping and even augmenting their deliveries of cheap gas from Russia. Russia’s proposal to double the Nord Stream pipeline’s capacity with a second one – Nord Stream 2 – following the same route was welcomed by Germany, France, The Netherlands, the UK and Austria.
In the meantime, unhappy of Moscow successfully securing and increasing its share of the EU energy market, the US adopted a new set of sanctions in August 2017 to punish companies investing in joint business with Russia. Nonetheless, the temptation of cheap Russian energy has rendered the EU’s biggest members bolder. Openly reaffirming that “Europe’s energy supply is a matter for Europe, not the United States of America,” they circumvented Washington’s sanctions and took the diversification of energy suppliers out of the picture.
The 2006 and 2009 disruptions of gas supplies to Eastern Europe had led the European Commission to push forward the necessity of diversifying energy suppliers and reducing the Union’s reliance on Russian supplies. However, more than 10 years after the first energy crisis, it seems that the EU’s Western members have not followed the Commission’s agenda to the letter. In fact, Gazprom’s exports to the EU increased by over 12 percent in 2016 and the same happened in 2017.
The EU’s production simply cannot meet its growing demand for energy. Regional and international commitments to reduce carbon emissions force the Union to replace coal and oil with cleaner energies. Whilst incentives have been put in place to develop renewables, such energy sources remain unreliable, thus pushing member states to rely mostly on nuclear and gas. Cheap, flexible in end-use, generating no radioactive waste and much safer than nuclear, gas has been the preferred alternative low-carbon energy by many EU member states. Therefore, instead of focusing on diversifying supplies, to avoid energy crises, EU states have built several interconnexions with the capacity of sending gas in both directions to allow Western Europe to send gas to its Eastern neighbors when supply would stop at the Ukrainian border.
Western Europe has not reduced its reliance on Russian piped gas for several reasons. Firstly, Russian gas prices being in part attached to oil prices, the fall in oil prices since 2014 has led to a threefold drop in gas prices. Secondly, Gazprom has agreed to changes in its contracts with EU partners, namely a reduction of Take or Pay clause’ levels from 85% – 90% to 70% for its biggest clients. Finally, Russia has made several moves to secure supply routes to the EU.
On top of doubling the Nord Stream capacity and developing a South route to avoid future energy crises with Ukraine, Russia has decided not to renew its transit agreement with Ukraine, which ends in late 2019. Since the supply disruptions of 2006 and 2009, the Kremlin no longer sees Ukraine as a secure transit route for its gas exports. Furthermore, the Ukrainian pipelines involve modernization costs; however, “if Ukraine presents economically grounded factors for using its gas transportation system, we have nothing against continuing cooperation with Ukraine. The question is only in the volumes of pumping,” explained the Russian President. Indeed, with Kiev doubling the transit fee for Russian gas, Moscow is unlikely to keep pumping the same amounts of gas through Ukraine. Russian Minister of Energy Alexander Novak and Gazprom’s CEO Alexei Miller declared Russia’s intention to lower transit through Ukraine by fivefold by 2020, when both Nord Stream 2 and Turk Stream should be operating. With a capacity of 86.5 bcm (Billion Cubic Meters of Natural Gas) per year these two alternative routes should cover the 80 bcm Gazprom sent through Ukraine in 2016.
Nord Stream 2 and Turk Stream have received support from several EU members. Neither US sanctions nor the EU’s disapproval managed to scare Germany which is the biggest EU importer of Russian gas and appears determined to complete this project directly linking it to Russia. With support from France, the UK, the Netherlands and Austria, Germany can afford to turn a deaf ear to the EU.
Backed by Poland and the Baltics, the EU has repeatedly sought to halt Nord Stream 2 arguing that the project would only reinforce Russia’s stronghold over the Union and go against its energy agenda, i.e. the diversification of energy suppliers. After failing to request a mandate to negotiate with Moscow on behalf of EU member states and to apply EU regulations to offshore import pipelines, the European Commission seems to have found another way to block the progress of the project with a member state which territorial waters will be crossed by Nord Stream 2. In November 2017, Denmark passed a law allowing it to refuse the construction of pipelines through its waters on the grounds of security or foreign policy interests. The law entered into force in January 2018 and is retroactive. However, this new step to prevent the project from being completed could be the last one. The Nord Stream 2 route can be modified to avoid crossing Danish waters and instead go through international waters, but this would entail higher costs and maybe delay the completion of the project, according to Nord Stream 2 CFO Paul Corcoran.
Nord Stream 2 also seems to have survived the sanctions voted by the American Congress in August 2017 on “companies involved in Russian offshore oil projects, and those participating in Russian oil or gas pipeline construction within Russia.” Despite this new law, the project’s participants, Engie (France), OMV (Austria), Royal Dutch Shell (UK and the Netherlands), Uniper and Wintershall (Germany) have repeated their support for the new pipeline. Their position was backed by the US Department of State’s note published in late September 2017 stating that the sanctions were not retroactive and therefore would not apply to agreements concluded before 2 August 2017. As the financing of Nord Stream 2 was agreed upon in April 2017, the project does not fall under these sanctions, and European firms were able to “fulfill their financing obligations for 2017” as stated by Gazprom’s CEO Alexei Miller. The pipeline’s construction cost (€9.5 billion) is covered at 50 percent by the five European companies, the other 50 percent coming from Gazprom.
Central and Eastern European opponents to Nord Stream 2 appear to have come to term with the project going ahead anyway. Neither their declarations, letters, nor any of their initiatives succeeded in stopping Nord Stream 2. Once speaking as one, the Visegrad group eventually found it wiser to secure their individual interests. Hungary recently signed an agreement with Gazprom to be linked to Turk Stream, the second alternative pipeline to Ukraine linking Russia to the EU through Turkey. Bulgaria is still discussing its integration into Turk Stream. The strongest anti-Russian EU state, Poland, still hopes for US sanctions to apply to Nord Stream but did not wait to secure gas supplies from outside Russia. Supported by the US, Poland as well as Lithuania invested in new infrastructures to receive liquefied natural gas (LNG) tankers and American LNG started arriving to Poland and Lithuania in the summer of 2017.
American LNG getting into the European market at the same time as the US imposed new sanctions explicitly intended to cut Russian market shares in the EU energy market is not a coincidence. Both European and Russian Nord Stream 2 partners have understood Washington’s tactic and declared that its latest move targeting EU-Russian energy cooperation was “part of unfair competition practices” in order “to favor its own gas” in Europe.
Although the US has failed to derail Nord Stream 2 through legislation, they are still actively trying to render the project underused by overflowing the EU energy market with their LNG. As the world’s biggest gas importer and with a stably growing demand, Europe represents a attractive market market for US LNG on top of an opportunity for the US to assert themselves in Gazprom’s backyard. But to what extent could American LNG take over Russian gas in Europe? How profitable would it be for EU customers who are currently benefiting from cheap Russian piped gas? And how far is Gazprom ready to go to defend its share? These questions will be explored in an upcoming article.
Diane Pallardy studied an MA in Politics and International Relations at the University of Kent, and MA in World Politics and Fossil Energy at the Higher School of Economics, in Moscow.